The London Bullion Market Association quietly launched this summer what may turn out to be one of the most revolutionary changesin commodity trading ever seen – through the introduction of an online auction platform for the calculation of silver prices.
Since the LBMA launch, in mid-August, discussion about the innovation has been largely restricted to the silver trading sector. Wider consideration of the benefits a similar approach could deliver to other sectors and the commodities sphere as a whole have yet to feature.
This is surprising, as interest in online auction solutions is plainly evident across most modern industries, including many financial institutions and sectors. Indeed our experience at Perfect Channel confirms that there is a growing appetite for solutions which offer not only fair price for participants, but fair value for clients increasingly attracted by that other elusive ingredient so often lacking in traditional trading models: transparency.
Given the accomplishments of consumer goods auction websites in recent years, it’s only to be expected that interest in online auction platforms has increased over time. The eBay phenomenon has been predicated on providing dividends to both the seller and buyer in a transaction; vendors often achieve higher prices than they otherwise would, due to a larger number of bidding participants, while prudent buyers can secure effective bargains. This simple platform increases sales efficiency by connecting the two groups directly. Moving forward, online auctions have now cemented a reputation as the ideal marketplace – one where demand and supply meet in compliant and enthusiastic harmony.
If this online auction model can be applied to consumer goods and more typical auction lots, the question LBMA posed was quite simple: why not commodities too? There have been experiments in moving the commodities auctions process online since the turn of the century; so far, however, these efforts have largely focused upon agricultural and livestock commodities. Examples include online auctions administrated by the Brazilian Specialty Coffee Association, Online Livestock Trading, e-Choupal and GlobalDairyTrade. Given that agricultural commodities auctions are a recognised and vital segment of the sector’s supply chain and have been for many years, such developments are not so much a revolution, more a timely evolution. While these have primarily served to connect rural communities with the online sphere, they have also produced notable successes in other areas: online platforms have allowed for the establishment and circulation of price information; eliminated costly intermediaries; reduced the scope for unscrupulous and unfair practices; lowered overall transaction costs, and encouraged less collusive practices among both buyers and sellers. Unfairly stacked and distorted behaviours tend to shrivel under the glare of transparency. It is surprising, then, that other commodities sectors have been hesitant to adopt an online auction model – and that corresponding futures and options markets have also seemed ambivalent.
Again, there has been some movement in certain areas, with the institution of online auction platforms allowing for limited buying and selling of carbon credits, port capacity, rough diamonds and electricity – however the LBMA move constitutes the first time a major international trade association has made a significant foray into the online auction sphere.
Switching silver price-setting facilities online is undoubtedly a positive step forward; the extension of this provision to gold pricing can be expected. Commodities trading moving away from investment banks is an emerging trend; it could be argued that the sluggish moves to embrace online auctions for commodities to date resulted from the lack of dedicated and reliable platforms. Until recently, suppliers and sellers owning their own auction-based platforms has either been unrealistic or too costly. This is simply no longer the case. Fair price not only drives the bidding process, but certainly underpins our approach commercially at Perfect Channel. The market will ensure that others behave in a similar manner if they are to secure long-term client satisfaction. Already one sees numerous solutions available to sectors and individual vendors that allow for the direct sale of commodities without the necessity for a middleman. Crucially, the best digital auction platforms can be tailored to meet specific needs. Depending on the type of commodity sold, and the type of sale, different dynamics are applicable; the ability to modify and structure individual transactions is therefore vital.
One historical criticism of online auction resources is that they remove the interpersonal association and relationship that comes with more typical forms of sale. Contemporary online auction solutions help preserve this trading feature by replicating traditional direct connections in a digital context. For instance, bidding can be restricted to preferred favourites by instituting an ‘invite only’ policy – meaning that only bidders validated by the auctioneer have access. Unique bid provisions can keep bidder identities public, but individual bids private – with the auctioneer free to choose both the bid they deem most favourable as the winner, and unbound by an obligation to award the highest bidder. Limits can be imposed on bidding totals to level the playing field and create a fairer bidding environment. There’s even the opportunity to grant access to auction monitors – individuals that may not bid, but can observe the process and transactions arising. This way, auction prices and activity can be turned into a commodity creating new revenue streams. A bespoke platform also allows the founding party to ensure their auctions are administered according to industry-wide principles. In the case of LBMA, their platform adheres strictly to doctrines established by the International Organisation of Securities Commissions (IOSCO) for Financial Benchmarks.
While the financial industry certainly doesn’t fear progress, a general dislike of change is apparent. Perhaps now is the time for associations, producers and businesses within individual sectors to initiate change and grasp the potential of the online marketplace?
The LBMA’s innovative foray does raise the question whether other commodities sectors are willing to seize this challenge – not only to pursue optimum performance within their own sphere, but for the increased performance and success of the industry as a whole.
Who knows, perhaps this little-noticed step may indeed herald a giant leap into a fairer price future for all?