5.34 Digital Exchanges

Digital exchanges are independently-owned marketplaces that allow multiple suppliers and purchasers to trade in real time. Most operate in vertical markets, and earn commissions on transactions. They are particularly employed for spot-purchasing by large companies in the IT, food and industrial equipment sectors.

Many exchanges were launched in the dotcom boom, probably some 1,500, but failed because the larger purchasers preferred to deal with a selected list of suppliers through private industrial networks. Digital exchanges may stabilize at some 200 odd. {1}

Example: Intercontinental Exchange

IntercontinentalExchange, Inc., (ICE) is an American financial company that operates Internet-based marketplaces which trade a wide range of products — futures, over-the-counter energy and commodity contracts, derivative financial products, energy products (crude and refined oil, natural gas, power, and emissions), and soft commodities (sugar, cotton and coffee), foreign exchange and equity index futures. {4}

ICE is headquartered in Atlanta, but also has offices in Calgary, Chicago, Houston, London, New York and Singapore. The company joined forces with Nasdaq in 2011 to bid against Deutsche Borse after the latter announced a $9.5 billion deal to merge with NYSE Euronext, but the bids were withdrawn after encountering antitrust regulations.

ICE is organized into three business lines:
1. ICE Markets: futures, options, and over the counter markets. Energy futures are traded via ICE Futures Europe. Soft commodity futures/options are handled by ICE Futures US
2. ICE Services: electronic trade confirmations and education.
3. ICE Data: electronic delivery of market data, including real-time trades, historical prices and daily indices.

Advantages

The benefits of digital exchange depend on the industry concerned, but Active International, for example, which trades excess inventory or assets, emphasizes these advantages. {2} A company can:

1. Realize much better returns on excess inventory or other assets than traditional liquidators can offer.
2. Decrease cash outlay by using excess inventory, real estate holdings or capital equipment in lieu of cash to acquire the goods and services a business requires to thrive: desirable ad space, retail marketing, freight, warehousing, event space, hotel rooms, etc.
3. Extend the reach and power of their marketing plans without spending additional cash.
4. Improve and sustain growth by making assets work harder for them.
5. Increase product distribution and discover new channels that can be leveraged around the globe.

Questions

1. Distinguish between eprocurement, digital exchanges, industrial consortia and private industrial networks.
2. Under what keywords would you undertake a search for eprocurement systems on the Internet?
3. Explain how digital exchanges work. What are their advantages?

Sources and Further Reading

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