InformationWeek

But in the competitive marketplace arena, Altra has things besides volume in its favor. For example, Altra's two-year head start on its competitors helped it become the de facto exchange in which prices are established for propane, butane, and other natural gases. During the past year, Altrade averaged 7,000 to 8,000 transactions a month.

"Altrade has existing liquidity. They already have activity and critical mass, which is in short supply among independent trading exchanges," says Bob Parker, an analyst with AMR Research. In a study released in March, AMR named Altrade the top independent trading exchange in any industry based on the strength of its business model and functionality. The study took into account industry expertise, how much business the exchange facilitates, its strategic position, its industry expertise, integration, and other technology services.

Even with those benefits, Altrade CEO E. Russell "Rusty" Braziel is staying alert: He's looking ahead to how his exchange can expand market share while it prepares to interact with other energy-industry exchanges and new entrants to the field.

Altrade was born out of frustration with the way energy products were historically bought and sold-a process Braziel knew all too well. In the early 1990s, when Braziel was VP of Texaco Inc.'s energy marketing group in Houston, he was constantly vexed by the high error rate of manual transactions processed by his energy traders.

In 1995, he worked for the Williams Co., an energy pipeline and telecommunications company in Tulsa, Okla., where he managed the company's first steps toward an energy exchange. "The Williams Co. started the beginning of an energy trading network on the back of their bandwidth private network," Braziel says. "But it was only a trading platform to match buyers and sellers." In 1996, the Williams Co. network was merged with the provider of its fulfillment software, Duke Energy Corp. in Charlotte, N.C.

Altra was created from those efforts in 1997 when it became apparent that energy companies were wary of buying back-office software and using an exchange operated by a competitor. Altra has maintained its independent status by accepting limited equity stakes from energy companies, but not majority stakes or board seats from investors.

More than 2,200 buyers and sellers of energy products such as liquid and natural gas use Altrade to enter and pick up orders, and to negotiate deals in private chat rooms. Traders specify prices based on product type, quantity, timing, and delivery locations. Without Altrade, the traders would have to make dozens or even hundreds of phone calls to get the best prices-still the way more than half of the energy commodity market operates. In 1999, the average size of a transaction on Altrade was $150,000 per mouse click.

Transactions are anonymous and made in real time, using a dynamic bid/ask process that works in a fashion similar to a stock or commodity exchange. The bids are pushed out to the desktops of 2,200 individual energy buyers using an Oracle database and Java applets on the buyer's desktops.

"The anonymous aspect is very important because we don't want other companies to know our buying position," says one trader, who requested anonymity.

Altrade's business model includes strong transactional capabilities as well, AMR says. In the natural gas and natural gas liquid markets, an insurance company rates participants' credit, and Altra takes responsibility for title and settlement of the shipments. In the wholesale power market, Altrade participants rank the credit risk of other participants and alert them if a buyer is reaching its maximum credit threshold. This service is included in the transaction fee.

While most Internet exchanges still only bring buyers and sellers together, Altrade also offers business services, software, and integration. Indeed, software and services represent more than half of Altra's $60 million in annual revenue. Altra Energy has developed such applications as risk management, scheduling and delivery, and reporting that are used by more than 130 companies. The initial software license fee is $200,000 to $400,000, depending on the size of the site.

Altrade has a logistics component as well. After a company agrees to a transaction, the information is sent to Altrade's scheduling and delivery software so the resources can be transferred from seller to buyer. Altra Energy has a division that will integrate these applications into a company's back-end systems or help the company develop an E-commerce infrastructure. "Altrade has a very good story in terms of integration of participants' back-end systems, which is not common yet among the independent exchanges," AMR's Parker says.

While other leading exchanges look to increase revenue by expanding to new industries, Altrade wants to stay focused and grab a bigger share of its vertical-industry niche. By Braziel's estimate, sales of gas, electricity, natural gas liquids, crude oil, and petroleum products represent a $3.9 trillion marketplace in North America and Western Europe. "Right now there is too much potential in simply expanding what we already do," he says.

In October, for instance, Altrade added electricity trading to its offerings, looking to capitalize on some of the $750 million wholesale market dominated by the Powermatch exchange operated by Bloomberg Financial Markets.

If Altrade can expand from its natural gas liquids niche into the natural gas and electricity market, analysts say, revenue could explode. According to Forrester Research, online trading of natural gas and electricity will surge to $171 billion in 2004 from $11 billion this year.

Of course, Altrade faces plenty of competition. In addition to Powermatch, Houston Street Exchange, a subsidiary of BayCorp Holdings Ltd. in Portsmouth, N.H., was launched in July as an online trading platform that lets power traders buy and sell wholesale electricity. In December, EnronOnline, another Internet-based transaction system for wholesale energy and other commodities, went online.

But AMR's Parker says Altrade's early entry into the market gives it an edge: "Altra has built up a lot of activity and is a trusted party in the energy industry."

"Altra is rapidly developing into a market leader due to the enhanced liquidity that its system provides," says David Goodman, director of power trading for Koch Energy Trading Corp., a Houston energy company that uses the exchange. But some other traders are hedging their bets. "I'll probably use a variety of systems and see who offers the best price at a particular time," says another trader, who requested anonymity.

Analysts also expect to see a number of exchanges coexisting to serve different parts of the energy market. For instance, Petrocosm, a new industry marketplace launched by a consortium led by Chevron Corp., could provide basic procurement. WorldOil.com, an independent site specializing in catalog product aggregation, could also offer those aggregation services. The key, analysts say, is to make all the sites work together.

Braziel says he also expects to see cooperation among the trading hubs. "Today, we don't offer jet fuel," he says. "It would be a good thing to have an Internet marketplace that offers jet fuel show their prices to my customers and allow me to share my price for butane with their customers." Ultimately, this could lead to the hubs routing order flow and splitting the transaction fees. Braziel says Altra is negotiating one such arrangement with another hub.

Deciding what hubs to partner with and how to split transaction fees are thorny issues. Braziel's test: "Before we consider doing some of these things, many energy trading hubs that have been announced have to get past the press-release stage and show some sizable transactions."