Friday, December 30, 2011

Musings at Year-End

Here we are at the end of December and I haven’t written anything since late November.

Actually, that’s not quite true… I’ve begun several posts in the past six weeks but I haven’t finished (or posted) any of them.

In a couple of those cases I didn’t finish because I realized I was writing in a state of frustration and confusion and that nothing written under those conditions ought to actually be shared.

In others cases I just decided I wasn’t sure that what I had to say was either correct or of any value.

And that kind of sums up the 4th quarter activity for me: It’s been a time of frustration, uncertainty and doubt about the future.

But I can’t let the year end without a few comments. So.....

Thankfully, the flood of liquidity that played havoc with pricing early in the quarter began to recede in November and by the second half of December it appeared that a reasonable balance had again been found.

That reasonable balance wasn’t necessarily reflected in pricing, though, because in early November the Exchange’s new risk mitigation program went live. And the initial reactions to that program had a significant impact on prices.

There’s not a lot that can be said about that program at this point except that I think it is both more and less than meets the eye.

It will take quite a while before anyone will be able to say what its real value is or what an appropriate pricing response actually should be. Meanwhile we’ll just have to muddle through making decisions on the basis of largely unproven assumptions.

TRE deserves much credit, I think, for a number of things as this 3rd full year of operation ends:

1. There are still a few hours left in the trading day as I write this but it is quite clear that December 2011 will set, by a very substantial margin, a new high water mark for SMB auction volume.

2. December has also seen the first new activity in the Corporate auction market since the NYSE relationship was completed in September. The new auctions were received positively and I suspect that all parties must be pleased.

3. The pace of new SMB Seller acquisition has clearly accelerated in the 2nd half of the year and some of the new Sellers have been unusual in both size and expected volume of activity. The Seller marketing team appears to have shifted its targeting in a way that might be really meaningful.

4. The roll-out of the new risk-mitigation program appeared to go quite smoothly. While it was delayed a bit in an effort to get it right before roll-out, that decision seems to have been a good one. Implementing that sort of program in a relatively seamless manner is tough. Both the tech people and the business people involved in the implementation appear to have done a very good job.

5. TRE’s administrative people have continued to tighten up their processes. The job of obtaining and posting updated financial data from Sellers has become much more disciplined, with more Sellers finding their postings delayed until the required data is provided. For a volume-dependent organization, it’s tough to exercise that sort of discipline.

6. The Member Services department which, among other things, handles the transaction reporting and cash management functions deserves a lot of credit. It's one of those functions that only gets noticed when there's a mistake. But, at least in my case, I can't think of a single error that has occurred this year in those functions. That's actually remarkable.

7. The risk management and loss control functions have been significantly strengthened, both in terms of people and processes.

8. The operation of the trading desk has been strengthened and communication between the desk and the Buyers has clearly been an operational focus.

9. TRE management has to be acutely aware that volume growth has been much slower than initially hoped. Many would be tempted, in such a situation, to scrimp on investment in the “nuts and bolts” improvements in systems, personnel and processes: especially in those functions that few people actually see. To their credit, TRE’s management did not take the short view. They have continued to invest in the platform and the processes even though it must hurt to do so.

10. And, of course, you’ve got to give TRE management full marks for PR! They DO get noticed and their name IS out there all the time.

On the other hand...

In order for any of us involved in the TRE enterprise to prosper, the business has to achieve substantial scale, and we’re a long way from any level that might be called “substantial” in the context of the market size.

A year ago the volume pattern could appropriately be called “encouraging”. But for most of 2011 we couldn’t really say that the pattern was encouraging.

After three full years of operation we have to look at things as they are, not just as they might be. And the way things ARE falls short.

There are two issues that are really cultural, as opposed to technical or strategic, that I frankly think TRE has gotten wrong and should reconsider in 2012.

The logical approach for those wanting to bring a new process to an existing industry is to attempt to align themselves with the opinion leaders in that industry or to at least create some strategic relationships within the industry. There will be differences of opinion as to why TRE has not done, or has not been able to do, that. But the fact is that TRE continues to be an outsider with respect to the established factoring community.

I happen to believe that the TRE model has much to recommend it as a way to substantially increase the penetration of the factoring function in our economy. And I think that there are ways for TRE and the established community to work together for common benefit. That is not happening. And I believe that at least some of the failure to achieve TRE volume goals can be attributed to a failure to capitalize on the opportunities that working with the established community might present.

Responsibility for that situation has to be shared. Finger pointing helps neither side. It’s time to mend the rift and move forward.

The second cultural issue manifests in a number of ways that I think hinder the growth and threaten the success of the TRE enterprise.

It is the implicit stance taken by TRE that it should be in complete control but at the same time be relieved of all liability. That approach, I believe, might prove to be the largest barrier to actually achieving scale. Because a lot of potential participants will “just say no”.

Shakespeare got it right when he wrote: "First we'll kill all the lawyers..."

There is only one way that I can conceive of a total-control strategy working; but that also goes against the TRE cultural grain. And it will certainly be rejected by its lawyers.

That approach is ... complete transparency.

The culture of control includes a total control of information about Exchange operations, participants, finances, defaults, etc.

The TRE PR machine cranks out positive releases on a seemingly round-the-clock basis.

But information about the real operation of the Exchange is held very tightly to the corporate vest.

Ultimately, an approach that is intended to protect the Exchange actually, in my view, makes TRE more vulnerable. It becomes the subject of unfounded rumors, inaccurate analysis and ill-informed attacks. It makes it appear that there is something to hide. And that’s counter-productive.

I have made this point to TRE in private communication, so this will come as no surprise, but I would strongly advise the Exchange and its management to adopt a policy of complete transparency and to foster, rather than hinder, a full range of communications among all market participants.

TRE should start acting like a public company.

It should make public a full range of operational and financial information just as if it were public.

It should support, rather than hinder, productive and even organized communications and associations among Buyers and Sellers and analysts.

It should stand ready to explain what has worked well and what has not and what has been done in response to the problems that it has faced.

No business, and certainly no new business, is going to escape problems and errors. The good ones acknowledge those problems and errors and respond to them openly and constructively. That stuff always comes out eventually, anyway, so why not take control of THAT and use it to advantage?

Finally, Happy New Year to all! And may 2012 be a year of growth, learning and prosperity for the entire community of TRE participants.


  1. Great post, Mr. Lightner.

    What are your thoughts on the idea of TRE effectively being a commercial finance company itself?

    Meaning does TRE essentially perform the same functions as, and compete against, a traditional factoring company, but using other people's money, and profiting from fee income?

    What are the nuances of such economics? And what are potential ramifications?

  2. Thanks, Nick.

    An interesting thought.

    My initial reaction is that IF TRE can actually scale to significant size and IF they can maintain something like the current fee structure and IF they can really insulate themselves from liability to the extent they desire, the risk-adjusted return to the exchange operation should be substantially more attractive than the risk-adjusted return to the Buyers. So I suspect they'd prefer to keep their position separate from the capital-provider risk.

    But who knows how all those issues will play out.

    I appreciate the comment!