Arbitrage Cargo

[Niobe Hennigan]

Thefact that the freight transportation originating from an international trade does not occur on a previously agreed term by the parties may cause conflict. The dispute in the overseas trade process can be determined by arbitration, according to which law it will be resolved. Transportation and shipping arbitration handles a variety of complex, cross-border transportation disputes in jurisdictions around the world.

Arbitration in shipping is a method of resolving disputes between parties in the shipping industry, such as shipowners, charterers, or cargo owners, without going to court. It involves the appointment of an independent arbitrator or panel of arbitrators to review the evidence and make a binding decision on the dispute. Arbitration is often used in the shipping industry because it is considered more efficient and less expensive than going to court, and because it allows for greater confidentiality in the resolution of disputes.

Yes, arbitrage is legal in the U.S. Many investors like this type of trading because it provides liquidity and encourages market efficiency by identifying price discrepancies and fostering price convergence.

You can lose money in arbitrage. Although pure arbitrage should be no-risk and the price differences are typically very small, there are still some limits to arbitrage. Traders still face execution risk, counterparty risk, and liquidity risk in trading.

Pure, "textbook" arbitrage is considered low- (or no-) risk because it doesn't involve additional capital; it's merely buying in one market and selling in another. And, since the price difference is so low, the amount risked is usually low, too. However, arbitrage in the real world usually entails large-volume trades as well as leveraged capital, timing variations, and other factors that increase risk.

Arbitrageurs, as arbitrage traders are called, usually work on behalf of large financial institutions. It usually involves trading a substantial amount of money, and the split-second opportunities it offers can be identified and acted upon only with highly sophisticated software.

The standard definition of arbitrage involves buying and selling shares of stock, commodities, or currencies on multiple markets to profit from inevitable differences in their prices from minute to minute.

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Many of you have been watching the year-long fight among SBTC, OOIDA and TIA over "broker transparency" (if you have followed me for a while then you will remember that my battles with TIA go back more than a decade to when I first created the AIPBA in July of 2010 before we merged it into the SBTC four years ago).

In its latest effort, TIA is trying to convince the FMCSA to repeal the 40 year old 49 CFR 371.3c transparency rule on the basis that freight brokers are not really brokers any more... they are actually shippers. Yet in the same breath, the TIA calls for "dispatch services" to be required to get broker licenses because when you arrange motor carrier transportation for hire, guess what: you're a broker (we have actually been saying this for six years now)! If you think the transportation industry has suddenly gone full on crazy, you're absolutely right. Here is why...

"...a person who, for compensation, arranges, or offers to arrange, the transportation of property by an authorized motor carrier. Motor carriers, or persons who are employees or bona fide agents of carriers, are not brokers within the meaning of this section when they arrange or offer to arrange the transportation of shipments which they are authorized to transport and which they have accepted and legally bound themselves to transport."

"...persons who are part of the normal organization of a motor carrier and perform duties under the carrier's directions pursuant to a preexisting agreement which provides for a continuing relationship, precluding the exercise of discretion on the part of the agent in allocating traffic between the carrier and others."

Now, you can't be an agent of two competing motor carriers at the same time because an agent has a "fiduciary duty to principal" and a person calling themselves an agent of two competing carriers violates this duty the moment he chooses to give a load to one carrier over another. So, "dispatch services" are essentially illegal brokers. We have spent 6 years trying to convince FMCSA, TIA, and the rest of the industry this is so and it looks like, with the departure of Bob Voltmann, TIA is finally ready to acknowledge we are right.

But disappointingly, the TIA is doing a little 'song and dance' around the concept of broker as it attempts to fight the SBTC and OOIDA proposals to strengthen transparency (we contend it is a matter of closing a loophole and enforcing the rule and evasion of regulation statute; OOIDA wants to increase regulations on brokers). For folks outside the transportation industry, when they hear the term "broker" they immediately think in terms of stock broker or real estate broker. Let's compare freight broker with the latter...

If I were to tell you that I am in the business of bringing together a shipper and carrier, you would agree with me that I am a third-party intermediary called a "broker." Because that is what "brokers" do. They bring together buyers of transportation services (shippers) with sellers of such services (motor carriers). Likewise, if I were to tell you that I am a real estate professional who brings together someone who wants to buy a house and someone who wants to sell a house, you would call me a real estate broker. But what if I told you I am in the business of buying houses and then turning around and selling them? You would say I am not a broker but an investor in the business of "flipping houses." This is the nature of the cake that TIA is trying to have and eat too.

In the house-flipping example, usually there is a certain amount of time that goes by after I buy a house and flip it. In fact, I might buy a house in bad shape, fix it up after closing, and give it a new coat of paint. Then 6 months later I list it (through an actual licensed real estate broker) and sell it for a higher price. In the stock market, there is a term that covers this but it is done without the time lapse. That term is called "arbitrage."

This is what freight brokers have begun to do and this is the TIA's rationale for why its members should not have to be transparent. For big brokers, they internally finance the buying of transportation until they get the payoff from their sale to the shipper. For smaller brokers --including those represented by the SBTC, they do this often with the help of a financier we call a "factor". That is, as soon as the invoice to the shipper is generated, it is a tangible asset that can be sold and assigned to yet another third party factoring company (for a fee). So, why isn't TIA just saying their members are not actually "brokers" per se but are freight flipper investors engaged in arbitrage? Because of the competition factor (sorry for the pun, folks).

Anyone following the regulatory petition comments and the discussions during the October 28th Broker Listening Session, including the FMCSA, hopefully, can see there is an inconsistency, here, and serious holes in the TIA's argument. Especially, when they start saying brokers are really shippers on the one hand but then argue, in the next breath, that independent dispatchers need to be licensed brokers.

Brokers should not need to be transparent, TIA suggests, because it is nobody's business how much they bought the truck for and it is nobody's business how much they sold the truck for to their shipper client. They will say the shipper wants them to be confidential... but in reality, it is really all about hiding their own "margins". Next, we have to distinguish between "margins" and "commissions"...

First, note that these are all service based businesses. This is not the buying and selling of a product. Second, real estate brokers do not have "margins." Real estate brokers earn "commissions" as a result of providing a service of bringing together the buyer and the seller. Usually, this is a percentage of the house sale price. In some instances in business, this might be called a "finder's fee" but the amount or percentage awarded for doing the finding is always discussed and agreed upon in advance contractually.

Interestingly, so do these illegal broker "dispatch services" earn a commission. We would suggest that so do freight brokers no matter how you slice it... even if freight brokers advance the money to the carrier contractually before the shipper pays the broker what is essentially freight charges plus brokerage commission. No one would ever support real estate brokers not revealing what percentage they charge to do the brokerage service. The real estate industry is regulated in terms of transparency and ethics and when you contract with a realtor to sell your house, you know how much it will cost you from the onset. It is not hidden from you. As anyone who has ever bought a house knows, the realtor's cut is always made clear to all parties and documented at closing. Imagine if your stock broker tried to convince you the cost of his service is none of your business...

TIA does not make the "arbitrage" argument outright because it would be an argument essentially for the deregulation of brokers and would open up their members to more competition. Remember, not too long ago, they wrote a bill that they got attached to the 2012 MAP-21 highway bill to raise the broker bond from $10,000 to $75,000 (and they would have gotten away with $100,000 but not for the AIPBA and Factoring Association). To make it difficult to become a broker. So, TIA just explains how their members are 'brokers' when it comes to their members holding a license and bond (to keep the bar to entry intact) but their members are really shippers when it comes to whether we should keep a rule that requires they be transparent like brokers in every other industry.

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