November/December 1994
This privately owned secondary fiber exchange matches brokers with brokers in an effort to close the paper recycling loop and increase participants’ profits.
By Eileen Zagone
Eileen Zagone is editorial associate for Scrap Processing and Recycling.
Say you're looking to buy 200 tons of sorted office paper or sell a few tons of unused pizza circles, and your regular market contacts can't help. What do you do?
The answer, say Gennaro "Jerry" Lobosco and Peter McLachlan, lies in a call to SEFEX, a recycled paper brokerage matchmaking service they started a year ago to bring together the buy and sell orders of geographically diverse brokers.
Operated as an independent subsidiary of Lobosco Recycling Corp. (Paterson, N.J.), SEFEX (the name is a play on SEcondary Fiber EXchange) offers brokers a simple way to open previously unavailable or inconvenient avenues of trade, the exchange's developers say. And by the end of the year, they add, it will be an even easier proposition, as SEFEX will be accessible from the comfort of participating brokers' personal computers.
The Germination of the Idea
As president of Lobosco Recycling, a paper packing operation, Jerry Lobosco was well aware that secondary paper prices vary significantly by region. While discussing this market fragmentation with McLachlan, who had joined Lobosco Recycling in mid- 1992 after having spent 20 years as a broker in the foreign currency and money market exchanges, the two began to seriously talk about what they figured could be a viable solution: the creation of a national--or even international--centralized marketplace for the buying and selling of recyclable Paper. After all, they reasoned, such a forum for trading exists for many other commodities, giving brokers unlimited access to a breadth of information about those commodities and thus giving prices a better opportunity than they might otherwise have to reflect broad market realities.
And so SEFEX was born. Its self-imposed charge? To combine prices and market information from all over the country into a single exchange as a way to stabilize fluctuating prices as well as provide brokers greater access to the entire U.S. secondary fiber market.
The concept may be new to the paper recycling industry, but McLachlan is quick to point out that it's an idea that's been proven in plenty of other commodity markets. "This is a standard way of doing business in most of the other traded markets," he says. "We try to provide an indication of where prices are in the market. Then the only price difference that should exist is the cost of transportation.
Broker response to SEFEX has been strong since Lobosco and McLachlan initially contacted brokers about participating in the exchange last December, they claim. Of course, they add, some brokers were skeptical of the service at first, deeming it another competitor, but the exchange's founders say they were able to convince most of these doubters that SEFEX can only help brokers, not hurt them. And to ensure that the service can't be a competitor to its customers, Lobosco and McLachlan point out that SEFEX acts only as a neutral agent representing both sides of the transaction equally and that access to the exchange is limited to paper brokers; suppliers and mills can't use SEFEX to bypass established brokers.
How Does It Work?
The SEFEX service is actually much more elementary than its goals might indicate. In fact, McLachlan notes that the most frequent comment he gets from interested brokers is "this seems so simple, how can it work?"
It works like this: Traders at SEFEX keep track of the buy and sell orders of all brokers participating in the exchange. Then, the traders try to match what one broker is selling with what another wants to buy, and, if they find a match suitable to both parties, they negotiate the terms of the order. The identity of both the buying and selling brokers is kept in strict confidence until the final stages of the trade, when the two brokers are connected to discuss delivery of the goods.
So what does SEFEX get out of this arrangement? A fee of $1 or less per ton, depending on the volume of material traded (the value of the material is inconsequential in determining this commission). This fee structure is very reasonable for brokers, McLachlan contends, particularly when you consider that SEFEX can arrange business deals that brokers would not normally find, "providing them their normal commission on something they would not have been part of otherwise."
This access to new markets and business opportunities, says McLachlan, is one of the most tangible benefits of participating in the exchange. Plus, SEFEX can come in handy in locating those last few tons needed to complete a transaction, he says, pointing out that the last 20 percent of a broker's average order can take as much time and legwork to fill as the first 80 percent. "We're not asking brokers to change the way they do business, we're offering a mechanism that will allow them to more efficiently conduct business and perhaps expand their business," he notes.
Coming Soon to a Computer Near You
By early December, SEFEX expects to complete some upgrades to its trading system to make it remote-computer-accessible. In other words, McLachlan explains, participating brokers will be able to download the exchange's listings of buy and sell orders onto their own computers, allowing them to examine the information at their convenience. To ensure that the system will be compatible with virtually all of the computer systems participating brokers use, SEFEX surveyed many current exchange participants in the initial development stages of the computer system.
The notion of devising a computer trading system was a "natural extension" of the service SEFEX had been providing and a necessity to accommodate the growing number of participants and orders, McLachlan says. "We didn't say 'maybe we should do it on computer,' we said 'we can't do it without computers."' The fact is that the service has become so popular that SEFEX's trading staff has been unable to accommodate additional brokers using the telephone and fax machine as primary channels of communication. "We have a large number of orders and for us to tell an interested broker all of the orders we have is tremendously time-consuming not only for us, but also for them," says McLachlan. "The computer system will solve this problem and allow us to give much better service to even more participants."
While the redesign represents a substantial change to SEFEX, when all is said and done it really won't alter the fundamental way in which the exchange operates. Participating brokers will still be able to rely on the exchange to provide buy and sell information, including prices and any other particulars, and if there's a listing they are interested in, they'll need to contact a SEFEX trader, who will then negotiate the deal to a conclusion in essentially the same manner as before.
What will be different, of course, is that brokers will pull the market information from SEFEX's main computer to their own. In addition, the electronic system will allow users to access buy and sell orders by geographic region and material grade. "What we are looking to do is to give the participating brokers the ability to check the location and prices of material anywhere across the country in any particular grade," McLachlan says.
Growth for the Future
Converting the exchange for electronic access is only one of the goals Lobosco and McLachlan have for SEFEX for the near future. The other big item on their list-and one they hope the computerized system will help them attain-is the participation of more and more brokers. Someday, in fact, they aspire to make SEFEX the paper exchange worldwide.
Currently, there are nearly 200 participants in the exchange, most of them domestic, including large as well as small brokers. McLachlan explains that while the exchange "initially offers a tremendous benefit to the smaller brokers in that it effectively offers them nationwide exposure for their buying and selling interests," larger brokers handling more and higher-volume orders can benefit just as greatly because SEFEX enables them to complete orders more quickly.
Once the industry learns that the computerized system is available, SEFEX's principals hope to bring total participation to at least 250 brokers. But they don't want to stop at that number, not only for the sake of the exchange's bottom line, but also to increase its usefulness to the paper brokerage community.
Indeed, they say, the more brokers in SEFEX, the more efficient and valuable the exchange will be to participants and to the secondary paper industry in general. "Without the participation of brokers, there is no SEFEX," says McLachlan, emphasizing that brokers can make the exchange more efficient and beneficial to themselves by taking an active part in it.
He envisions ever-improving mill technology that will enable mills to consume a greater variety of paper grades, helping boost the growth of the entire secondary fiber industry and, correspondingly, the growth of SEFEX. "There is an unlimited variety of ultimate uses for used paper. It just depends on the creativity and imagination of someone to come up with an interesting use for the material," McLachlan notes. And the broker-friendly SEFEX system and its soon-to-be-available computer access could be the creative tool that ensures that those market opportunities are fulfilled.•
This privately owned secondary fiber exchange matches brokers with brokers in an effort to close the paper recycling loop and increase participants’ profits.