The pricing accuracy of any given lane is based on its daily load volumes. In financial jargon, volume is referred to as liquidity. The more volume, the less friction in buying and selling, the more liquid a transaction becomes.
Stocks traded on the New York Stock Exchange (NYSE) are one of the most liquid assets. There are tens of thousands of buyers and sellers for most stocks at any given moment. If there are not enough of buyers or sellers, a financial firm, or market maker, will step in to create liquidity for the stock. With this system, almost any investor can buy and sell shares in a matter of seconds. Prices are transparent and
the spread between the buy and sell prices create slim margins or commissions.
Real estate, on the other hand, is an illiquid asset. It can take months to buy or sell a property. There is only one seller and maybe a handful of buyers for a property. While the price of the property is listed, there is typically much negotiating involved. The number of buyers could be one, or maybe none if there are not any buyers. Or it could be a few individuals who create a bidding war with each other. When a price is agreed, the seller and the buyer each have to go through a time-consuming process before the sale finally closes and money exchanges hands.
The same principle applies to both the spot and contract market in trucking. In this paper, we will focus on the spot market and how liquidity in a truckload lane determines how stable its spot market pricing is over time.
As daily volumes on a lane increase, so does the lane’s liquidity. The more liquidity a truckload lane has, the more stable the normal trucking rate is for the lane. Volatility or the variance in price across time stays relatively low and stable. This makes predicting pricing for the lane over time easier, especially if you can measure a lane’s volatility like in the stock market with the Sharpe ratio.
As load volumes decrease on a lane, the normal trucking rate becomes less stable. Volatility also naturally increases as the lane loses its liquidity. This, in turn, makes predicting trucking rates much more difficult.
When transactions close in on the zero bound of activity per day, or per week, then the dynamics of a competitive marketplace break down completely. A truckload lane that is this illiquid works more as an oligopoly or monopoly market. Either the carrier or shipper controls the market, and pricing decisions are based on one-off needs of either party.
This means the rate for one carrier could be wildly different from another. It also means that the demands placed on the shipper control how much it is willing to pay a carrier to move the load. These needs of both parties can be wildly different over the course of time. It is why one can find a rate of $8,000 one week and $2,000 for two weeks later on the same lane.
While liquidity acts as a long-term stabilizer for the spot market, it is important to have the ability to gauge volatility. Seasonal patterns are an example of volatility. For dry vans the markets will tighten during the holiday season, for flatbeds it is the summer months, and for reefers it is during harvest seasons around the country.
Volatility in load volumes and truck capacity, though, occurs at what would seem random times, especially for statisticians. These can be weather events, regulations or economic boosts. To be able to measure volatility in isolated markets, freight forecasters and pricing analysts need the most recent load volume and truck capacity data available. With real-time or near-time data, current volatility can be measured for freight markets with much greater accuracy than with any other method.
In this white paper, we will discuss four categories of truckload lanes by their liquidity:
— The blue chip lanes where spot market rates are the most precise.
— Midmarket lanes where spot market rates can be reasonably priced.
— Small-market lanes where spot market rates become opaque.
— And the over-the-counter lanes where the dynamics of a functioning market break down completely.
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