Trading Desk – Trading Post

Posted: 04/2001

Trading Desk

Trading Post
What are the Differences Between
IP, Bandwidth Trading?

A: With IP transit you actually are buying or selling Internet
transit, specifically, access to and through the Internet. Bandwidth trading
refers to circuits or networks of dark or lit fiber, primarily from one point to
another. Here are key questions and answers that should help elucidate the

Q: How can IP be traded?

A: In order to trade IP, quality standards are required. It can be
traded only with a full understanding of the different carrier and ISP
offerings. According to TeleGeography, IP can be traded three different ways: as
an agent or broker, which is not really trading because buyers and sellers deal
directly together; through a physical delivery point, which is a complex
business model; or financial trading, which more commonly is associated with the
buying and selling of contracts and derivatives more in line with how
commodities are traded.

Today there is a lot of talk about an IP commodities market. It is important
to note that this is by no means a mature area and has not yet evolved enough to
be traded on financial risk alone. The real business is happening with physical
delivery where quality standards are being set.

Q: What are the benefits of trading IP rather than setting up traditional
transit relationships?

A: Trading IP, or more specifically, buying IP transit through an
exchange, offers many advantages, including price and flexibility. Many
companies that purchase IP transit through traditional relationships usually
sign a contract with a fixed price for a fixed duration, usually 12 months. This
is a disadvantage for the buyer. Once connected, they normally can’t negotiate
rates, increase the standard of quality or opt out of a contract without

Today, with prices falling throughout the industry and continual price
erosion expected, buying IP through an exchange is attractive. With one single
connection, the ability to purchase based on price fluctuations over a period of
12 months offers companies a substantial savings over the course of a year.

The dynamic Internet industry also demands flexible business plans, so the
ability to only buy as much as you need, at the quality you need, is attractive.
It’s a matter of being competitive not only today, but also through the course
of time. To have the cost structure reflect the market value is truly what an IP
exchange can provide.

Q: Why should carriers sell IP transit via an exchange?

A: There is an abundance of carriers that are keen to sell more
transit. An exchange offers sellers a captive market where traffic is to be had
by whomever is selling. Exchanges provide sellers with another revenue
opportunity. In addition, they enable network backbone operators to scale their
infrastructure and reduce the unit cost associated with network buildout. By
using an exchange as an alternate channel to market, sellers can significantly
reduce their SG&A associated with every Mbps sold. After connecting to the
exchange, sellers need no further connections to reach the buyers, but simply
offer a solid network and competitive price. The ability to reach a wider
customer base, try alternate pricing structures and arrange for significant
discounts represent additional benefits of selling on an exchange.

Q: Why aren’t more exchanges opening?

A: It’s a complex environment. A company has to fully understand the
market and the technologies that run it. For instance, exchanges that run voice
minutes don’t understand the complexity of IP and haven’t yet built into that
area. There’s an assumption that providers simply have to physically connect to
an exchange. But it’s important to realize they have to present their networks
to the exchange for testing, monitoring and quality control. Only then does it
become a true marketplace where quality stands tall.

Q: What are the necessary market conditions for an IP Routed exchange?

A: In terms of market conditions, all you need are ISPs–both buyers
and sellers–in a single facility. The organization providing the exchange needs
to be neutral, independent and trustworthy. When selecting an exchange, choose a
neutral, independent provider who offers quality, flexibility and service level
agreements that are either equivalent to or exceed market expectations today.

Nigel Panter, executive vice president of Band-X Ltd. IP Routed,
contributed this article. Band-X offers a neutral and independent exchange for
IP transit buyers and sellers that allow ISPs to buy IP transit according to
independently monitored quality and price. For information, login to
or contact Nigel via e-mail at

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