A renegade band of semiconductor industry veterans is trying its hand at selling commodities futures. Not oil, coffee beans, or pork bellies, but DRAM.
Calling itself Semiconductor Futures Exchange Inc. (SFX), the self-financed operation is offering its internally developed software as a platform for DRAM price hedging, and claims it is not affiliated with any chip manufacturer or distributor.
The concept is not new. Organizations with more financial muscle and proven track records in futures trading have tried it, none with success. Yet, SFX hopes its first-hand knowledge of the chip market will lend credibility to the enterprise.
Modeled after marketplaces like the Chicago Merchantile Exchange, but set up as an industry-specific exchange, SFX aims to give OEMs, EMS providers, distributors, and brokers a tool to manage price risk by buying and selling DRAM inventory on speculation.
"A planner can assure himself guaranteed cost of components at a future point six months from now, and need not be concerned about fluctuations," said Jackson Cole, chairman of San Francisco-based SFX and a former executive of memory chip and module supplier Quadrant Components Inc.
The exchange can also serve as an inventory management tool, though it's not intended to take the place of
the spot market or act as a venue for trading parts for immediate delivery, said Lee Hagelshaw, a technology attorney and president and chief executive of SFX.
"Instead of holding physical inventory, a company can hold a contract to buy a certain number of parts at a certain price at some future date," Hagelshaw said. "If they don't need the inventory, they can sell the contract before it comes due."
The process, he said, could help smooth out the DRAM market's characteristic volatility by giving buyers better control of inventory, and chip suppliers better insight into future production needs.
However, one manufacturer said that's not the way DRAM suppliers operate. "We typically don't adjust production based on market needs from a cost perspective," said a spokesman for Micron Technology Inc., Boise, Idaho. "We generally run at 100% capacity to keep our fixed cost down."
Production-level adjustments occur by other means, the most common being technology transitions, he said.
SFX is in discussions with several leading chipmakers and distributors, according to company executives.
Under U.S. securities laws, participation in the exchange is limited to qualified members of the semiconductor industry. "John Doe off the street can't come in and speculate," Cole said.
A similar venture centered in Asia, called Semicon Exchange Pte. Ltd., is expected to begin trading DRAM futures later this year, mainly targeting institutional and private investors. SemiconX has the backing of the Singapore Exchange and funding from the Singapore government, according to Kamil Alsagoff, vice president of North America sales for SemiconX in Fremont, Calif.
SFX plans to broaden its platform to support other types of commodity semiconductors, such as EEPROM and SRAM, when the industry becomes more comfortable with the concept of trading futures. DRAM was chosen as the starting point, Hagelshaw said, because it is well specified by part number and type.
Though it has never been successfully demonstrated, the idea of trading DRAM futures has been around for more than 20 years. New ventures spring up sporadically, irrespective of market cycles, observers said.
In one recent example, Enron Corp. in 2001 began a forward contracting service for DRAM, using its own money to bankroll the endeavor. The financial collapse of Enron forced the Houston-based conglomerate to pull the plug on the program before its impact could be measured.
Around the same time, Buckaroo.com, a former DRAM broker, tried to launch a futures exchange before the dot-com crash led it to abandon its ambitions.
While bad timing could be blamed for these flame-outs, even commodities exchanges like those in Chicago and New York have yet to find the right formula for trading electronic components futures.
"It's such a logical idea--in theory, it's brilliant, but it just doesn't work," said Grant Johnson, an independent analyst in San Diego. "DRAM is a natural candidate for futures trading, because it's the most commodity-like of all semiconductors, but it's not a pure commodity."
DRAM is still too varied to benchmark and track, analysts said, noting that multiple types of DRAM are in mainstream use at any given time.
"You can have a standard density, a standard type, and a standard configuration, but you can have infinite combinations of those," said Sherry Garber, an analyst at Semico Research Corp., Phoenix. "There are continual shifting demand issues, there has been a lot of supplier consolidation, and there have been a lot of changes in terms of the manufacturers who use DRAM. It's unpredictable."
What's more, DRAM pricing can fluctuate daily--sometimes hourly. "DRAM makers are less willing to lock in prices three to six months out when the fear is that prices may rise and the competition may gain an advantage," Johnson said.
However, distribution executives said it is for this very reason that a futures exchange might be attractive to some customers.
"As a distributor, we try to speculate on some of the risk factors on behalf of customers, but we don't always get it right, because it's so volatile," said Anna Torchia, vice president of the memory products business unit at Avnet Electronics Marketing, Phoenix.
SFX is unlikely to disrupt or displace the traditional distribution model, however. "The value we offer that exchanges can't is a portfolio of value-added services, like programming and testing," Torchia said.
Avnet entertained past efforts by Buckaroo and Enron, but has not been approached by SFX, she said.
Trading on SFX is anonymous, according to Cole, though buyers always know specifically what supplier and part numbers they are contracting for. All participants in the exchange must clear a financial qualification stage, and are required to post an irrevocable, noncancelable letter of credit. As a backup, SFX, through an unnamed partner, will provide a separate assurances bond.
If a contract comes due (that is, the holder chooses not to sell), the product is delivered to SFX's facility in San Francisco, where the company confirms the part numbers and ships the product to the contract holder.
While in ordinary futures trading there might be 50 trades for every one that's delivered upon, SFX anticipates a high percentage of buyers initially will be those who expect to take delivery.
As the process becomes more familiar, the exchange could be used not only to buy needed inventory but to cover potential product needs or unload excess parts, Hagelshaw said.
A trading simulation tool is available to registered users on SFX's Website at www.semifutures.com. The company said it expects to begin live trading early next year.