In July 2008, OTC Global Holdings (OTCGH) announced its formation, uniting six independent brokerages in the over-the-counter (OTC) commodities sector. In just six months it has grown to 14 subsidiaries, 110 brokers, and is the largest liquidity provider to Nymex Clearport. Its growth has significantly outpaced the market, with revenue gains of 40% for 2008.
OTCGH was formed to enable boutique brokers to compete with larger brokers in terms of their technological offerings and execution services, and to increase market share and liquidity while maintaining a specialised service for clients.
"We don't want to change the brand of a niche broker or ask shops to relocate to a central headquarters," says Javier Loya, OTCGH's chairman and CEO. "We look for brokerages we can partner with, not ones that want to sell out."
In fact, because OTCGH looks for brokers that are market leaders in their niches, it's important for the company that it retains the brokers' expertise. Each subsidiary company joining OTCGH has struck its own deal. OTCGH owns between 70% and 100% of the companies, but, crucially, all the subsidiaries have equity in OTCGH. "We spent a lot of time figuring out a deal that would best keep our business interests aligned," says Loya.
When a company joins OTCGH, the parent company fits it out with IT systems, creating a common back office, and the same trading systems for all companies. The now well-practiced process of installing these systems has a two to three week turnaround.
This system upgrade has been particularly helpful to the subsidiaries. "It has meant the brokers can focus on what they do best, rather than systems and admin," says Loya. "It's given management the time to go out and recruit new brokers."
Loya points to the example of one subsidiary, PVO, which has grown from a two-man operation to 25 people in 14 months. "Our model lends itself to quick growth," he says.
OTCGH's initial portfolio of brokers comprised Black Barrel, Choice Natural Gas, Choice Power and Elite Brokers located in Houston; and Power Merchants Group and PVO Energy based in New York, and specialised in energy products that included natural gas, power and crude oil.
In September, OTCGH announced the creation of its seventh portfolio company, Valence Energy. That month, OTCGH also announced the acquisition of its eighth portfolio company, Infinity, which offers a range of products in coffee, sugar, cocoa, cotton and frozen, concentrated orange juice and marked the company's entry into the soft agricultural asset class.
Since then the company has bought subsidiaries specialising in agriculture, crude oil, refined products, liquefied natural gas, and natural gas swaps and options.
The company's long-term plan is to grow its offerings both geographically, including internationally, and in terms of the diversity of the commodities and complex instruments it brokers.
"Europe is a key goal for us," says Loya. "It's not as fragmented as the US energy markets, so there aren't as many small market leaders, but we hope to have a presence there next year," he adds.
In the last two months, the company has faced several serious challenges, including Hurricane Ike, relocations and the financial crisis. While many of its competitors have announced 3Q 2008 revenue losses and layoffs, OTCGH continues to grow, both in size and in liquidity. Its continued investments in technology, talented individuals and its core businesses, as well as its diversity in asset class and geography, has created synergies within its respective brokerages and has enabled it to better weather the volatility of the current financial environment. OTCGH is well on its way to achieving its goal of becoming the largest, independent broker in the world.