Tom Lewis was named the new CEO of Green Exchange on Monday. He spoke with Jim Kharouf about bringing his experience as former CEO of Ameritrade and Automated Power Exchange Inc. (APX) to the exchange.
Q: Green Exchange hasn’t had a CEO since its inception more than 18 months ago. How will you approach this job in terms of building an organization?
A: I would hope that we all look at this as a new day. Green Exchange was originally formed under the DCM of NYMEX and operates as a limited venture using NYMEX’s technology platform in partnership with a handful of firms, one of which (Evolution Markets) I was on the board of. I watched it evolve and the most significant event was the acquisition of NYMEX by CME (in August 2008). That commitment by CME to provide its ClearPort and Globex technology opened up a much greater potential for the value of the market.
That led to significant interest from liquidity providers. So we now have participation from firms like Credit Suisse, Goldman Sachs, JP Morgan and Morgan Stanley. We also have commercial partners who bring a great deal of liquidity from Constellation Energy and Vitol. And we have brokers, who have not been very quick to embrace an exchange as this market has evolved. So the mere fact that ICAP, TFS, Evolution Markets and Spectron and then hedge funds are getting together to say “Okay, this is global in scope. This could address all environmental commodities. This has the ability to provide 24-7 rapid technology with fast execution, clearing facilities and the ability to address all the environmental commodities across all markets. Let’s go.” That is a different thing than the original anointing of Green Ex and their decision to apply for separate DCM status, to hire a CEO and employ a separate team. They want a new company to be launched with significant support from these liquidity providers. We believe there really isn’t anything out there like it.
Q: You have extensive experience in the brokerage side of the business with Ameritrade and energy with APX, how will that help you build Green Exchange?
A: I moved to Wall Street early in my career and was appointed to be the head of technology at the executive offices of the president at 29 years old. I believe I was and am the youngest person to hold that position. I learned trading systems, clearing systems, pricing engines – everything that was necessary for trading on Wall Street from the inside out. I managed the development of trading systems. Learning capital markets and technology from that granular level is a wonderful education. From there, having the opportunity to manage an organization where the execution is critical to an online trading environment, which was not seen as credible at the time, and bringing credibility to that industry was also an important step. The move to environmental markets was another important step and happened with the advent of APX. APX originally provided clearance capabilities and was set up to be an exchange for wholesale power. It evolved from that to being a scheduling and settlement capability for cross-market wholesale power. And we moved that technology to the infrastructure for the renewable energy credit (REC) market. It first went into serializing every megawatt of renewable energy and it was very successful. It was more than a registry because it tracks the inventories through their entire cycle for all renewable energy credits in all five markets in North America including Canada and Mexico. That registry is now used by California under AB 32 for carbon and is the registry for the Western Climate Initiative. It’s also been endorsed by most of the verifiers as their registry of choice. I went from that to serving on the board of Evolution Markets for three years. That was a wonderful experience because it not only gave me exposure to the trading level, but also the merchant banking component, the structured deals, which are the large blocks of liquidity that can be brought to bear, and the value of these assets in assessing a new project. At that time I also arrived at Johns Hopkins business school at the time they received a $50 million grant. I proposed that there aren’t jobs on Wall Street right now, but I believe there is an enormous need for people who understand environmental finance, particularly from a capital markets perspective. So I spent six to seven months designing a track for environmental finance that has been very successful. That led me to this. There is an opportunity here, to become a trusted platform for these institutional clients. In this nascent stage in the market, with that degree of committed liquidity organized this well and the platform for CME, I believe we can capture a significant amount of market share.
Q: Green Exchange recently waived trading fees – how will this market be re-launched in the coming weeks?
A: These are short-term things. My highest priority is to recruit a really talented team. We’ve initiated that process. And we see ourselves as being a very product-centric company. The first efforts are not to simply stimulate liquidity flow. That’s important but it’s also about having the world take notice.
Right now the priority is to build a team and continue to work through the application process of the CFTC to become our own DCM. And we’re in the process of securing regulatory approvals in Europe to ensure that we have these global capabilities and evaluate the needs of our customers. As you know, there is a high percentage of exchange-traded products that fail. That’s just the nature of contracts on exchanges. The way you minimize that is to have partners who commit as you do that product planning and ensure you are doing the proper segmentation analysis. We plan to do that and take our time.
I would not have done this had we not been extremely well-capitalized with brilliant partners at the right time. I believe we have a group of people who are patient and have a very long-term perspective and are not looking upon this for short-term goals. We believe these markets will be global in nature, cross-hedged and blended with traditional energy products. The complexity of these instruments will not be entrusted by large institutional liquidity providers through any exchange. It will be via a trusted environment like Globex and ClearPort.
A: I’ve never in my career looked at a single competitor as my win-loss. There are 11 exchanges today that are operating and 19 have filed. They are all in various stages. There is going to be a lot of consolidation and lots of change within these markets. The unfortunate part is that climate change news has slowed down. The fortunate news is that it provides the firms who really want to build a very strong market an opportunity to put that in place. I think there is plenty of opportunity with the growth that has taken place in Europe for more players, and for players across jurisdictions. And you could create a multi-jurisdictional instrument that is traded in one location and cleared and settled in another location. That kind of complexity, particularly if you blend those things for hedging with traditional products like oil, natural gas and coal, is not easy to do. I don’t think we’re going to have a hard time competing because I don’t think there will be many firms who will do what we will be doing.
A: That’s true. And these nascent markets, as they mature in post-Copenhagen and post-climate legislation in the US, and the time horizon stretches from months to years, the desire to blend these with other commodities and hedge them becomes greater. People have longer horizons for combined portfolios. I think there will be a greater amount of assets that will be committed and greater confidence in these and it won’t be a local phenomenon. There’s plenty of road to compete.
Q: Any thoughts on what and when we’ll see in terms of a US cap-and-trade system?
A: Right now, healthcare is drawing most of the oxygen out of the room. So a lot of this is caught up behind that. So you have four scenarios: healthcare succeeds in a big way in a short time, or it slows down and there is a lot of negotiation in Congress and the administration, or healthcare dies and there is little political will to push climate legislation forward, or it drags on moves into another term.
We’ll probably see some delay on climate legislation. But ultimately, I do think climate legislation will take place. Do I think there will be some constraints, give-aways on allocations and some doubt? I’m relatively close to some of the utilities and others who will be capped, and my sense is their resistance will greatly shift once it becomes accepted that climate legislation is going to happen. And like the renewable energy credit market, more of the attention will be spent on how to maximize the value of those assets and manage the future of that environment. That’s where we need to get to.
Q: If you could give Congress one reason why we need cap-and-trade for carbon what would it be?
A: We have to control emissions. That has to happen. And the lowest cost mechanism, proven over and over in renewable energy or acid rain, carbon in other markets, for achieving environmental objectives is cap-and-trade. And it creates a new capital market for growth. The alternative is command and control and tax. That capital does not get re-deployed into improvements. That to me, would be a tragedy for us.