By John McCrank
NEW YORK (Reuters) - Those loyalty points are worth more than you think.
Later this year, institutional investors will be able to create and trade securities based on reward programs offered by airlines, banks, phone companies, shops and hotels, potentially turbocharging a market worth nearly half a trillion dollars.
Affinity Capital Exchange, a New York-based company, plans to launch an exchange by the middle of this year that will allow companies like airlines, banks, and hedge funds to trade points that have been packaged into "point-backed securities."
Retail investors will not be allowed to trade on ACE.
ACE is part of a new breed of exchanges popping up to create electronic trading opportunities from industries not normally associated with buy and sell orders.
It is one of two new marketplaces exchange operator Nasdaq Inc said on Tuesday it was supplying with technology. The other, New York Interactive Advertising Exchange, or NYIAX, plans to trade digital advertising contracts, which make up a $32 billion market.
Loyalty points had a book value of around $350 billion in 2015 and will be worth an estimated $500 billion by 2019, according to ACE.
On the market, they could be worth more than $1 trillion, said ACE Chief Executive Officer Atanas Christov.
"Why $1 trillion worth of value is not traded really defies explanation," he said.
Electronic trading has long dominated markets for assets like stocks and currencies and has been shown to bring down costs, increase visible liquidity and improve transparency.
That could prove particularly helpful for loyalty programs, which are already the basis of a huge, largely opaque market and have been described as a "virtual currency" by regulators.
Banks currently buy points sold by loyalty programs such as frequent flyer programs as part of co-branded credit card portfolio deals. The airlines use the revenue for various purposes, even to buy new planes, while the banks can gain new customers willing to spend more to rack up points.
Private equity firms and hedge funds have also been getting into the points business to help diversify their portfolios. But to do so they generally have to buy stakes in loyalty program companies. For instance, in July 2015, buyout firm Advent International bought a 30 percent stake in a subsidiary of Avianca Holdings SA (CN:AVT_p) for nearly $350 million.
ACE is largely aimed at providing a vehicle for institutional investors to gain exposure to the points market while expanding the market for issuers and their partners, said Christov.
The exchange is also working with Nasdaq to develop a blockchain application, likely in 2018, that would reduce transaction costs and improve the post-trade process, he said.
The exchange also will allow for initial offerings, as well as a secondary market for trading the securities.