Price Disconnect in Commodity Markets Amplified by Complexity of Data
The increasing complexly of data is creating an “information gap” in commodity markets that could be causing commodity prices not to follow the logic of underlining economic fundamentals.
In the study Financialized Commodity Markets: Recent Developments and Policy Issues released last month, the United Nations Conference on Trade and Development recommended governments that they find ways to improve “data collection, analysis and dissemination” to enhance transparency in physical commodity markets. The report stated that while there may be “ample information on physical commodity markets, it is not easy to obtain in a systematic way” and that it “takes time and expertise to find out which are the most useful, relevant and reliable sources of information required for a specific commodity.” The report cited specific concerns with investor participants who lacked the required underlining fundamental data, yet were still able to influence prices, sometimes even making the market in various commodities mainly due to their relatively large capital positions.
Economists would describe this as a market with asymmetric information – a market where a group of participants have more or more accurate information than another group, creating an imbalance of power in the market. Normally, the parties with the information advantage would be able to profit from this as they have a better understanding of the underlining value of the asset. However, in a case where investor participants provide the majority of the capital and are able to make the market, prices can deviate from the underlining value of the asset toward what these investors perceive to be a reasonable price. The result is a price disconnect from the underlining fundamentals, supply and demand of the asset, and increased volatility in the market.
The study surveyed investor participants, who reported that the primary information used in determining trade strategies was foreign exchange rates and macro indicators (such as GDP, unemployment figures and monetary policy) and that little attention is paid to supply fundamentals.
It was noted that market information will be improved once regulators begin collecting and aggregating transaction data from exchanges, OTC and related physical markets under new regulation, the Dodd-Frank Wall Street Reform Act. Still, there will be more work to be done to aggregate data related to the supply and demand fundamentals in commodities markets. The study pointed to the Joint Organisations Data Initiative that now provides the most comprehensive source of data on production, demand, refinery intake and output, imports, exports, closing stock levels and stock changes as an example of when governments can take action to improve market data.
Market participants can take steps to improve data collection, analysis and dissemination internally to ensure they have the accurate and correct information possible. ZE Powergroup is a leading commodity data aggregator that produces the ZEMA Suite of products, a data management and analysis solution, rated as three years in a row as best data manager by energy risk magazine. Learn more about our line of products at www.ze.com