5 Trends Shaping Commodity Trading

In 1848, trading started at the oldest mercantile exchange in the world, the Chicago Board of Trade (CBOT).[1] In the beginning, CBOT allowed producers of grains to sell their products through contracts to buyers. This was just the beginning of a global commodity trading industry. Then, producers of various products were able to secure their business by locking in the contracts, thereby mitigating the risk of uncertain sales. On the other hand, buyers and potential consumers of traded products wanted to secure their future purchases. By meeting these supply and demand needs, mercantile exchanges allowed for a whole new type of global business to develop.

Over time, the array of contracts being traded has expanded in both breadth and depth. Commodity trading has continued to grow in the global economy, as market participants aim for improved efficiency and greater knowledge. Despite or sometimes because of the fact that the interests of various parties like governments, producers, traders, and consumers may sometimes collide, new trends continue to develop in trading. Below is a summary of five recent trends.

Risk Mitigation

Effective control of market and default risk requires real-time risk analysis and reporting, which will enable individuals to make sound trading decisions. Market risk reflects uncertainties in business due to overall movements in the markets. A good example of market risk is foreign exchange risk. Default risk represents uncertainty in businesses due to the possible default of business partners.

Figure 1: Historical Movement of Canadian Dollar against European Euro (Source: Bank of Canada)

Figure 1: Historical Movement of Canadian Dollar against European Euro (Source: Bank of Canada)

ZE’s award-winning data management software, ZEMA, helps users visualize historical data alongside the data retrieved from future contracts. Figure 1 shows the historical movement of the Canadian dollar against European euro until late in September 2014, including values deducted from futures contracts.

 

Liquidity

Global exchanges are moving towards non-stop trading, with more and more products available. Chicago Mercantile Exchange, one of the largest global commodity exchanges, traded 2,585 millions of contracts in 2009 and 3,161 millions of contracts in 2013 (Figure 2).

Figure 2: Number of Contracts Traded on CME (Source: NYMEX)

Figure 2: Number of Contracts Traded on CME (Source: NYMEX)

Complex Market Data

Market data is increasing in complexity. As a result, timely data management and accurate information interpretation are of critical importance.

Due to various business requirements, market participants require new, specifically tailored trading instruments. This makes the simplification and breakdown of those instruments more and more demanding.

Figure 3: Call Option Premium on Brent Crude Oil (Source: NYMEX)

Figure 3: Call Option Premium on Brent Crude Oil (Source: NYMEX)

ZEMA allows for the detailed segregation of every product. Figure 3 shows the evolution of the call option premium on Brent crude oil traded on NYMEX, with strike prices 100 and 108 and expiration dates of October and December 2014.

Consolidation

Global exchanges are becoming even more global through mergers, acquisitions, and collaborations. Many well-established exchanges are looking for growth opportunities in Asia. One recent example is the collaboration between the Tokyo Commodity Exchange and Dubai Mercantile Exchange on energy products, which is one among many.

Deregulation

Vertically integrated companies in the energy market are going through the process of ongoing decomposition. This requires that systems be in place in order to manage their energy business-related processes.

The ZEMA Solution

ZEMA collects over 4,000 reports from more than 400 data providers—using the solution, commodity market participants can soften the effects of uncertainties in the market. Furthermore, elaborate trading goods are easy to analyze with ZEMA. ZEMA captures data from existing and new sources which emerge through mergers of companies or their vertical decomposition. To learn more, book a complimentary ZEMA demonstration.

———————————————————————————————————————————————————————–

[1] “Timeline of CME Achievements,” CME Group, January 1, 2014, accessed September 18, 2014, http://www.cmegroup.com/education/featured-reports/interbank-fx-market-trends-2014-08-06.html?source=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed: FeaturedReports.