Ask the Right Questions to Improve Trading Analytics
Co-authored by Andrew P. Vo and Faron B. Schonfeld
Commodity trading organizations seeking to optimize the value of their assets -- or to benefit from future commodity price movements -- employ many forms of analysis to support their trading strategies. With the proliferation of analytical tools in the marketplace, there are now more technology options than ever to help guide decision-making.
Many trading firms have found it difficult, however, to realize the full benefit of the analytics tools or services they purchase. This may be because firms are not asking the right questions about their trading strategy and the goals they hope that analytics can help them achieve.
Each firm is different, and there is no comprehensive list of questions that all trading organizations can use to unlock the value of their analytical tools. There are, however, common challenges facing many organizations -- especially those that are part of publicly traded companies. It is particularly important to arrive at an understanding of how trading performance drives shareholder value.
We often begin discussions about analytics investments with these general questions:
- What is the estimated impact of the trading portfolio on earnings per share (EPS)? How effectively have positions hedged their forecasted asset output?
- How does the return on equity (ROE) or return on invested capital (ROIC) within the trading business compare with internal targets? How does it compare with peers?
- What level of catastrophic risk exists within the trading portfolio and how may that affect current and future earnings?
- How much of these risks can be insured using market instruments and how much cannot? How much of these risks are attributable to credit versus price versus operational risk? How are these risks interdependent?
As trading instruments and markets evolve, valuing and reporting performance becomes increasingly difficult as more information is required to calculate and interpret performance. Making use of advanced analytics becomes an essential step in this process.
At the next level, questions should focus on trading strategies:
- What current trading strategies (e.g. transaction types, locations, and time periods) generate the most profit for the firm?
- How or why does the company make or lose money in a particular book or strategy?
- What is the ROI on each dollar of collateral employed in the trading business?
- How do you use analytics to assess opportunities within new markets?
- How do you use analytics proactively to identify arbitrage opportunities in the market?
- What potential merger or acquisition targets offer the best return when combined with current activity?
Most analytical tools have very advanced simulation and mathematical engines that can answer a wide variety of such queries. But each tool should be configured properly upfront to drive toward an answer.
While questions will vary from firm to firm, analytical tools can help organizations derive the right answers in almost every case, including understanding shareholder and financial impact, capital allocation efficiency, and emerging market trends. The exercise requires some preparation, especially in terms of collecting and organizing needed data. Asking the right questions, however, is an indispensable first step in determining trading strategy and direction.
Andrew is managing director lead of the North America Finance Processes & Operations practice within Accenture's Finance & Enterprise Performance organization. He is responsible for five sub-offerings: Finance Process Led Transformation, Liquidity Management, Real Estate ... View Full Bio
Tweet This