Commodity Trading: Challenges and Responses
Soft demand for many commodities in recent years may seem like the new normal, but the future is anyone's guess. That complicates things for traders as they chart the future. Optimizing trading operations may be the answer for some. But designing processes and a scalable technical infrastructure that can navigate today's challenging fiscal and regulatory environment could help better position commodities companies to compete, even as the trading landscape continues to change.
Here are four actions that may provide guideposts for transforming trading operations for this new environment:
1. Increase efficiencies across the trading environment.
After undertaking major initiatives to implement or consolidate trading and risk management systems, many traders are now looking upstream and downstream at systems and processes to identify opportunities to increase their efficiency. Everything from pre-processing systems such as market data aggregators and modeling tools, to post-processing systems, such as data warehousing, strategy management tools and monitoring and reporting technology are being examined. Ultimately, technology and process innovation are prominent in the projects undertaken to increase efficiency.
2. Use analytics to monetize technology.
To create the capability to model many market trend complexities, trading groups seem to be increasing their investments in new analytics engines to help them gain a competitive edge. Pairing these new technologies with cloud computing and other analytical platforms presents traders with an opportunity to uncover previously undetected patterns.
Despite the challenges associated with modeling basket products and sifting through the nuances of individual products, new technology may allow traders to "test" trading strategies. The obstacle that many companies find difficult to overcome, however, may be realized by identifying the right questions to generate information that can help define or refine trading strategies. Typically, trading firms need to understand their historical performance – where they experienced strong performance in the past. Also, they may need to do one or two additional things: analyze how they can modify profitable approaches to improve their profits, and/or examine their losses to help them identify unsuccessful trading strategies that could be eliminated in the future.
3. Reduce costs.
Traders are also looking for ways to make their global trading operations leaner from end to end. Regardless of whether clients focus on technology or process efficiency to cut costs, quantifiable and material impacts to operating costs may be an important goal.
4. Adapt to regulatory changes.
Additionally, financial regulations continue to evolve, and as that occurs, many trading organizations are factoring compliance into their budgets. Some companies may infuse their commodity trading groups with more capital to help them meet minimum collateral requirements while others may terminate their proprietary commodity trading activities. Still, other companies may seek out technological workarounds to prevent triggering events that would require real-time reporting.
In any case, many trading operations executives have the opportunity to establish rules, standards and processes in their organization to aid regulatory compliance. New standards also may be applied to reporting, data aggregation and data quality.
The Future?
What the future may hold for commodities is anyone's guess. Whether prices rebound or not, optimizing trading operations can offer a prudent way forward that can help trading organizations compete more profitably in the future.
About The Authors: Andrew Vo and Faron Schonfeld are managing directors in the Finance & Enterprise Performance Strategy group at Accenture, a global management consulting, technology services and outsourcing company.
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