Commodities trading: An overview
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While you can still use bbh. Max Schlubach sits down with Rashed Haq, Vice President of Business Consulting at Sapient Global Markets, to discuss the use of data and risk analytics by global physical commodity traders. As global banks have exited the physical commodity trading sector due to new regulations, physical commodity traders have largely stepped in to fill the void.
In many respects, banks were natural participants in physical trading commodities companies physical commodity trading has increasingly become a business where investing in a sophisticated, often proprietary technology platform is a precondition to success and can even create a competitive advantage.
Banks could leverage existing trading platforms and compete given lower costs of capital. As banks wind down their physical activity, are traders up to the technology challenge?
Technology — even more than trading acumen — may define the winners and losers in the sector over the next decade. No one is better to answer the question than Rashed Haq. Haq is the Vice President of Business Consulting at Sapient Global Markets, which provides integrated advisory, program management, data analytics and technology consulting services to commodity market participants. Based in Houston, Mr. Haq runs a team of business consultants focused on physical energy merchants who look to Sapient for advice on harnessing trading data within the scope of regulatory compliance, platform optimization or adding efficiencies to their bulk commodity logistics infrastructure.
With an evolving trading landscape that has recently seen physical flows shift from publicly owned bank balance sheets to those of global commodity trading companies, the CMU sat down with Mr. Haq to discuss the use of data and risk analytics by global physical merchants. Thanks for sitting down with us, Rashed. Sapient Physical trading commodities companies Markets is a business technology consulting company working across capital and commodities markets. Within commodities, we work primarily in the energy industry — about of the largest publicly traded energy companies are clients.
We work with trading companies, producers, fractionaters, refineries and midstream operators. My team specifically focuses on two areas: As consultants, we evaluate overall operating models for different ways to optimize trading or logistics functions, with a particular focus on data analytics. We will implement the recommendations we make based on our findings, and in some cases, we provide ongoing operational support. If a customer needs a team of quants, we can provide that, for example.
Whether we look at crude oil storage, pipeline development, LNG 1 export capacity or port terminalling, the level of investment in midstream infrastructure has grown substantially over the past decade. Is the level of trade data integration between midstream operators keeping pace with infrastructure development? With the exception of a few leading companies, information management is generally lagging; most companies are playing catch-up.
Someday, but probably not until years down the line. Right now, most physical trading commodities companies are investing in software that allows them to play out various logistics scenarios. A human then looks at the various outputs and makes the final trade decision. There are a few people doing algorithmic physical trading in power and gas, where computers are actually making physical trading decisions.
For the most part, that kind of technology is being used by banks — not the pure-play trading companies. Energy markets are ever-evolving. To our previous question: If not, what might that do to hinder their ability to fill the trading void? The answer probably falls somewhere in between, in the sense that banks are exiting, so overall physical trading commodities companies is less liquidity in physical markets. The larger players with the biggest balance sheets are most exposed.
They need to get three things right. First, trading companies have to effectively measure their cost physical trading commodities companies capital. Second, they have to look at their trading book physical trading commodities companies, as a portfolio. Where do they want to take structured product risks?
How do they measure those risks? Is enough capital supporting those risks? Physical trading commodities companies, this is another area in which banks had the chance to learn a hard lesson. Finally, traders need to use technology. What segments of the midstream do you see making the best use of innovations in data capture and analytics? What segments have physical trading commodities companies most opportunity to improve?
If I look at the segments overall, the furthest ahead on the curve are physical power merchants or utilities. Power has had to run up the tech curve faster out of pure necessity, based on historical volatility. The pure trading companies have the furthest to come. Information contained herein is based upon various sources believed to be reliable and subject to change without notice.
This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U. Internal Revenue Code physical trading commodities companies for promotion, marketing or recommendation to third parties.
This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without physical trading commodities companies.
Unauthorized use or distribution without the prior written permission of BBH is prohibited. Looks like your browser is out of date Update now for the best viewing experience By updating your browser, you'll get the optimal experience from bbh. Home Insights Commodity Traders and Technology: A New Wave of Capital Investment? Thank you for your information. Commodity Traders and Technology: December 1, Subscribe to Commodity Markets Update. Rashed, thank you so much for your time and insights.
PB 1 Liquefied natural gas.