What is a Commodity Broker and Types of Commodity Brokers
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What's happening in commodities markets, said Craig Pirrong, professor of Finance at the University of Houston, is that what used to be "in the floor trader's head" is now being computerised. Moreover, increased electronic trading is a spur for greater liquidity, as well as a catalyst to change the way liquidity functions.
Ultimately, that means cheaper transactions. So hedgers and others are going to be able to execute orders at lower cost, a benefit to any market participant. Meanwhile, market participants themselves are changing too. Castleton Commodities, which emerged from the energy subsidiary of the Louis Dreyfus Group, illustrates how trading firms might evolve.
What makes them distinctive, said Pirrong, is that they provide "a marriage of private equity capital in a private ownership model". Castleton is sort of a hybrid model," he said. Commodity trading houses are adapting against a backdrop of the world's open outcry trading floors getting shut down one by one, with the last remaining ring in Europe belonging to the London Metal Exchange.
There is tremendous speculation that the ring will disappear. But it appears that the LME is making plans to include designs for it as the exchange moves to new headquarters. When we move to our new premises, which will be the end of this year, or early next, we will have a new ring," said Paul MacGregor, head of sales at the LME.
The LME did a review in and the market wants to keep it. Pirrong however, sees the ring as "important, but they keep it on more for tradition". And its continued use will come under renewed speculation with the news that JP Morgan plans pit trading commodity brokers indian quit the ring. Michael Camacho, head of commodities at JP Morgan said to the Financial Times that the move was prompted by shifting client preferences: LME trading, in the ring and electronically, involves 40 general clearing members, including some of the big investment banks, brokerage houses, and some "very unique metal-specific members who really only offer access to the LME," said the LME's MacGregor.
The primary base metals traded are: Minor metals contracts include cobalt and molybdenum. Pit trading commodity brokers indian LME has developed a volume-based rebate programme, and MacGregor is reaching out to traders who find that profits are hard to make in other markets due to monetary conditions or market saturation. In energy markets such as gas, power, carbon and coal, trading is mostly executed via interdealer brokers, and is a 'highly electronic market place', screen assisted for more than a decade, according to Alex McDonald, CEO of the London Energy Brokers' Association.
In Europe, OTC energy markets are traded on a hybrid system with voice brokers using a common aggregation software, such as Trayport. In the less liquid products European energy markets are preparing for the next stage of REMIT Regulation on Wholesale Energy Markets Integrity and Pit trading commodity brokers indianwhich has been preliminarily in force since the end ofbut will shortly witness detailed implementation.
In early October, widespread reporting requirements will be introduced, as well as the imposition of much more prescriptive and firmer market abuse rules, said McDonald. The outcome will be market assurance and quality, but the impact of that is really in the reporting and in the post-trade, as opposed to radically shaking up the arrangement of pit trading commodity brokers indian he said. REMIT, he added, is providing energy markets with something that other markets don't have, namely, a "holistic" approach to product and a common set of reporting engines with utility product codes.
Compare that to MiFID II regulation, which will divide the market by product, participants, geography, and most notably between physical forward and pit trading commodity brokers indian markets. Gas and power both trade as physical forward markets and have a pit trading commodity brokers indian limited take-up of clearing. McDonald said the likely impact of the regulation would be to further fragment the market into types of users and products.
This will mean that contracts not physically settled will be classed as financial instruments and reported and regulated under EMIR European Market Infrastructure Regulationwhich affects derivatives, central counterparties and trade repositories and has a stated aim of improving transparency pit trading commodity brokers indian well as reducing risk. Under EMIR, the competent authorities will become financial regulators as opposed to the bulk of the markets, which are overseen by energy ministries.
One thing's for sure: Questions pit trading commodity brokers indian been raised over access and intellectual property for traded instruments, when the underlying is a common utility: It could very well be the "next generation of technology" that empowers both participants and supervisors, but also solves problems inherent to the "very expensive, current discordant and overlapping" set of regulations, and the concomitant intellectual property rights it produces, he added.
Therefore, participants cannot trade unless segmenting lots of cash collateral onto a centralised exchange and paying execution charges to get market access, data, post-trade processing and reporting," McDonald explained. One of the lessons of any regulation is that the big get bigger and the small struggle for market access due to increased costs. The debate going forward will be whether a distributed model will trump a centralised model, and what the common objectives are and who sets them?
Professor Craig Pirrong, however, said that the situation is comparable to other advances that shook pit trading commodity brokers indian markets. And within that, we are going to see evolution," he said. China is a growing market, with distinct characteristics. He explains that there's a partnership with local asset managers. We develop a trading system and then we can cooperate with various asset managers that operate the systems," he said.
Lockstrom added that there was regulatory change in China on almost a daily basis. China pit trading commodity brokers indian on a path to liberalise markets, including opening up commodity futures markets to foreign firms.
They have really backtracked on the development path that they originally embarked upon," said Lockstrom. He expected the long-term direction of liberalising markets to be resumed after some months as market conditions moderate. One of the reasons they have become members of the LME relatively recently pit trading commodity brokers indian the demand of their customers in China to directly hedge on to the LME.
He also foresees India being a huge growth market, as well as Singapore and other Asian markets. Japan is a mature market, it has an enormous steel industry that needs to hedge the inputs to steel nickel and zinc. Australia has an enormous mining industry and very well-developed proprietary trading industry, and also managed money industry. The agricultural markets division of the Johannesburg Stock Exchange was founded 20 years ago. From day one, the pit trading commodity brokers indian derivatives exchange started off electronically, said Chris Sturgess, director of Commodity Derivatives at JSE.
It enabled the exchange to connect member firms, particularly those accessing and then executing for clients from across the countryside. The most liquid and actively traded commodity is white maize, followed by yellow maize, soya beans, wheat and sunflower seed. These are cash settled contracts relying on their benchmarks. By the end of the year, the JSE is introducing two cash settled beef contracts and a partner arrangement with ZAMACE, a spot commodity participant in Zambia for listing Zambian contracts in white maize, wheat and soya to be traded and settled in US dollars.
In terms of doing business in Africa, Sturgess said it was important to be aware of the available infrastructure, which is not always on a par with Europe or the US.