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Commodities Trading: Time to Let Go of Manual Legacies?

Traders Magazine Online News, November 15, 2018

Mike Wilkins

From 2019, Audi will no longer sell a new car with manual transmission in the United States. America has long preferred automatic, but it feels significant; like a turning point where the manual world for motorists begins to fade into obsolescence. Maybe in a few years we’ll witness the final few petrolheads resist a change that has since become inevitable.

In commodities trading, that’s where we are right now. Electronification and technological advancement in trading systems have put us on the brink of a world where ‘manual’ is rightly a thing of the past. But we’re only on the brink – there’s still a final jump to make yet.

Electric futures

Recent years have seen rapid electronification of a once stubbornly voice-driven market and the roar of barked orders in the options pits has dwindled to a murmur, while the futures pits have been silenced completely. Additionally, even as the last holdouts continue to defend their corner, electronification has enabled frontier markets around the world to open their own commodities exchanges with contracts based on regional nuances and catering to local players, creating a wider array of products to trade and developing a new set of benchmarks. One only needs to look at trading volumes of agricultural products in China and compare them to those traded in Chicago to see how volumes in these markets has exploded over the past decade.

Today, voice flows are ebbing even for the complex options which had resisted electronification for a long time. For example, five or six-legged natural gas options with different durations are being cleared on exchange that would never have been a few years ago. Brokers can create these custom strategies on exchange, where market makers see them, analyse them and instantly publish a two-sided market in response which brokers can then show back out to their clients. Traders are finding that, even if volumes will never be huge, there are venues and counterparties that can be relied on to take the trade, and communicating with those counterparties gets more automated and quicker. With orders being sent, filled, cleared and reconciled in a matter of moments there’s little incentive to enter into an OTC trade when a futurized trade can be just as effective and significantly more efficient. As complex options join futures on-screen, a big part of the more manual, analogue commodities trading world slips away.

Manual gearboxes

But that moment has been coming a long time and everybody in the commodities market has watched as it has inched closer. It’s not the only way the commodities world is letting go of manual though – equally important is what’s happening under the bonnet.

Electronification of instruments has gone hand-in-hand with electronification of workflow too. However, there have remained gaps where manual processes have persisted. Fully transitioning to a post-manual world for commodities trading will mean eliminating these, front to back, top to bottom.

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