Digitalisation in Commodity Trading
How Digitalisation changes Commodities Market in 2021
While global digitalisation today has permeated virtually every sector, including financial markets (particularly the stock market), the commodities market has lagged in its adoption. However, we are beginning to see the adoption of Blockchain and digitalisation in commodity trading. As digital transformation disrupts and continues to reshape the commodity trading industry, market participants now have access to an abundance of data, as well as the digital tools and analytics platforms necessary to interpret and use that data. As a result, digitalisation is already generating significant opportunities for commodity traders, with innovative technologies enabling increased organisational efficiency, margin expansion, and other benefits. In addition, digitalisation is reducing market imperfections, accelerating the transition of commodities to a highly efficient and automated state known as “hyper liquidity.”
What are the benefits of Digitalisation in Commodity Trading?
There is no doubt that advanced data analysis tools in critical commodities sectors such as contract creation, logistics, market risk management, and complex networks have long-term benefits for the industry.
- The digitalisation in commodity trading has resulted in significant changes that have levelled the playing field and increased transparency while also presenting new opportunities and challenges.
- New technologies in this area can improve profit margins and save traders time compiling the data contained in contracts, thereby avoiding the need to rewrite them. More importantly, this digitalisation process converts data to market information, enabling businesses to respond to significant changes in real-time and mitigate operational risk.
- Computer analysis can process large amounts of data in seconds, make specific recommendations to traders, and even initiate trades on their behalf, all at a rate far exceeding that of humans.
Access to data is insufficient; true success is contingent on firms extracting the maximum value from the data at their disposal quickly and accurately. Technology is altering the landscape in numerous ways, including recruitment patterns. Those who adapt to these changes will have a better chance of maintaining their competitive edge in the new decade.
How Digital Transformation affects Commodities Trading?
While the use of automated tools in financial markets has increased, the commodities sector continues to experience low levels of innovation and adoption. One reason is that physical commodities such as oil and LNG (liquefied natural gas) are traded in the spot market, fundamentally different from trading stocks in secondary markets. In addition, the spot market involves trading large quantities of a physical commodity that must be financed, insured, stored, transported, and received. As a result, the entire commodity supply chain is subject to price volatility and risk.
Commodity market participants embrace new technologies such as machine learning and Blockchain to improve the storage, logistics, and transaction of physical commodities, significantly increasing market efficiency and transparency. However, to fully leverage these technologies, businesses must first digitise their data and workflows: the primary benefit of digitalisation in commodities is the ability to extract insights through data analysis, obtain real-time business information, and reduce costs – all of which are critical considerations in a market with extremely thin margins. Big data and predictive algorithms enhance the rigour and accuracy of fundamental analysis, while information specialists provide structured data directly to trading systems.
These changes have levelled the playing field, as virtually all commodity traders and analysts now have access to critical data and near-real-time information previously available only to a select few. The data explosion has effectively eroded the traditional ‘informational advantage, and transparency is being brought to an industry that has been shrouded in mystery far too long.
What’s the impact on Commodities Trading Supply Chain?
As digital technologies continue to develop in strength, they will continue to transform the commodity trading value chain – before, during, and after a transaction:
- Securitisation. Rather than requiring trading desks and commodity traders to negotiate each transaction, financial products can be pooled and traded instantly.
- Assistance with investment decisions. Commodity traders now have instant access to various new types of data that can assist them in predicting future supply and demand dynamics. While many organisations already have access to a wealth of data, many continue to spend significant time and resources discovering, evaluating, ingesting, mapping, normalising, and analysing data that comes in a variety of formats and from a variety of frequently disparate sources.
- Generation of positions. By enabling automated, faster, and more accurate decision making and cost reduction, digital technologies are transforming item generation. Today’s technologies, such as those offered by Kensho, enable real-time viewing of bids, offers, and transactions. As a result, market participants can now observe cash market activity as watching a video game. By viewing live interactions between buyers and sellers via conversion charts, market participants can make more informed trading decisions..
- Portfolios Management. With the computing power available in the cloud, integrated, intelligent trading systems enable traders to conduct much more realistic, path-dependent risk assessments and sophisticated scenario analysis in real-time. Companies that monitor global commodity supply and demand, storage capacity, refining capacity, and transportation of commodities are paying attention. Each day, this data is digitised and made available to market participants via APIs, enabling them to make informed decisions.
- Execution. Intelligent trading systems can help reduce costs, make trade execution less noticeable, and optimise trades to have the most negligible impact on market price. Rather than a series of discrete and sequential technology adaptations or upgrades, this transformation entails anticipating and responding to changes and challenges on an ongoing basis. Additionally, it requires a disruptive vision, a willingness to experiment, and senior management’s strong support and commitment.
- After-trade. Additionally, most trading firms have digitised their back-office processes to enhance the quality of their post-trading relationships.
What does the future hold for 2021/2022?
Not only is technology increasing efficiency and lowering costs, but it is also altering hiring patterns and reporting lines. Along with technological advancements in the industry, talent demographics are shifting. For example, we have witnessed the emergence of a new generation of traders and analysts, one that is capable of navigating the digital world, writing code, and interacting with data. This has increased the number of data scientists employed by commodity trading firms. Additionally, CIOs and CTOs report directly to CEOs, indicating that their strategic role is growing in importance.
Although the commodities world is becoming increasingly digital, there is a natural lag in technology adoption when market participants’ systems must evolve to harness intelligent data and act in real-time. Nevertheless, we are actively digitising data processing and sharing through technology and are well on our way to developing taxonomies, ontologies, and knowledge graphs for commodity markets. This enables us to intelligently tag all datasets, thereby making them more valuable and intelligent for customers.
As commodity trading continues to transform, traders who can adapt to these and other changes will undoubtedly be the new decade’s heroes. Recent changes show no sign of abating; in fact, they are likely to accelerate and become more complex. Unlike Keanu Reeves in the Matrix, market participants require the Matrix to survive as the commodity matrix evolves and the analogue world rapidly approaches obsolescence. Technological evolution is unavoidable as the physical and digital worlds continue to converge. Market participants will be well-positioned to not only survive but thrive in the commodity matrix if they have access to reliable, real-time data and the technology platforms necessary to turn that data into action.