Technology Options in Commodities Trading (Strategic Focus)

This publication has been discontinued on July 19, 2011.

Introduction

Abstract

Overview

Introduction

The rapid growth in investment in commodities due to low returns in equity and debt markets is presenting its own challenges and opportunities. New players are being drawn by the returns on offer as the commodity ' super cycle' shows no sign of abating. This report will look at how new market entrants has changed the market dynamics and the technology responses of types of market participants.

Scope

• Covers commodities globally, focusing on exchanges based in Europe and Nth America
• APAC focus with Australian electricity market case studies

Report Highlights

The rapid growth in commodities trading volumes and prices will continue with fundamental demand in China and India for oil and raw materials providing a counterbalance against the downturn in the US. New entrants are flooding into the market in large numbers, in many cases without physical exposure to the underlying commodities.

They are contributing to volatility by exacerbating any movements in price, which coupled with the rise in algorithmic trading is causing risk management strategies to be re-evaluated in light of the breakdown of historical trends.

Carbon trading continues to develop, with the EU Emissions Trading Scheme (ETS) publishing its roadmap for phase III. It will be keenly watched as it is envisaged the EU ETS will provide the foundation for a global carbon trading scheme. With the advent of a US based cap and trade scheme the US domestic market alone could reach $1Trillion by 2020

Reasons to Purchase

• Gain visibility of changes in commodities markets
• Gain market insight to assist in your strategic planning and go-to-market strategy
• Technology Options in Commodities Trading (Strategic Focus)

Table of Contents

• Overview
  • Catalyst
  • Summary
• Key Messages
  • Commodities growth set to continue due to demand and the search for higher returns
  • New markets continue to proliferate as underlying trade drives growth
  • Emissions trading is set to take off, presenting potentially vast trading opportunities
  • Volatility and the replacement of open cry trading is driving explosion in electronic trading
  • New levels of volatility in markets are demanding new risk and reporting solutions
  • Vendors must have an appreciation of the underlying physical market
• Table of Contents
• Table of figures
• Table of tables
• Market Opportunity
  • Commodities growth set to continue due to demand and the search for higher returns
    • Higher returns in commodities will continue to attract new market entrants
    • Electronic trading and index products are contributing to increased volatility and higher prices
    • The relative sophistication of energy markets is attracting financial players back into the market
  • New market entrants driving the detachment of price from underlying supply and demand
    • Financial services firms are bringing sophisticated risk management tools as they re-enter commodities
  • New markets continue to proliferate as underlying trade drives growth
  • Emissions trading set to take off, presenting potentially vast trading opportunities
    • Carbon exchanges are proliferating rapidly
  • Volatility in and replacement of open cry trading is driving explosion in electronic trading
    • Exchange consolidation to continue with growing convergence between OTC and exchange-traded markets
• Technology Evolution
  • New levels of volatility in markets are demanding new risk and reporting solutions
    • Multi-product capability is essential for arbitrage or hedging through inter-related markets
    • Energy trading and risk management solutions are mission critical for physical and financial exposure
  • The search for latency reductions in deal execution is driving exchange investment
• Customer Impact
  • Case study: Australian electricity market
    • Startup phases
    • IT sourcing
    • Cost and delivery risk key evaluation criteria
    • Credit crisis placing pressure on ability to operate in the market
    • Uncertainty in emissions trading scheme is having liquidity implications
    • Customers must determine their development lifecycle in deciding which vendor is right for them
    • Arcadia Energy Trading
      • Arcadia' s electricity systems requirements
      • Flexibility and solution tailored to local market are key to decision
    • Increase in commercial motivations due to new entrants in the market
    • Credit crisis leading to increase in futures trading
    • Rise of the futures market in response to tightening in credit market
    • Volatility in futures market assisting with OTC pricing while complicating contract timing for energy users
    • Emissions trading uncertainty is complicating contracting beyond 2010
• Go to Market
  • The commodities boom presents new opportunities in integration and risk management
  • Client' s development phases must be clearly identified and understood
    • Vendors must clearly identify their client' s risk profiles
    • Portfolio risk aggregation is the key requirement of a comprehensive risk management approach
    • Vendors must determine their strategy as either niche or full spectrum providers
    • Multi-product capability is essential to any offering in the market
  • Vendors must have an appreciation of the underlying physical market
    • The deregulation of energy markets will provide scope for vendors as niche plays abound
  • The potential size of the carbon market dictates that firms get involved to shape the debate
• APPENDIX
  • Definitions
  • Methodology
  • Further reading
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
  • List of Tables
    • Table 1: Carbon exchanges are proliferating rapidly
    • Table 2: Exchange consolidation history
    • Table 3: ERM Power' s vendor evaluation table
    • Table 4: Other vendors considered (names withheld)
  • List of Figures
    • Figure 1: Prices are supported by demand and exacerbated by speculative investment
    • Figure 2: Energy usage by region 1980-2005
    • Figure 3: Growth in all merchandise export sectors
    • Figure 4: Rate of investment in carbon reduction projects
    • Figure 5: Explosive growth set to continue
    • Figure 6: Intercontinental Exchange monthly volumes 2005-07

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