Big Banks’ exodus from Commodities

Post by

May 30th, 2014

Goldman Sachs, Morgan Stanley, Barclays and JP Morgan used to be the biggest traders of commodity among banks. However, this space has witnessed many of the big banks exiting the business line in recent times. JPMorgan recently decided to exit physical commodities trading business by selling its raw-materials trading unit to Mercuria Energy Group Ltd. Morgan Stanley decided to sell its physical oil business to Russia’s Rosneft. Barclays decided to exit some of its commodities business. Deutsche Bank said it would exit dedicated energy, agriculture, dry-bulk and industrial-metals trading. Bank of America Corp. said it would dispose of its European power and gas inventory. UBS decided to shrink its commodities business sharply. Goldman began a process to sell part of its physical trading operations.

This retreat of the big banks from commodity business has been driven by tighter regulation, stricter capital requirements, increasing political pressure and lower profitability in recent times. Key regulations impacting banks in commodity trading include Basel III, Dodd-Frank, and the Volcker Rule. Rules brought in to address the financial crisis of 2008 (Basel III, Dodd Frank) require banks to hold more capital than in the past against trading operations, which has made holding commodities more expensive for the banks. New charge for credit valuation adjustment (CVA) – which requires higher charge for longer dated trades with lower rated counterparties – is likely to have significant impact on hedging practices of longer dated trades. Further, regulators are pushing for over the counter trades to the public exchanges, which is likely to significantly reduce profitability of such trades for the banks. Volcker rule, aimed at banning banks from trading with their own capital, is another catalyst in this regard. Anticipating this rule many banks have already scaled back or spun off their proprietary trading desks.

Politicians have also exerted pressure on banks to cut back their commodities business. Regulators and some senators have expressed concerns about banks being in the business of natural resources. This has been largely prompted by events like Deepwater Horizon oil spill, complains from other industries and associated media coverage. Policy makers are now seeking comment and exploring ways to limit banks’ role in trading of commodities.The U.S. Federal Reserve is considering new limits on trading and warehousing of physical commodities. Policy makers suspect that there are conflicts of interest when the same entity is involved in the physical market and also in trading derivatives on the same underlying. Commodity Futures Trading Commissions (CFTC) is investigating the effect banks are having in the commodities markets, as it has been argued that banks played a major role in the rising commodity prices, including that of agro-prices, in the latter part of the last decade.

Lacklustre market conditions are another driver behind many banks’ decision to shrink or wind up their commodity business. While regulatory burdens have added to cost side of the business, less volatility in commodity prices have hit top line. Combination of these factors has resulted in lower revenue from the business. Industry estimates suggest commodity-trading revenue for the ten biggest banks shrunk by over 67% in 2013 compared to peak levels attained in 2008. This trend of falling revenues holds good for not only the commodity business, but also to the FICC (Fixed income, currency and commodity) segment in general. Forced by this, some banks are shrinking or winding up their Fixed Income business as well.

These developments are making commodity trading an inefficient use of capital at a time when other markets, such as equities, are showing signs of recovery.

Exchanges and innovation

Post by

May 29th, 2014

I recently attended the 2014 IOMA/WFE conference in Moscow. An interesting panel debate was on the role of innovation in the exchange universe.

Some observations:
• While not all innovation begins at the product level, exchanges tend to focus energies there consistently
• Exchanges seek early feedback from customers on product needs, particularly any products that offer risk hedging
• In some geographies innovation must involve a wide array of stakeholders including regulators
• Exchanges also concentrate on innovation along the value chain; seeking and filling gaps

In summary, the current state of innovation at exchanges appears to be fairly customer-centric when launching new products (e.g. index options or futures products).

To get beyond product innovation at exchanges, one must consider technology innovation. Since only a few exchanges think of themselves as technology vendors, technology innovation is difficult, but some exchanges may focus on driving down latency, improving capacity or delivering technology to a community of users.

Collaborative innovation may be on the rise, as exchanges look outside their walls for partnerships. For example, CBOE plans to invest in Tradelegs, a developer of advanced decision-support software.

Beyond HFT

Post by

May 15th, 2014

I recently attended the Tokyo Financial Information Summit, put on by Interactive Media. The event was interesting from a number of perspectives. This event focuses on the capital markets; attendees are usually domestic sell side and buy side firms and vendors, including global firms active in Japan. This year there was good representation from around Asia ex-Japan as well; possibly attracted by the new volatility in Japan’s stock market. The new activity in the market was set off by the government’s Abenomics policies aimed at reinvigorating the Japanese economy. But I suspect the fact that Japan’s stock market is traded on an increasingly low latency and fragmented market structure gives some extra juice to the engine.

Speaking of high frequency trading, Celent’s presentation at the event pointed out that HFT volumes have fallen from their peak (at the time of the financial crisis) and that HFT revenues have fallen drastically from this peak. In response to this trend, as well as the severe cost pressures in the post-GFC period, cutting-edge firms seeking to maintain profitable trading operations are removing themselves from the low latency arms race. Instead, firms are seeking to maximize the potential of their existing low-latency infrastructures by investing in real-time analytics and other new capabilities to support smarter trading. HFT is not dead, but firms are moving beyond pure horsepower to more nuanced strategies.

Interestingly, this theme was echoed by the buy and sell side participants in a panel at the event moderated by my colleague, Celent Senior Analyst Eiichiro Yanagawa. Even though HFT levels in Japan, at around 25 – 35% of trading, have probably not reached their peak, firms are already pulling out of the ultra-low latency arms race–or deciding not to enter it in the first place. The message was that for many firms it is not advisable to enter a race where they are already outgunned. Instead they should focus on smarter trading that may leverage the exchanges’ low latency environment, but rely on the specific capabilities and strategies of a firm and its traders.

Looking at this discussion in a global context, it seems interesting and not a little ironic that just as regulators are preparing to strike against HFT, the industry has in some sense already started to move beyond it.

How can financial advisors benefit from leveraging social media?

May 15th, 2014

Private Asset Management (PAM) magazine recently approached Celent about the benefits financial advisors could receive from leveraging social media.

Read what we had to say here:


6.11.2014 Celent Webinar: How to Better Leverage Celent

Post by

May 12th, 2014

Celent CEO, Craig Weber

This event is free to attend and we expect you to walk away with a better view as to how you can get more from working with us. For more information, please contact Anna Griem at +1 603 582 6137 or

Please click here for more information.


Celent Wealth Management Webinar Replay: The Evolution of the Retail Investor Landscape

May 9th, 2014

Audio for this event is available here.

The retail investor market across Europe and North America continues to evolve in the face of more stringent regulations, slow economic growth, an increasingly sophisticated client base, and an increasing number of digital channels. Among investor groups, retail investors are unique in having differing levels of affluence, investment knowledge, investment product preferences, and expertise.

Technology continues to play a significant role in the evolution of the retail investor and how businesses will establish themselves in the post-financial crisis environment. With the proliferation of social media and smartphones, the way clients prefer to perform banking or trading activities is evolving. As such, the continued enhancement and development of digital strategies are at the forefront of firms’ strategic plans.

This webinar examines how the retail investor landscape has evolved and what online brokerages can do to differentiate themselves. Isabella Fonseca, Research Director within Celent’s Wealth Management group, and Ashley Globerman, Analyst within Celent’s Wealth Management group, discuss the challenges facing the industry and takes a prospective look at the future role of digital strategies in the retail investor market. They also examine the latest trends and developments in the market.

For more information about this event, please contact Andrew Renzella at +1.617.262.3124 or


6.6.2014 Celent Securities & Investments Webinar: Swap Execution Facilities: What’s Next in Store?

Post by

May 6th, 2014

Anshuman Jaswal, PhD, Senior Analyst with Celent’s Securities and Investments Group

This event is free to attend for Celent clients and the media. Non-clients can attend for a fee of US$250. If you are unsure of your client status, please contact Andrew Renzella at +1.617.262.3124 or

Please click here for more information.


New SWIFT-Celent reports released on adoption of T2S

Post by

May 6th, 2014

SWIFT and Celent have been closely following developments related to the implementation of the Euro system’s Target2 Securities (T2S) initiative and how market participants are gearing up in preparation for the same. As part of that we published a report titled ‘The European Post-Trade Ecosystem under T2S: Dealing with Complexity’ in March, 2013. Last week two new reports were published looking at the progress made in the last 12 months and what are still some of the open questions. The first of these two reports focuses on development pertaining to the settlement function under T2S, while the second one looks at firm strategies and arrangements for asset servicing and securities payments. These new reports, based on detailed interviews with major participants in the European post-trade environment, find that though there has been progress, the strategies of many players remain unclear. We also identify new offerings in post-trade services that are likely to emerge in the post T2S world and the drivers behind them. The press release of these reports’ launch can be found here.

5.22.2014 Celent Webinar: Multi-Channel Analytics for Wealth Management

Post by

Apr 25th, 2014

Senior Wealth Management Analyst, Bill Fearnley, Jr.

This event is free to attend for Celent clients, flex-plan clients, and the media. Non-clients can attend for a fee of US$250. If you are unsure of your client status, please contact Andrew Renzella at or at +1 617 262 3124.

Please click here for more information.


The Market structure debate in Asian context

Post by

Apr 24th, 2014

The recent debate about the impact of High Frequency Trading (HFT) and on the issue of market structure in general is no more confined within the US market. Regulators and market participants worldwide are discussing this issue seriously. The chairman of the Australian Securities and Investment Commission (ASIC) recently detailed the position of the Australian authorities in this regard. Incidentally Australia, along with Japan, is one of the few Asian countries that have multiple trading venues, a necessary condition for the growth of advanced trading and order routing capabilities, including HFT. It is worthwhile to look at the state of adoption of the Asian region in terms of adoption of advanced trading tools, and the role of the Asian exchanges in that regard.

The different Asian markets are at different levels of maturity, and therefore it is difficult to analyse the region as a single homogenous entity; rather the Asian markets can be grouped into two broad categories. The first category belongs to the advanced economies like Australia, Hong Kong, Japan and Singapore which have well developed capital markets. Exchanges in these countries are at par with western competitors in terms of latency and adoption of advanced trading technologies. The second category consists of exchanges in emerging economies like India, China, Malaysia, Korea which are somewhat lagging their Asian counterparts in the first category.

However, there is a common factor that runs across the two categories of exchanges – lack of competition from alternative trading venues. This means that most of the Asian exchanges are largely national monopolies without significant competition from alternative providers, though the situation is slowly changing in some markets (e.g., Australia, Japan). This is one aspect which distinguishes Asia from the western markets where the competition among exchanges and alternative trading venues is severe.

Another key challenge in Asia is the fragmentation of markets and lack of harmonization – regulatory, economic, monetary and technological – in trading and settlement practices. This restricts the growth of cross border trading volumes and greater regional integration at an Asian level. The ASEAN initiative is a move in that direction, but it is still early days to judge its potential for achieving regional integration.

Asia has also lagged the western markets in terms of adoption of advanced trading tools and technologies (like DMA, algorithmic trading, high frequency trading etc). Some of the Asian exchanges, particularly the ones in the advanced economies, have adopted latest technologies with low latency and colocation offerings, but some of the above mentioned factors still present challenges. For example, lack of multiple trading venues limits arbitrage opportunities. Lack of regional integration means cross border flows have yet to realize its full potential. These prevent growth of trading volumes, need for advanced trading tools and technologies, and participation of foreign players in domestic markets.

Regulators in Asia are traditionally very conservative. Therefore decision making for significant changes in market structure and practices takes time. In a rapidly evolving trading world, this means Asian exchanges find hard to stay abreast with global trends. Also because domestic exchanges are perceived more as national utilities, any proposal that threatens the position of incumbent exchanges is met with resistance and difficult to implement.

Some of the Asian exchanges have been very aggressive in exploring newer avenues beyond the traditional revenue sources. The Singapore exchange is a good example of that. It started offering clearing services for commodity derivatives through its AsiaClear offering a few years ago. In addition to providing CCP services as mandated for OTC derivatives under the proposed reforms, the SGX is collaborating with the Korea Exchange to develop the latters’ OTC clearing capabilities. Therefore in some markets (like Singapore) the incumbent exchanges are taking a leading role in clearing of OTC derivatives as proposed by new regulations. It will be interesting to see if new players will be able to enter and succeed in this business. Low volumes in the Asian markets, proliferation of CCPs, and competition from international ones may result in each CCP specializing in specific niches along product lines or local currency instruments.