Changes in market structure, regulation and business models have affected asset classes worldwide. The key to understanding these changes is realizing the fundamental difference between commodities like agriculture, products and livestock, and financial assets like stocks and bonds. Commodities offer inflation protection while financial assets claim cash flows against an economic unit.
A vital structural change happening within commodity markets is marked by an increasing number of buy-side firms, especially pension funds, making noteworthy investments in commodities. With lower risk premiums, reduced cost of hedging and a drop in the volatility of commodity futures prices, it is easy to understand the increased growth of buy-side participation, and a new connectivity model that supports it.
Top Challenges of Commodity Market Participants
The addition of derivative contracts to gain access to commodities as well as the growth and change in mix of buy-side participation have created two significant challenges for market participants:
- Secure, reliable connectivity throughout the trade lifecycle.
- Having and maintaining instant access to a robust ecosystem of counterparties, liquidity venues, brokers/dealers, institutional investors, trade lifecycle services and market data. ?
Simply put, connectivity is key for investing, from order creation to market data delivery.
Risk management and compliance for commodity portfolios are also dependent on connectivity through the entire trade lifecycle as well as access to an established ecosystem of market participants. The combination of communication, connectivity and collaboration solutions are essential to:
- Calculate net asset values and assess risk more accurately, by evaluating a range of independent market data sources
- Reduce market impact costs of liquidating large, concentrated positions by reaching a global community of liquidity venues ?
- Join forces with various groups within a trading firm to record, confirm and reconcile trades
- Enforce position and risk limits by connecting to a range of trade lifecycle services, including risk management, portfolio management, execution management and order management systems
Secure, Cost-Effective and Successful: Cloud-based Solutions
Savvy market participants are making the most of financial extranets, business continuity planning, voice communications, latency-sensitive connectivity solutions and collaboration tools to address challenges and tackle risk management issues.
But how can market participants do this cost effectively?
Enter the cloud. To execute commodity trading strategies and manage associated risks without the investment in, or ongoing management and maintenance of their own infrastructure, market participants are deploying cloud-based solutions. The cloud allows for adaptive, on-demand connectivity throughout the trade lifecycle and across multiple asset classes so participants can address the markets communication, collaboration and connectivity needs – especially for small and medium-sized firms.
Cloud-based solutions facilitate:
- Reliable and secure access to counterparties, liquidity and trade lifecycle services at any time, from anywhere and with any device
- The ability to meet regulatory requirements, such as capture, archiving analytics and retrieval of all voice, mobile, email and IM data associated with communications
- Complex cross-asset class trading strategies
- Mitigation of business, operational, investment process and market risk
- Reduced infrastructure and operations expenses
Commodities markets will continue to face challenges, so the use of cost-effective communications via cloud-based solutions is important to make it easier to maintain trustworthy, secure connectivity and access to an ecosystem necessary to execute trading strategies. This just means that now more than ever having your head — or at least your critical communications — in the cloud is crucial.
Ganesh Iyer is Director, Global Marketing at IPC
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine or its staff. Traders Magazine welcomes reader feedback on thiscolumn and on all issues relevant to the institutional trading community. Please send your comments to jdantona@marketsmedia.com
