Getting Out of the Commodities Trading Game by Attain Capital
For those who’ve been too busy looking at the fines, guilty pleas, and general misdeeds at the big banks over the last year – you may not have realized their getting out of the commodities trading game, en masse. A recent Bloomberg piece laid out the latest deals for bank’s commodities units :
“Morgan Stanley still expects to complete the sale of a physical oil business to OAO Rosneft amid U.S. sanctions of Russian leaders… JPMorgan agreed in March to sell its physical commodities business to Mercuria Energy Group Ltd. for $3.5 billion.
Deutsche Bank is cutting about 200 raw-materials jobs after deciding last year to exit dedicated energy, agriculture, dry-bulk and industrial-metals trading. Bank of America said in January it would dispose of its European power and gas inventory as opportunities shrink and increasing regulation curbs trading.”
Banks cannot be in the commodities trading game
“Market watchers said the reasons for the banks to leave are two-fold — shrinking profits and increased regulatory scrutiny.
…over a five-year time span, profits in commodities have diminished. According to a Bloomberg story, in 2013 commodity-related profit for the top 10 banks was around $4.5 billion, compared to a record $14.1 billion in 2008 for the top 10 commodity-trading banks.
Not only are profits down, but regulatory scrutiny is up…. market watchers said the accusations of market manipulation in power and energy markets, with the Federal Energy Regulatory Commission levying nearly $1 billion in fines combined at several banks, are just another reason for them to consider leaving.”
The obvious question is just what will this do to the futures markets we all love and know? These banks certainly have large dealings in the markets, at one point last year, JPMorgan had 150,000 contracts of gold, and 23,000 contracts in Silver, so will we see volumes decrease across the physical commodity market futures (oil, gas, grains, etc)? Or will the all stars from the banks simply join the top 10 physical commodity traders, who actually do the commodity trading thing bigger than the banks anyway. Zerohegde had a piece on Mercuria implying that the “bank trading” will continue on, just in a less regulated manner in Switzerland.
From a hedge fund and managed commodities trading perspective – the fear for existing managers is lower volumes and less liquidity. But the reality is likely no decline in volatility, with the volume simply shifting over from group x,y,z at such and such bank, to the same group x,y,z at such and such hedge fund/commodity house. The bigger fear the managers might not be thinking of is increased competition. There will likely be a lot of talent out looking or a job once the banks wind them down, and more than a few of those folks are likely to try their hand at managing investor money via their commodities trading expertise.