Technology options in commodities trading (Strategic Focus)

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.

Report Highlights
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
[Studien Infos ausblenden]

TABLE OF CONTENTS
Overview 1
Catalyst 1
Summary 1
Key Messages 2
Commodities growth set to continue due to demand and the search for higher returns 2
New markets continue to proliferate as underlying trade drives growth 2
Emissions trading is set to take off, presenting potentially vast trading opportunities 2
Volatility and the replacement of open cry trading is driving explosion in electronic trading 2
New levels of volatility in markets are demanding new risk and reporting solutions 2
Vendors must have an appreciation of the underlying physical market 2
Table of Contents 3
Table of figures 4
Table of tables 4
Market Opportunity 5
Commodities growth set to continue due to demand and the search for higher returns 5
Higher returns in commodities will continue to attract new market entrants 5
Electronic trading and index products are contributing to increased volatility and higher prices 6
The relative sophistication of energy markets is attracting financial players back into the market 7
New market entrants driving the detachment of price from underlying supply and demand 7
Financial services firms are bringing sophisticated risk management tools as they re-enter commodities 8
New markets continue to proliferate as underlying trade drives growth 8
Emissions trading set to take off, presenting potentially vast trading opportunities 9
Carbon exchanges are proliferating rapidly 11
Volatility in and replacement of open cry trading is driving explosion in electronic trading 12
Exchange consolidation to continue with growing convergence between OTC and exchange-traded markets 14
Technology Evolution 15
New levels of volatility in markets are demanding new risk and reporting solutions 15
Multi-product capability is essential for arbitrage or hedging through inter-related markets 15
Energy trading and risk management solutions are mission critical for physical and financial exposure 15
The search for latency reductions in deal execution is driving exchange investment 16
Customer Impact 17
Case study: Australian electricity market 17
Startup phases 18
IT sourcing 18
Cost and delivery risk key evaluation criteria 19
Credit crisis placing pressure on ability to operate in the market 21
Uncertainty in emissions trading scheme is having liquidity implications 21
Customers must determine their development lifecycle in deciding which vendor is right for them 21
Arcadia Energy Trading 21
Arcadia's electricity systems requirements 22
Flexibility and solution tailored to local market are key to decision 22
Increase in commercial motivations due to new entrants in the market 22
Credit crisis leading to increase in futures trading 23
Rise of the futures market in response to tightening in credit market 23
Volatility in futures market assisting with OTC pricing while complicating contract timing for energy users 23
Emissions trading uncertainty is complicating contracting beyond 2010 23
Go to Market 24
The commodities boom presents new opportunities in integration and risk management 24
Client's development phases must be clearly identified and understood 24
Vendors must clearly identify their client's risk profiles 24
Portfolio risk aggregation is the key requirement of a comprehensive risk management approach 24
Vendors must determine their strategy as either niche or full spectrum providers 25
Multi-product capability is essential to any offering in the market 25
Vendors must have an appreciation of the underlying physical market 25
The deregulation of energy markets will provide scope for vendors as niche plays abound 26
The potential size of the carbon market dictates that firms get involved to shape the debate 26
APPENDIX 27
Definitions 27
Methodology 27
Further reading 27
Ask the analyst 27
Datamonitor consulting 27
Disclaimer 27
[Inhaltsverzeichnis ausblenden]

LIST OF TABLES
Table 1: Carbon exchanges are proliferating rapidly 11
Table 2: Exchange consolidation history 14
Table 3: ERM Power's vendor evaluation table 19
Table 4: Other vendors considered (names withheld) 20
LIST OF FIGURES
Figure 1: Prices are supported by demand and exacerbated by speculative investment 6
Figure 2: Energy usage by region 1980-2005 7
Figure 3: Growth in all merchandise export sectors 9
Figure 4: Rate of investment in carbon reduction projects 10
Figure 5: Explosive growth set to continue 12
Figure 6: Intercontinental Exchange monthly volumes 2005-07 13
[Tabellenverzeichnis ausblenden]