What’s the current deal with commodities trading?

For over a hundred years, the London Metal Exchange (LME) trading ring has been the noisy home of metals traders buying and selling. It is the oldest and biggest metals market in the world and is host to the last open floor of outcry trading.

The age-old trading ring, however, has recently been closed during the pandemic, and the LME announced only a few weeks ago that it will remain so for another six months and that it is taking steps to boost its electronic trading.

This news fits in with a rising commodity narrative about a change under the surface to electronic trading that has been bubbling away.

There’s definitely something stirring in commodities. Different raw materials have been affected differently by the crisis: a weakening dollar and growing inflation threats bode well for certain commodities with very attractive precious metals, as shown by gold hitting all-time highs.

On the other side, oil has had a difficult year and the Saudi-Russia price war has experienced record lows.

It’s been a volatile year and prices are now looking ready to soar. While a recent Goldman Sachs analyst study forecasts a bullish commodity market for the coming year the company predicts that its commodity index will increase by 28 percent, led by energy (43 percent) and precious metals (43 percent) (18 percent ).

Landmark moment for commodities

Therefore it seems increasing that 2020 is turning out to be a landmark moment for commodities, and the years ahead are likely to bring about a major change.

And although the coronavirus may have forced this evolution in part, these changes have been building up for some time. Commodities are one of the last assets to accept electronic trading; FX was the first to take the plunge in the 1990s, and equities and bonds have incorporated technology into their infrastructure since then, which has been gradually becoming more advanced.

What’s the current deal with commodities trading

Multiple truths can explain the slow adoption of commodities: the quantities are smaller and there is less liquidity, and the instruments are usually less exotic, which basically implies that such technology has not been sufficient for them to evolve, at least not until now.

This means that the technology in commodity trading is for the most part, a little obsolete. That’s changing, however. Trading in commodities is on the verge of taking steps towards the rate of trading complexity that we see in other asset classes, with automated and also trading becoming increasingly popular.

Commodity trading institutions

Yet when their systems are being updated by commodity trading institutions, they may begin to discover the scale of the job at hand. Upgrading how an entire trading group works is not an easy job, so there is a lot to be learned in these large organizations.

It needs a major infrastructure upgrade, and the way they proceed must be vigilant for exchanges and trading companies alike, carefully designing a holistic, step-by-step implementation plan, ideally with an agile, V-model approach.

To ensure a smooth end-to-end trading experience, the workflow needs to be updated at every level. These players would also aim to transform key elements of their trading infrastructure, including re-engineering matching engines and strengthening communications with clearinghouses, to replace the notorious ring.

These modifications, however, reach beyond technology. For commodity players to thrive in their community’s transition, exchanges need to have highly skilled technicians and alter the very culture of trade.

All of which is currently being performed against a lockout backdrop, which makes it even tougher and can slow down execution.

What is obvious is that the coronavirus has undoubtedly served as a trigger for commodity reformation. It is a foreshadowing of what lies ahead for infrastructure trading commodities since, a few years down the road, trade-in commodities may well be very different from what it is today, and consigned to history by the trading ring.