Hard and soft, edible and not-so-edible commodities have been a hot topic recently. But what substance is there behind the sizzle? Automated Trader has been looking into the current commodity boom, and asking, are these markets ripe for automation, and if so, what are their trading characteristics and their long-term potential for automated alpha generation?
In the first of our series of linked articles on this theme, Dr. Robert Brady, CTO of Brady PLC analyses the current use and likely future evolution of automated trading in commodities markets. This is, as Dr. Brady observes, a whole asset class in transition. Some of its trading practices are arcane, but some put it right up on the screen alongside already heavily auto-traded markets such as FX and stock indices. Shouldnt you be getting a feed on commodities?

Commodities on the menu

Dr Robert Brady, CTO, Brady plc

The commodity markets are unique because they contain such a wide range of automation practices – ranging from virtually 100% openness and automated trading in the case of the US exchanges, to partly open processes in the London Metal Exchange, right through to highly manual practices in the commodity industry that these exchanges serve. There is now a pent-up demand to extend trading automation right into the commodity industry. For example, some industry participants who have implemented internal straight-through-processing systems now report that fully 50% of their remaining back-office costs are taken up in correcting manual keying errors, a cost that will be almost eliminated with the ability to agree transactions electronically with counterparties. The existing exchange contracts are over-simple for the purposes of the industry participants because of the complexity of the “real” trades that are executed in the marketplace, away from the exchanges, and there is recognition of the need for new industry-wide standards bodies to define and agree interface standards to meet this demand. As we shall see, these standards bodies are already beginning to emerge. ...

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