Automated trading in European intraday power and gas markets is just the tip of the iceberg. According to a CFTC report published last year, there have been substantial increases in automated trading across almost all commodities. However, beyond simply automation of trading is the use of machine learning and Artificial Intelligence to actually decide when and what to trade. This too is on the rise as evidenced by the interest in solutions offered on the software market. To catch up with the latest trends, I often reach out to recruiters. I spoke with Carl Vellenoweth of Commoditas Partners and James Richmond of MethodSearch – who better to know what the hot trends are than those tasked with hiring people to perform those activities? To get some feedback on the implications of this trend, I spoke with Tim Rogers of Contigo and Aviv Handler of ETR Advisory as well.
I initially spoke with Carl Vellenoweth, MD Commoditas Partners and an ad hoc contributor to CTRMCenter, to get his views and he was very clear – “It’s all about data – there is more data, it’s cheaper and more accessible…” he told me. “Put another way, ten years ago, we hired traders based on their knowledge of trading, their contacts and record now we ask how are your programming skills!” In his opinion, traders are now quants and quants are data scientists and he fully anticipates that the entire front office will become automated in the future.
But what are the implications of this trend? Well, firstly perhaps, the days of the trader as a ‘demigod’ earning big bonus payments might well be numbered. The new breed of trader/programmer is more economical to hire it seems and the playing field has been levelled a bit. Having skills in Python and other languages might be more relevant than knowing a bunch of other traders in the industry? Of course, there must be experts on the underlying commodities, instruments and markets but in the end, these may act more like trader analysts working with programmer/traders to build intelligent robots and stay abreast of the other robots out there. While it may read like a cheap Sci-Fi novel, it really does seem that things are headed in that direction.
I also asked James Richmond, MD of MethodSearch his thoughts, “the main commodity futures I see being traded algorithmically are power + gas, certain agri commodities (wheat, cattle, corn, Soybeans) and some metals. In these markets with relatively simple / less long-term trading strategies, I see a rise in automation. Oil I am not so sure, but I guess we need to look at what comes of VAKT and Komgo. Within oil, the data science projects around vessel tracking, refinery optimisation, thermal imaging should enhance the capability of the trader and enable better decision making.
With this in mind I see the ‘traditional trader’ declining within these asset classes as a variety of machine learning, AI techniques as well as Bot’s automate some / all of the trading process. The team that drives such projects is combination of right IT and Quant Analysts that develop trading strategies.
The role of the ‘traditional trader’ could morph into that of a ‘product owner’ within such projects. Of course, some of the ‘best of the best’ traders that hold dominant positions in their respective markets may remain successful, but will need to embrace technology and adapt in the long term to avoid getting left behind. Many of the better ‘bulge bracket’ banks have successfully replaced traders with programmers…
What I am not saying is the role of the trader will vanish from the face of the earth. This is definitely not the case. More that the role of the trader will change, headcount will reduce over time and the combination of traders combined with assisted / automated trading will be good for profitability and also enhance the role of the trader whilst diminishing some of the reliability of the traders’ gut feeling.”
The move to automated trading in commodity markets has happened quickly with many exchanges reporting rapid increases in this type of trading. The impact of automated trading has also been blamed for ‘disconnecting’ markets from fundamentals in coffee, sugar and cocoa to name a few commodities impacted, driving volatility and unexpected price movements. A number of high profile hedge fund managers exiting the business have even gone so far as to blame automated trading in part, for the exit.
Given this, the impact on systems could also be interesting. Automation and faster automated trading probably means the end of the monolithic CTRM solution down the road in favor of a more agile and dynamic set of applications and APIs – the trading ecosystem. Some of these applications may be commercially developed and delivered and others built internally. The trend is already evident looking at today’s markets we already see vendors like Generation10 and Eka moving towards an application and API ecosystem model. Certainly, smaller vendors on more modern platforms targeting specific functionalities also seem to be doing better and platform vendors like Beacon also look set to capitalize on the trend to build it and deploy it fast and modify as you go.
According to Tim Rogers at Contigo, “the only constant is change and that applies to trading as much as anything else. For many years busy traders would use the skills of VBA developers who were often seen close to or on the trading desk. Scripts in Excel monitoring live prices and flows, raising alerts in bespoke applications was and still is common. Some may have attempted algo. trading only to notice that liquidity was not sufficient to allow algorithms to execute over venue APIs. In a changing market with creative people looking for opportunities the need for new ways to look at data will remain key, but I suspect the tried and trusted methods will continue to evolve. Solid, accessible APIs which front modern ETRM systems coupled with a new breed of decision support tools and reporting interfaces like Power BI and you have a recipe which could give trading a new vision not just a view of the market.”
One area that is probably going to have to do a bit of catching up are the regulators. I’m not a regulatory specialist but I’m betting that the implications around controls, oversight and so on have yet to be fully thought through. Risk management will increasingly be important and in real-time as well. We asked regulatory expert Aviv Handler, MD ETR Advisory, for his opinion, “The trend to algo trading is partially regulated via MiFID II, which contains extensive rules for those engaging in any algo trading in financial instruments, whether they are Investment Firms or not. Those algo trading in the physical markets are not under these rules, although most venues’ rule books replicate many of the requirements. it is very possible that energy regulators will turn their attention to these markets as algo trading becomes more prominent,” he told us.
All the signs are that the front office in most commodities is changing very fast and so is the job description of tomorrow’s trader. In the future, traders may need to be expert programmers familiar with extracting value from data in near real-time. The days of the trader with a track record and a Rolodex might be as numbered as the rolodex itself.
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