RiskTech Forum

Chartis: A Diverging Commodity Trading Marketplace Means Difficult Decisions for Vendors

Posted: 2 March 2017  |  Author: John MacDonagh   |  Source: Chartis


Commodity trading markets are undergoing significant change. A rift is forming, and traders are diverging into two groups: those that only trade commodities as financial instruments, and those that trade both financial and physical commodity contracts. Historically, commodity trading risk management (CTRM) systems have focused only on financial instruments, and some systems and traders still do. In recent years, however, the number of systems covering physical commodities trading – in which managing supply chain logistics and processes is a major aspect – has been increasing.

The divergence, which is driving most of the changes we are currently seeing in commodity trading markets, has occurred mainly because of regulation-driven changes to the pool of trading participants. What was once a bank-dominated landscape has opened up to new players, largely trading houses and asset managers. Banks traditionally focused on commodities as financial instruments, while the new participants are more open to physicals trading. So many vendors of CTRM solutions, observing this shift, are adapting their solutions to offer deeper functionality for logistics and supply chain management. This move is transforming CTRM solutions, and many now share significant functionality with enterprise resource planning (ERP) offerings.

Because of the growing significance of logistics and supply chain management, data and data management are now more vital than ever. To manage supply chains and logistics properly, firms need types of data they don’t need for traditional CTRM, such as weather, transport, storage and processing data. The heightened focus on data means that the services of specialist data vendors are more in demand. And CTRM solution vendors with strong data backgrounds (in both managing and providing data) have an advantage over those that don’t have data management as a core strength.

In responding to market changes, software vendors are facing difficult decisions. Attempting to offer full, deep coverage of all market segments is ultimately a naïve move at this stage: the market is very broad, and many commodities require functionality that does not carry over to unrelated products. This leaves vendors with the option of providing broad, shallow coverage, or deeper coverage of a specific area (a few closely related commodities, for example, with similar supply chains).

As vendors align their offerings with the new market participants and their needs, end users will enjoy a more diverse market for solutions. The solution they ultimately select depends heavily on which commodities they trade, whether they need physicals coverage, and whether or not the solution is priced appropriately.

For an executive summary of Chartis’s report Commodity Trading Risk Management Systems: Market Update 2017, visit www.chartis-research.com.