Technology Options in Commodities Trading (Strategic Focus)

Table of Contents

• Overview
  • Catalyst
  • Summary
• Key Messages
  • Commodities growth set to continue due to demand and the search for higher returns
  • New markets continue to proliferate as underlying trade drives growth
  • Emissions trading is set to take off, presenting potentially vast trading opportunities
  • Volatility and the replacement of open cry trading is driving explosion in electronic trading
  • New levels of volatility in markets are demanding new risk and reporting solutions
  • Vendors must have an appreciation of the underlying physical market
• Table of Contents
• Table of figures
• Table of tables
• Market Opportunity
  • Commodities growth set to continue due to demand and the search for higher returns
    • Higher returns in commodities will continue to attract new market entrants
    • Electronic trading and index products are contributing to increased volatility and higher prices
    • The relative sophistication of energy markets is attracting financial players back into the market
  • New market entrants driving the detachment of price from underlying supply and demand
    • Financial services firms are bringing sophisticated risk management tools as they re-enter commodities
  • New markets continue to proliferate as underlying trade drives growth
  • Emissions trading set to take off, presenting potentially vast trading opportunities
    • Carbon exchanges are proliferating rapidly
  • Volatility in and replacement of open cry trading is driving explosion in electronic trading
    • Exchange consolidation to continue with growing convergence between OTC and exchange-traded markets
• Technology Evolution
  • New levels of volatility in markets are demanding new risk and reporting solutions
    • Multi-product capability is essential for arbitrage or hedging through inter-related markets
    • Energy trading and risk management solutions are mission critical for physical and financial exposure
  • The search for latency reductions in deal execution is driving exchange investment
• Customer Impact
  • Case study: Australian electricity market
    • Startup phases
    • IT sourcing
    • Cost and delivery risk key evaluation criteria
    • Credit crisis placing pressure on ability to operate in the market
    • Uncertainty in emissions trading scheme is having liquidity implications
    • Customers must determine their development lifecycle in deciding which vendor is right for them
    • Arcadia Energy Trading
      • Arcadia' s electricity systems requirements
      • Flexibility and solution tailored to local market are key to decision
    • Increase in commercial motivations due to new entrants in the market
    • Credit crisis leading to increase in futures trading
    • Rise of the futures market in response to tightening in credit market
    • Volatility in futures market assisting with OTC pricing while complicating contract timing for energy users
    • Emissions trading uncertainty is complicating contracting beyond 2010
• Go to Market
  • The commodities boom presents new opportunities in integration and risk management
  • Client' s development phases must be clearly identified and understood
    • Vendors must clearly identify their client' s risk profiles
    • Portfolio risk aggregation is the key requirement of a comprehensive risk management approach
    • Vendors must determine their strategy as either niche or full spectrum providers
    • Multi-product capability is essential to any offering in the market
  • Vendors must have an appreciation of the underlying physical market
    • The deregulation of energy markets will provide scope for vendors as niche plays abound
  • The potential size of the carbon market dictates that firms get involved to shape the debate
• APPENDIX
  • Definitions
  • Methodology
  • Further reading
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
  • List of Tables
    • Table 1: Carbon exchanges are proliferating rapidly
    • Table 2: Exchange consolidation history
    • Table 3: ERM Power' s vendor evaluation table
    • Table 4: Other vendors considered (names withheld)
  • List of Figures
    • Figure 1: Prices are supported by demand and exacerbated by speculative investment
    • Figure 2: Energy usage by region 1980-2005
    • Figure 3: Growth in all merchandise export sectors
    • Figure 4: Rate of investment in carbon reduction projects
    • Figure 5: Explosive growth set to continue
    • Figure 6: Intercontinental Exchange monthly volumes 2005-07