To no one’s surprise, the introduction of greater transparency to commodity trading has dramatically changed how this trading is done. Gone are the days of capturing a fat margin from arbitrage trading.
Unlike the stock market in which transactions are typically based on information that’s public, firms that buy and sell raw materials thrived for decades in an opaque world where their metier relied on knowledge privy only to a few. Now, technological development, expanding sources of data, more sophisticated producers and consumers as well as transparency surrounding deals are eroding their advantage.
“Everything is transparent, everybody knows everything and has access to information,”
As a consequence, trading margins have shrunk.
Faced with shrinking margins, traders set off to obtain a trading advantage.
“The most valuable commodity out there is information, and the most useful information is the proprietary, critical information that you obtain from your own supply chain,” … “You have to have skin in the game. You have to have access to assets, whether it’s infrastructure, terminals, vessels or refineries.”
This method for gaining a trading advantage wasn’t missed by Wall Street. Lead by Goldman, Wall Street firms for years have had investments in the commodity supply chain.
Investments that in theory Wall Street banks are not allowed to have based on the banking legislation that emerged during the Great Depression. To date, the Fed has chosen not to enforce this legislation.
One wonders if the banks would sell these investments if they had to disclose their exposure details at the end of each business day. After all, the other commodity traders could see what positions the banks were taking and easily work backwards to what information the banks must be getting from their investments in the commodity supply chain.