Brief Business Profile:
Clients trust a good broker because he delivers value by sharply watching liquidity pockets, has the experience to handle orders with discretion and achieve improvements on benchmark prices.
Both finding liquidity and exercising discretion to achieve better execution average prices are key in times when clients need to close or open positions in Commodities. For example, equity funds frequently need to execute 25-100mio USD notional clips. These positions are significant compared to the daily market turnover, and more so when Options or non-vanilla Structures are needed.
As such, large institutional clients – even with small allocations to Commodities – almost always have deal sizes that are large proportional to daily market liquidity and execution needs to stretch across timezones and sometimes over several days.
At the same time, large institutional clients almost never have dedicated traders for Commodity markets. Trust and solid relations with a good broker add value to such clients.
An Execution Advisory business that adds value is profitable
Business Metrics:
Revenue: 3 – 8 000 000
Estimated RoE: >100%
Team size: 1-2
Regional expertise: Asian-hours execution is our speciality but we are experienced serving clients across all timezones.
Top 5 clients: Seatown, Farallon, Dymon, Cube Capital, Rockhampton.
Product requirements: Futures / Forwards, Vanilla Options, Structured Products.
Recent highlights: $1 bn traded notional by clients in 2015.
Where is the Opportunity?
The exit of many market players from commodity products, leaves a vacuum for quality client service and liquidity. But this is particularly so for Asian hours execution in Commodities.
Asian & Australian clients Segment
Market share among Asian & Australian clients can be gained by adding value during Asian hours but also extending execution of larger orders to London and NY hours if required. This could be the case for crude oil options, for example, where London hour liquidity allows for less slippage.
Another example is Coal, or Base Metals options: in such products, Asian and Australian clients would have to rely on quality broker service to start executing during Asian hours and likely complete execution in early morning London hours.
Such execution could particularly add value if a large position is managed and a significant market move is expected on London market open.
International clients Segment
Providing Asian-hours execution and order management for International clients is another key area. NY and London portfolio managers can start managing positions on early Asia market open and tap into 30% of daily liquidity in Commodities (see Liquidity chart example below).
China arbitrage fluctuations regularly cause markets to take direction in early Asian hours and continue into London. By establishing positions in Asia, systematic and discretionary Fund managers often capture a 5-10% market move before London wakes up.
Navigating arbitrage-driven markets and handling orders and liquidity in Asian hours adds value to clients that do not have a dedicated Asian execution specialist.
Regional Focus:
Opportunity distribution:
Product demand:
The ability to execute, make markets, watch orders across Commodities and across Products directly impacts the value to clients and – consequently – expected Revenue.
| Futures/Forwards | Vanilla Options | Financing/Structures | |
| Base Metals | |||
| Crude oil | |||
| Precious Metals | |||
| Iron Ore | |||
| Coal | |||
| Oil products | |||
| Agriculture |
The larger the platform, the more value it could add to clients. But the questions a client should ask are:
How large/varied is the Commodities products offering?
Hedging requirements and commodities Correlations to the rest of the client portfolio change. Opportunities arise in different places and often suddenly – such as in the case of Geopolitical risk hedging, for example.
The more a specialist advisor can cover for clients and the more liquidity can be made available, the more client interests are served.
”What
Not every Commodities execution business is created equal.
The Management in every bank and brokerage house leans and focuses towards specific commodities and hires specialist staff to cover such commodities well. Other areas remain weak and clients do not get best pricing or execution service.
Of course, such weaknesses are never advertised. It is in the interests of all clients to become aware of where to source the best execution for a set of commodities. RD has 12 years experience in understanding such nuances.
”What
Clients count on cooperation across departments and across timezones because it can mean the difference between getting the best average price, getting a timely order fill and being able to rely that someone is looking sharply after their interests while they sleep at night.
