Analysts expect that increased volatility in commodities markets globally will drive spend in risk management IT. However, commodities present their own unique characteristics that must be observed, making it fundamental for IT vendors looking to capitalize on the opportunity to have a full understanding and appreciation of the underlying physical market and of their potential client's business.
A Datamonitor report examining how new entrants have changed the market dynamics and the technology responses of types of market participants, has found that risk tools developed within financial services will provide the sophistication and responsiveness required to manage risk effectively.
The rapid growth in commodities trading volumes and prices will continue, as fundamental demand in China and India for oil and raw materials is providing a counterbalance against the downturn in the US. The continued upheaval in equity markets and the continuing credit crisis will ensure the steady stream of investment into commodity markets, as financial players are attracted by the higher returns that are currently available.
New entrants are also flooding into the market in large numbers, in many cases without physical exposure to the underlying commodities. They are contributing to market volatility by exacerbating any movements in price, which, coupled with the rise in algorithmic trading, is causing risk management strategies to be re-evaluated in light of the breakdown of historical trends.
Analysts claim that the unprecedented expansion of world trade in all classes of exports is driving demand for resources across the board. As the scale and volumes increase, stages of the supply chain are becoming increasingly commoditized and are becoming marketable commodities in their own right. In addition, the investment into supply capacity is, in turn, spurring demand further, and is driving maturation in markets that had hitherto lagged behind in terms of market infrastructure.
There are also potentially huge trading opportunities through the growth in emissions trading. Carbon trading continues to develop, with the EU Emissions Trading Scheme (ETS) publishing its roadmap for phase III. The scheme will be watched keenly, as it is envisaged that the EU ETS will provide the foundation for a global carbon trading scheme through link ups with other nations' schemes. With the advent of a US-based cap and trade scheme, the US market alone could reach $1 trillion by 2020.
The entrance of new players has changed the dynamics of commodity markets, and this, in turn, has placed numerous new demands on established participants. However, the increase in volatility presents significant opportunities as well as risks.
Given the differing demands of trading both physical and financial commodities, players require systems that enable compliance with a range of regulatory regimes and are also able to support an enterprise-wide approach to risk and business intelligence. Traditional commodity players - i.e. those with a physical presence - need fully integrated sets of software in order to manage the front, middle, and back office aspects of a commodity trading entity. The software must be capable of enabling the entire trading chain, from deal capture, to risk exposure management, to settlement and accounting functions. Additionally, players will require a scheduling and tracking function that covers the full supply chain of the physical exposure.
These fundamental changes to old trends and market conventions have meant that a new look at trading platforms and risk management solutions, as well as protocols, is underway. There remain great opportunities for vendors to get ahead of the curve and facilitate the development of an exciting new trading opportunity through both multi-product applications and risk management packages for market participants, in addition to providing market data solutions in exchange consolidation and transformation.