"Arbitrage Is Dead" - Commodity Traders Lament A World "Where Everyone Knows Everything"

For commodity traders operating in the Information Age, Bloomberg reports that just good old trading doesn’t cut it anymore... "Everything is transparent, everybody knows everything and has access to information."

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.

Just ask Noble Group...

At a panel discussing ‘What’s Next for Commodity Trading: Drivers, Disruptors and Opportunities’, Bloomberg reports that Sunny Verghese, the chief executive officer of food trader Olam International Ltd., lamented declining margins.

“The consumers and producers are trying to eat our lunch. So we got to be smart about differentiating ourselves,” he said.

As market participants’ access to information increases, the traders highlighted the need to more than simply buy and sell commodities as profits from arbitrage -- or gains made from a differential in prices -- shrinks. That means getting involved in the supply chain by potentially buying into infrastructure that’s key to the production and distribution of raw materials, and also providing financing for the development of such assets.

“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,” said John Driscoll, the chief strategist at JTD Energy Services Pte, who has spent more than 30 years in the petroleum trading industry in Singapore.

“You have to have skin in the game. You have to have access to assets, whether it’s infrastructure, terminals, vessels or refineries.”

It’s critical for commodity traders to evolve as margins have declined because of more transparency and “price arbitrage has disappeared,” said Olam’s Verghese. For example, the number of price quotes published by agencies such as S&P Global Platts and Argus, which assess the value of commodities globally, have increased about 15 times since 1990, according to Verghese.

While “arbitrage is dead,” traders will “continue to have substantial opportunity and disruption but the way of capturing that opportunity becomes more sophisticated,” Mercuria’s Jaeggi said.