The markets: past, present and future

Commodity futures markets have gone through a huge transformation in recent years, with one of the major changes being that traditional open outcry systems have been replaced by electronic marketplaces. The electronic market venue was embraced because it appeared to offer a more transparent, faster, efficient and orderly way to execute. It also promised better liquidity and less market manipulation. But there is now growing debate in the trading community as to whether these new marketplaces have been successful in meeting these objectives and delivering the promised benefits. It is certainly true that electronic screens do not provide commodity markets with all the answers; option floors still remain active and liquidity outside of the front months for futures and options remains erratic.

Soft and agricultural commodity futures are now predominantly traded electronically. But in some markets liquidity is dramatically down from where it was during the open outcry days. In the soft markets, for example, orange juice and cotton see larger intra-day price swings than ever before. This volatility would seem to be, in part, due to the lack of liquidity available on the screen. In addition to the lack of liquidity, the trading and hedging community has noticed the bid/ask spread has widened in these markets since the open outcry futures pits disappeared. It is even debatable whether the screen has brought increased transparency to these markets. Price discovery becomes more difficult to establish the further away you deal from the front month - it can only be determined by the spread markets’ “carry cost” from month to month. These spread markets have also seen liquidity dry up further out on the curve, which makes hedging and trading much more difficult.

New liquidity pools

As a result of the increased volatility and reduced liquidity there has been some pushback from traders. Although exchanges are unlikely to bring back the pits, we have seen the establishment of

exchange-cleared swaps and options and off-exchange futures and options trading in these markets through brokers. Moving forward we believe that there will be increasing volumes being executed in these emerging liquidity pools as market participants realize that these are one of the best ways of accessing greater liquidity and price transparency. The ability of brokers to negotiate price and volume benefits hedgers and traders because they can work their orders without the fear of unduly moving the markets.

The establishment of the hybrid execution model that has developed in the off-exchange marketplace, where participants are able to execute directly on the screen or with the assistance of a broker on the end of a telephone, should be the solution that meets all the objectives of the trading community. Furthermore with the advent of clearing, participants are now able to mitigate counter-party risk whether they are executing on or off-exchange.

Hybrid execution - the best of both worlds

The exchanges had the best intentions when they introduced electronic trading in the futures markets. Reduced costs of transaction, greater liquidity, and increased transparency are among the things they believed the screen would offer. However floor brokers and traders also added liquidity, price discovery, relative order, and transparency. They also had a key role in providing market “noise” and sentiment, something which electronic platforms just cannot do.

There is no doubt that electronic marketplaces have served the trading community well and many participants use these electronic marketplaces. However as more participants realize that the exchange-cleared market offered by brokers gives the best of both worlds there will be increased liquidity, increased transparency and potentially lower volatility ... the exact benefits that the electronic marketplaces believed they would bring.

 

On March 3rd, 2008 when soft commodity markets went fully electronic, the exchange held a record open interest of approximately 1.8 million contracts. As of June 30th, 2010 total exchange open interest had decreased to approximately 1.0 million contracts – a 45% drop. In fact, the sugar market saw the largest decline of 50%. While it is unlikely that this drop is entirely due to moving away from the traditional open outcry marketplace to the screen it appears that it is a contributing factor and possibly a key contributing factor. 

    

Spectron’s global softs & agricultural brokerage service operates discretely between buyers and sellers to help each side achieve the best possible price for commodities being traded in every marketplace.

Anonymity:

Spectron is able to provide customers with complete anonymity through its provision of on and off-exchange, as well as exchange cleared execution services.

 

Independent, agency only

Spectron is a neutral intermediary and as such never takes a proprietary position in the markets we cover. We work for buyers and sellers with no conflict of interest.

Liquidity

Spectron has access to a wide variety of liquidity pools and can bring the customer market color to assist their execution requirements.

Bilateral swaps & physical

commodities

Customization & flexibility

Spectron is able to bring the customer a wide variety of execution services in terms of products, term and execution venue. Spectron is a “one-stop” shop for your execution requirements, ranging from the execution of a standard exchange traded future or option to a long term strip in the exchange-cleared or bilateral markets.

   

Commercials Growers, Shippers, Mills,

Commercial Brokers, Consumer Companies and Refiners

Banks, Index Funds, Hedge

Funds and Pension Funds

High Frequency Traders, Algorithmic Traders and Market Makers

Financial institutions

Liquidity providers

Exchange cleared swaps & physical

commodities

On-exchange futures & options

Off-exchange futures & options

“blocks”

Spectron’s advantages: your edge

    

Deal execution: blurring the boundaries The execution of commodity products has historically been split into two broad categories; on-exchange and over-the-counter ("OTC") markets. In the last decade the boundaries between these two main categories have become increasingly blurred primarily through the introduction of centrally cleared contracts by exchanges and clearing houses. Spectron offers services across execution venues and brings a full service offering to its customers. 

Bilateral swaps and physical commodities 

On-exchange futures and options

Off-exchange futures and options (“Blocks”), cleared swaps and options, EFSs, EFPs, EFRPs and EOOs 

Privately negotiated through a broker Credit exposure is to clearing house

Fully margined rather than collateralized credit lines Limited flexibility but greater than exchange traded

No ISDA required to trade as long as registered with clearing house/exchange Access to all counterparties registered with clearing house/exchange

Privately negotiated direct or through a broker Predominantly voice-brokered in brokered

market, although can also be traded on-screen Direct credit exposure to swaps/physical

counterparty Complete flexibility in deal structure Swaps trade under ISDA master agreement Counterparties limited to whom swap user has

ISDA in place with

Exchange traded either on-screen or in pit

Credit exposure is to clearing house

Not flexible with respect to structure or term

Liquid front months

Less liquidity further out the curve

Significant levels of price slippage

Trader A

Trader B

Broker

Trader B

Broker Broker

Trader A

Floor

Clearing House

Clearing House

Broker Trader A Trader B

  

Spectron’s hybrid solutions

Spectron’s floor operation and OTC desk work in synergy to offer our clients exceptional price discovery and market sentiment that electronic platforms do not offer. Through our global network of customers, we specialize in the execution of: on-exchange-traded futures and options, “blocks” in all futures and options, as well as bilateral and exchange cleared swap contracts. Spectron Commodity Futures Inc and Spectron Energy Inc can assure our clients that every deal we broker we are on their side.

Spectron Commodity Futures Inc is approved as an independent Introducing Broker by the National Futures Association and operates a full service floor brokerage operation on ICE Futures US. We provide execution services in all exchange traded futures and options. Spectron’s trading floor operation is headed by Avery Putter. Avery has been an exchange member since 1996 and has over 18 years of experience on the trading floor. In 2001 he started his own floor operation and acquired member firm status.

Spectron floor brokers do not take positions in any markets they broker. It is our strong belief that acting as a neutral intermediary in the markets we broker, we can assure our clients the best possible price available with no conflict of interest.

Spectron Energy Inc’s global softs & agricultural brokerage service operates discretely between buyers and sellers to help each side achieve the best possible price for commodities being traded in every marketplace. The desk is based in New York and headed by Roger Corrado, the former Vice Chairman of NYBOT. Together with his team, Spectron has over 65 years experience in the softs & agricultural industry, has connections in several soft & agricultural producing countries, commercial soft & agricultural participants and the investment community of banks, hedge funds and liquidity providers. Spectron’s soft & agricultural desk provides brokerage services in bilateral, OTC cleared and futures & options blocks. We are also uniquely placed by working closely with one of the leading biofuels desks in the industry.

 

 

        

About Spectron

Spectron operates a global marketplace for commodities, energy, environmental products and freight: more than $500 billion of products trade through the company annually.

With an award-winning reputation for exceptional client service and innovation, Spectron acts as a neutral intermediary broker in the softs & agricultural commodities, natural gas, electricity, crude oil and petroleum products, freight, coal, base metals, weather, biofuels, and emissions & environmental products markets. Spectron facilitates the trading of financial derivatives as well as physical transactions and is able to guarantee clients’ neutrality because we do not trade or take market positions. Spectron is also a leading provider of market prices, report and analysis.

Spectron revolutionized energy trading in 2000 with the launch of SpectronLive.com, our electronic trading platform and the hybrid voice/screen model this created has since become the industry benchmark in Europe.

Spectron was founded in 1988 and has a track record spanning over 2 decades. In March 2008, Spectron was acquired by Imarex, the leading freight exchange, clearing and trading services group. Imarex is publicly listed on the Oslo Bourse, and its primary shareholder is the Chicago Mercantile Exchange (CME), the largest exchange in the world. Imarex is a large diversified group acting as intermediary and clearer for physical and derivative commodity transactions. Imarex Group serves its members and clients through nearly 300 staff in 12 cities around the world.

Spectron is regulated and authorized by the Financial Services Authority in the UK and Europe and the National Futures Association in the USA.

Contacts: Roger Corrado roger.corrado@spectrongroup.com Brett Muney brett.muney@spectrongroup.com               Avery Putter avery.putter@spectrongroup.com  

Telephone +1 201 610 1082 Fax +1 201 420 7136

Spectron floor services: Sugar +1 212 742 5352 Coffee +1 212 742 5353 Cocoa +1 212 742 5354 Cotton +1 212 748 3320 Orange Juice +1 212 748 3321

Website www.spectrongroup.com