Friday, January 29, 2010

The Volcker Rule and Commodities Trading

The Financial Times and Reuters both ran reports today about the possible impact of the Volcker rule on commodities trading. The FT says that commodities trading houses will "slip under" the Volcker net - this would benefit trading companies like Glencore and Vitol because the banks would cut back on physical trading. Reuters says the plan to stop banks speculating in financial markets on their own account may "spawn a host of new independent commodities houses as banks sell trading units and as dealers leave to set up on their own." They are both right. The trading houses of this world will always benefit from the banks' misfortune. It happens regularly. Commodities are a highly cyclical market, with volatile downward periods in what - as Jim Rogers claims - is an inexorable long term move upward. When the markets are on an upward romp, the banks pile in with prop trading in energy, agriculturals, metals and soft commodities. When the inevitable 'correction' happens it is almost always severe, and the banks pile out again leaving traders standing on the pavement scratching their heads. Then they call Vitol or Glencore or Trafigura for a job.
Given the current return-to-bubble feel of the commodities markets, it is likely that those getting the push from the banks will head to the established houses, or even try to start their own as the FT suggests. There is one problem with this. Credit. The trading houses have established lines of credit, of course, but many lines were pulled out from under them during the crisis. Credit remains limited for such a high-capital, high-risk type of trading business. Start-up hedge funds have been waiting in the wings for financing for over a year now, and most do not see venture capitalists or banks rushing to take on the risk. Banks have always been more willing to extend credit to oil or commodities traders if they themselves are trading. That way they have a feel for the market, and the players. They have a sense of who is solvent and who is struggling. They know each others' positions (to a degree) and can often tell when someone has made a serious loss.
Ultimately, the banks and the trading houses could be losers in the Volcker plan.

1 comment:

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