Last decade there emerged a new avenue for retail investors and traders to participate: this was the new modified electronic platform of commodity derivatives. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities emerged as an alternative tool and one of the best option across the globe.The financialisation of commodity derivative markets, reflected in the increased presence of financial investors, and its effects on commodity prices and the fundamental roles of these markets, i.e. price discovery and price risk management for commercial traders, have been controversially discussed. This working paper provides an analysis of the microstructure of commodity derivative markets with a focus on the commodities coffee, cotton, wheat and aluminium. Two questions are in the center: firstly, how, in the context of financialisation, have the composition of traders and their trading strategies changed, and, secondly, how have the increasing presence and trading strategies of financial investors affected commercial traders, price discovery and hedging.Commodities are traded on commodity spot and derivative markets. On spot markets physical commodities with immediate delivery are traded by actual producers and consumers. Commodity derivates are traded on exchanges (also called futures markets) or over the counter (OTC) and give holders the right (“options”) or the obligation (“forwards” or “futures”) to trade a physical commodity in the future at a given price.Firms that trade energy and commodities are recognizing the need to enhance their ability to rigorously monitor trading activity. Resource intensive compliance monitoring approaches based on periodic sampling, spreadsheetdriven reviews, and paper-based documentation have been replaced by technology-driven, automated monitoring solutions that leverage best practices approaches. For over a decade, Oracle Financial Services has delivered trade surveillance solutions that generate automated alerts extending across numerous asset classes for the global banking community. Futures contracts are standardized as the quantity, quality, maturity date and delivery location are spelled out. They can be bought and sold on exchanges without the ultimate buyer and seller having any direct connection. Exchange trading goes through a clearing house which demands certain transparency and security requirements.Futurewins Commodity Trading Consultants allows you to achieve: • A Proactive View of All Trading Activities. By allowing you to discern intentional from unintentional trading behaviors and detect trader and customer behaviors, Oracle Financial Services Energy and Commodity Trading Compliance gives you greater insight into your firm‘s trading activity. • Improved Regulator Relationships. Oracle Financial Services Energy and Commodity Trading Compliance covers multiple instruments, market segments, jurisdictions, time zones, currencies, and market structures through the use of behavior detection scenarios to identify trading anomalies. Ready access to alert data in electronic format helps you demonstrate a proactive approach to regulators and readily respond to regulator inquiries. • Compliance Process Efficiencies. Using market-driven approaches for identifying important behaviors of interest, compliance personnel can shift from time-consuming and manual methods of data gathering and hunting for anomalies to focusing on the most urgent and threatening issues that are automatically identified through rigorous alerting algorithms and methodologies. Additionally, Oracle Financial Services Energy and Commodity Trading Compliance provides compliance analysts with market and reference data that enables the rapid disposition and routing of alerts, efficient management of subsequent investigations, and a simple escalation process where further case management is required.
Till some years ago, this wouldn't have made sense. For retail investors, they could have done very little to actually invest in commodities beyond gold and silver however the emergence of state of the art technology and methodologies it became possible to think beyond traditional asset class and invest or manage the risk in various other commodities like chana, oilseeds, crude oil and copper etc. in the futures market.The role of speculators in financial markets has for long been a source of interest and controversy. There is a large literature related to behavioural finance on the microstructure of financial markets and its impact on prices and the functioning of these markets. However, with the setting up of three multi-commodity exchanges in the country around 2003-04, market participants like traders, manufacturers, retail investors can now trade in commodity futures with or even without having physical stocks.The CFTC currently faces a range of issues—many of them related to the many rulemakings it was charged with under the Dodd-Frank Act regarding bringing the swaps market under regulation. Other issues relate to the CFTC’s role in overseeing the derivatives markets. Some CFTC rulemakings have generated criticism from market participants, the financial industry, Members of Congress, or foreign regulators
How risky are these markets compared to stock & bond markets?
? Commodity prices are generally less volatile than the stocks and this has been statistically proven. Therefore it's relatively safer to trade in commodities. ? Also the regulatory authorities ensure through continuous vigil that the commodity prices are market-driven and free from manipulations. ? However, all investments are subject to market risk and depend on the individual decision. There is risk of loss while trading in commodity futures like any other financial instruments. ? Also the client should use Stop loss as a precautionary measure according to the risk appetite. The client should be aware of the amount of the risk he or she can absorb as sometimes market becomes volatile or move in opposite direction. So first of all the question arises - what are commodities? In economics, a Commodity is a marketable item produced to satisfy wants or needs. In other words commodity is a raw material or primary agricultural product that can be bought and sold, such as copper or coffee. Now the next question arises - what are Commodity Markets??? So the answer is any place where all raw or primary products are exchanged is called commodity market. Commodity markets can include direct physical trading and derivatives trading in the form of spot prices, forwards, futures and options. Commodity Futures are contracts to buy/sell specific quantity of a particular commodity at a future date on an exchange platform . It is similar to the Index futures and Stock futures but the underlying happens to be commodities instead of Stocks and indices.
Why Commodity Trading? Commodity trading can be done for various purposes out of which two are most important ? Against the exposure towards physical trades -for risk management (Hedging) ? Having no exposure in physical form - Investment & Speculation Hedging is the practice of offsetting the price risk inherent in any cash market position by taking an opposite position in the futures market. A long hedge involves buying futures contracts to protect against possible increasing prices of commodities. A short hedge involves selling futures contracts to protect against possible declining prices of commodities. Speculation is the practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value of a tradable good such as a financial instrument excommodity
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