Trading commodities is an ancient profession with a longer history which is either buy or sell of a product on a marketplace. The commodities market works just like any other market, which is a physical or a virtual space, where one can buy, sell or trade various commodities at current or future date.

1. TechnicalAspects of
CommodityTrading
Dr.P.MAHESWARI
DEPARTMENTOF COMMERCE
SRM INSTITUTE OF SCIENCE ANDTECHNOLOGY
CHENNAI

2. Evolution of
Development
Practices Trading process flow
and life cycle
Technology and
Frameworks
Upcoming technology,
Challenges &
opportunities
Q&A
What is
commodity
trading?

3. What is commodity trading?
Trading commodities is an ancient profession with a longer history which is either buy or sell of a
product on a marketplace. The commodities market works just like any other market, which is a
physical or a virtual space, where one can buy, sell or trade various commodities at current or
future date.
Stock MarketVs Commodity Market.
• Commodity trading has many similarities to stock trading, the biggest difference is the asset
that is traded .
• A stock or shares denotes the ownership of a company or units of overall equity of a company
which are traded over national exchanges like NSE or BSE in India.
• Like wise commodities can be traded in separate exchanges such as Multi Commodity
Exchange (MCX),Ace Derivatives Exchange (ACE), National MultiCommodity Exchange (NMCE)
in India. Exchanges like CME, NYMEX, ICE are famous international commodity trading
exchanges.

4. What is commodity trading?
Types
• Hard commodities - Metals (such as gold, silver, etc.), Energy (such as crude oil,
heating oil, natural gas and gasoline)
• Soft Commodities - Agricultural products, Livestock and Meats
Commodity markets
• A commodity market is a marketplace for buying, selling, and trading raw materials
or primary products.There are currently about 50 major commodity markets
worldwide that facilitate trade in approximately 100 primary commodities.
• Commodities markets allow producers and consumers of commodity products to gain
access to them in a centralized and liquid marketplace.These market actors can also
use commodities derivatives to hedge future consumption or production.

5. Commodity MarketTypes
There are a variety of basic types of instruments traded in commodity
marketplaces
• “Spot” contracts
• Forward contracts
• Futures contracts
• Options
• Swap

6. Types of Commodity Market types
• In general, commodities trade either in spot markets or derivatives
markets. Spot markets are also referred to as “physical markets” or “cash
markets” where buyers and sellers exchange physical commodities for
immediate delivery.
• Derivatives markets involve forwards, futures, and options. Forwards and
futures are derivatives contracts that use the spot market as the underlying
asset.
• Forwards and futures are generically the same, except that forwards are
customizable and trade over-the-counter (OTC), whereas futures are
standardized and traded on exchanges.

7. Types of Commodity Market
• Forward, futures, and spot contracts create binding obligations on the parties
Futures and Forward contracts can be used to transfer ownership of a
commodity
• These contracts can also be used to speculate
• They can also be used to manage risk—i.e., to hedge
Options are beneficial to the buyer, costly to the seller—hence they sell at a
positive price
• In contrast, as the name suggest, an option extends a choice to one of the
contract participants
• Call—option to buy
• Put—option to sell

8. Another example: Airlines Hedging on oil
Different ways Airlines Hedge Against Oil:
• The largest operating cost for airlines, on average, are the companies' fuel
expenses and those expenses related to the procurement of oil.
• When oil prices are increasing in the global economy, it's natural that the
stock prices of airlines drop. When oil prices decline in the economy, it's
equally natural that the stock prices of airlines go up.

9. Hedging strategies
Method1: Purchasing Current Oil Contracts
• In this hedging scenario, an airline would have to believe that prices will rise
in the future.To mitigate these rising prices, the airline purchases large
amounts of current oil contracts for its future needs.
Method2: Purchasing Call Options
• When a company purchases a call option, it allows the company to purchase
a stock or commodity at a specific price within a certain date range.This
means that airline companies are able to hedge against rising fuel prices by
buying the right to purchase oil in the future at a price that is agreed on
today.

10. Cash Settlement vs. Delivery Settlement
OTC vs Exchange
• Futures and forward contracts can be settled at delivery at expiration
• Alternatively, buyer and seller can agree to settle in cash at expiration
• Standardization: An ExchangeTrade is a standard contract wherein Stock
exchange acts as a guarantor for all the trades. But, OTC contracts are
customized as there is no specified guarantor and hence the risk increases a
lot.
• Counterparty Risk: When you buy or sell something OTC in a private
transaction, there is always the risk of not getting what you bargained for.
These risks are broadly referred to as counterparty risk. In an exchange,
however, counterpart risk is not an issue.

11. Trade life cycle

12. Technology and Frameworks
• Front office operation
1. Actions - Manual and electronic trade booking on Exchange and OTC. Delivery matching.
2. Tech - UI development, trade life cycle management tools, trade booking API
• Middle office: Risk management.
1. Actions - Market risk & Counterpart risk management, Market Price management
2. Tech - Portfolio management software, Risk assessment tools, Pricing
• Back office operation:
1. Action – Manual & automated Confirmation, settlement and invoice processing
2. Types -Swift confirmation, EFET, ICE matching, Auto match back office document
3. Tech – Image processing, BPM, SAP, CMS

13. Technology and Frameworks
• Generic operation:
1. Action – Interfaces, Reporting, security and data management applicable for
all operation
2. Tech – Data analytics, Data storage, web services, security management,
infrastructure management, Reporting software

14. Role of finance department in trade life cycle
• Credit risk (LC, SDLC), Market risk, Pricing, Cost management
• Statistics & historical data analysis and calculations
• Regulations(EMIR, DOT Frank), Legal entity, Quality validation and checks.
• Audit, settlement, invoice, tax, counterparty check & management
• Accounts Rule management, balance check, governance.

15. Upcoming technology and Challenges
1. The IOT,
2. Management of Big Data
3. Artificial intelligence and automation (Algorithmic trading)
4. More cloud options
5. Block chain

16. Upcoming technology and opportunities
• Block chain

17. Upcoming technology and opportunities
• Algorithmic trading: also known as automated trading is the process of
using computers programed to follow a defined set of instructions (an
algorithm) for placing a trade in order to generate profits at an increase
pace, frequency and accuracy.

18. Emerging technical aspects
• Traders around the world find themselves having to adapt quickly to AI and emerging
technologies, the move to automation, and the need to demonstrate best execution.
• AI and machine learning are widely expected to be the most disruptive.
Traders are looking for immediate impact from execution management
systems (EMS) and performance analytics.
• Data and analytics platforms: the solutions that will enable the trading
community to streamline, optimize and future-proof their operations are
those that combine flexibility, innovative technological capabilities, trusted
data and invaluable human expertise.
• Cyber security, trade performance analytics and real-time risk management
will remain top of the list of longer term defensive solutions important to
financial markets overall.

19. Evolution of Development Practices
Self development/learning to grow up along with below technological evolution
• Database evolution: Relational to OODM then SQL to no SQL
• Data structure evolutions
• Understanding cyber security and digital threat management
• Infrastructure evolution: Physical servers to cloud
• Traditional Automation to machine learning and AI.
• Data evolution: Data analysis, Big data, Data scientist

22. Evolution of Development Practices
Witnessing the major shifts in IT Landscape
Witnessing the major shifts in IT Landscape