November 10, 2010

The WSJ reports that we are witnessing a commodities surge thanks to emerging global markets and the policies of the Fed. While this is good news for an economic recovery - so long as the bubble doesn't burst, of course - it begs a question. Do the commodities desks inside investment firms have the proper trading tools to manage this new spate of activity?

Some background: After the Fed pumped money into the US economy and China started to emerge from its own economic slide, the price of commodities has risen. Gold and copper are at all time highs and cotton has reached a peak it hasn't seen for 140 years. (The president of the United States at the time was Ulysses S. Grant, fyi.)

"The underlying cause of this is strong emerging-market demand," an analyst at J.P. Morgan Chase & Co tells The Journal.

But are firms prepared to take advantage of this "new" opportunity? We all know that the first desk to get all the IT dollars, shiny trading tools and up-to-date algos are the equity traders. It makes sense - they tend to make the most money. After equities it's a race for the other asset classes for the remaining budget, the tools and access to high-end computing power. The commodities trading desks will have to fight fixed income, FX and futures for the leftover crumbs - and even if the commodities traders do get to the head of the line, there is no guarantee that the equity desk will not bump them and take their place in line for even newer tools and budget items.

It's like feudal England: The eldest brother inherits the land and the title and the male siblings after him fight for any remaining wealth and prestige. Usually the second son entered the military and the youngest entered the ministry because there was no more inheritance to fight over.

Let's hope the commodity traders do not lose out on a golden opportunity.

ABOUT THE AUTHOR
Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining ...