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Need for Trade Surveillance within Commodity Trading Firms

Posted by Chirag Ahuja
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Contrary to the financial services industry which has been quick to adapt to new age technologies such as hybrid cloud solutions, machine learning and artificial intelligence, the energy/commodity trading industry is largely in its nascent stages. However, the speed of adoption of such technologies is increasing rapidly. Capital markets across the globe are witnessing increased trading volumes, complex derivative structures, cross border transactions and stringent regulations. This has profoundly increased the complexity in monitoring transactions across different jurisdictions.

We have consolidated the various factors into three different ‘waves’ which will have a profound effect on speeding the development of Automated Trade Surveillance, Compliance and Risk Reporting Solutions for players in the energy/commodity trading industry.

Wave 1 - Increased Regulatory Demands Globally

  • Market Abuse Regulation (MAR) within the European Union (EU) have implemented stricter rules and tougher penalties for manipulation and other forms of abuse in commodity markets.
  • European Securities and Markets Authority (ESMA) require firms to monitor for unlawful trading through automated trade surveillance systems.
  • Dodd-Frank (US) and REMIT (EU) have set up mandatory trade-reporting regimes that help regulators view a more complete picture of the market than they ever had before.
  • In the U.S., the Federal Energy Regulatory Commission (FERC) has created a new Division of Analytics and Surveillance in 2012, and the unit now employs dozens of staffers monitoring US gas and power markets for violations.

Wave 2 - Low Margins / High Cost Pressures

  • The Bloomberg Commodity Index (a measure of returns from 22 raw materials) fell nearly 50% in the past five years. This has severely compressed profitability margins of players on the left side of the pump.
  • Increased compliance costs due to regulatory demands highlighted in Wave 1. Regulators have also imposed steep penalties incase on non-compliance and abusive trade practices.
  • The level of complexity of reporting has increased multifold over the past few years. Complex trading strategies, increased volumes of reports.

Wave 3 - Complex Trading Strategies

  • Analyzing thousands of trades in multiple different commodities spread across geographies with varying regulations may pose a herculean challenge to accomplish manually.
  • In many trading firms, bonuses are linked to the profits trader’s make on their positions. This may encourage some traders to deploy abusive trading strategies to manipulate the market.
  • On the flipside, traders may use different tactics such as ‘Sandbagging’, ‘Snowballing’ etc. to disguise their true positions and profit & loss statements.


The nature of such transactions is becoming increasingly common. It is estimated the rogue trading cases have costed their organizations more than $16 billion. And these are only the known cases. It is anybody’s guess how many of such trades dodge an organizations financial risk controls.

History has shown us that abusive trading strategies not only causes huge losses to a firm, but more importantly damages its brand and reputation to a point of no return.

Luckily, several ETRM systems already collect the required data to conduct effective trade surveillance. The key is visualizing this data in a meaningful manner and knowing exactly what to look for and detect any outliers.

About Author

Chirag Ahuja- Consultant, Commodity Trading and Risk Management, Wipro, Ltd.

As a Commodity Trading and Risk Management (CTRM) IT consultant, Chirag helps in designing and implementing solutions across front, mid and back offices within multiple trading firms. He has extensive knowledge of capturing the entire trade life cycle within E/CTRM systems. A dedicated team player with a commitment to provide high quality services, Chirag also conducts CTRM training programs to help build future leaders within the organization

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