By Stanislav Ermilov, founder and CEO, Tallarium

During prolonged periods of market volatility, like those witnessed across global commodity markets in recent years, the last thing traders want is for risk to be a blocker to returns. In the aftermath of the 2008 crash, a risk-centric era understandably emerged, but as is so often the case in the wake of a financial crisis, the regulatory and policy pendulum quickly swung hard in the opposite direction. As a result of growing risk-aversion measures and continued volatility, a cultural shift has crept in to create a chasm between profitability-focused traders and their cautious risk counterparts.

The challenge lies in the culture of risk chasing, where traders find themselves having to justify every position they take to the middle office risk manager, and risk managers find themselves having to monitor and stop out positions in volatile and illiquid markets. The objectives of risk departments can feel diametrically opposed to those of the revenue-driven front office, creating a friction that hampers the very thing any commodity trader is looking to achieve during bouts of volatility – profitability.

Given these conflicting aims, what exactly is the answer to bridging this gap which has been ever widening since 2008? The answer lies in harmonising trading and risk operations by providing global access to real-time insights across commodity trading firms operating in multiple time zones. This is the only way to create the stability required to navigate market volatility effectively, allowing for both profit-making and effective risk management.

When prices fluctuate drastically throughout the trading day, and pricing information is scattered and siloed across desks, the internal uncertainty only serves to increase risk aversion within a trading organisation. The uptick in globalised teams, comprised of traders in different locations and time zones, exacerbates the issue, particularly when major price swings occur. Disruptions in trade flow, not to mention liquidity squeezes triggered by unforeseen geopolitical events, further add to this complexity. When markets are volatile, firms have an imperative to create internal stability if they wish to turn volatility into profitability, and real-time market insights provide the fastest route to achieving this stability.

Volatility, while a potential profit boom for traders, requires effective management facilitated by real-time insights such as forward curves. Unfortunately, a significant portion of commodity traders have constrained access to such data. They may lack access to data or have access but not in real time. With better-informed insights, traders can navigate market fluctuations more profitably, knowing precisely when to enter or exit their positions. Take the LPG VLGC freight volatility from last year. VLGCs were earning $4.25 million ($3.36m) a month at the start of 2023. Within a matter of a couple of weeks, this hit $610,000 a month. That is a straight-line collapse that was brought on by non-existent PDH margins in China that crushed the physical market, leading to volatility that was boom for some traders and bust for others.

In cases like this, effective risk oversight becomes possible when both traders and risk managers have access to the same real-time information. This synergy stabilises the link between the two functions, allowing traders to capitalise on volatility without being prematurely stopped out by risk departments. This win-win situation not only empowers traders to make informed decisions but also alleviates compliance concerns by reducing the need for retrospective investigations into trading decisions.

Breaking down the silos between traders and risk managers is essential for the success of commodity trading firms. Providing everyone with access to more informed data insights not only harmonises conflicting objectives, but also enhances overall efficiency and profitability. It has been over one and a half decades since the global financial crisis, meaning it is now high time to liberate commodity traders from unnecessary risk measures. We should embrace a future where collaboration and data insights drive success in an increasingly volatile world of commodity trading to the benefits of both front office traders as well as risk managers.