In the world of financial markets, few foreign exchange traders have had experience working in a bureau de change.
The same pattern applies for bond traders, who are unlikely to have experience of raising money directly on behalf of a company.
But this is not true in the world of financial commodities trading, where knowing the physical aspects of the business is regarded as an important, if not crucial asset.
Indeed, most heads of commodities at the top investment banks started their careers trading physical commodities.
Isabelle Ealet of Goldman Sachs was a at predecessor of Total of France; at Barclays Capital, Roger Jones used to work at Cargill and Phibro; Jonathan Whitehead of Société Générale and Citigroup’s Stuart Staley are former Enron men; and Colin Bryce at Morgan Stanley started his career at the British National Oil Corporation – bought by BP in 1988.
Knowing how to analyse supply and demand and piecing together fragments of information gleaned from moving raw materials gives those with a physical trading background an edge, say analysts and hedge fund managers.
In fact, Blythe Masters, the head of commodities at JPMorgan may be among a handful of those in top investment banking posts who have a pure derivatives background. However, some bankers and hedge fund managers suggest that she may be a vanguard, and that in 10 to 15 years many of the investment banks’ heads of commodities will not have experience in physical commodities trading – rather it will be in financial markets.
“As commodities are increasingly driven by factors other than supply and demand, people from a financial background are becoming more important,” says one head of commodities at a leading bank.
To many in the commodities industry, such a comment is akin to blasphemy, but the number of financial traders in banks and hedge funds who don’t have physical commodities trading experience is rising. “You have funds who really don’t give a monkey’s about physical trading,” says one hedge fund manager who used to be at Cargill.
The increased correlation of commodities to other financial assets and the larger influence of macro factors has made supply and demand analysis less critical. The rise in the amount of available information has also meant that the edge the physical traders have over pure financial players is much smaller than it used to be.
“We used enter into a physical transaction purely to get more information than everyone else,” says a former physical energy trader. “But the era when you lost money on the physical trade in order to make money on derivatives is probably over.”
And it is not just the nature of commodities trading that is driving the decline in financial traders without physical experience. The sheer number of pure physical traders trained by market leading companies are on the decline.
Many oil and energy traders learnt their skills at BP and Shell, while Cargill taught its large trainee intake how to trade grains and other agricultural commodities. But some of those companies that used to teach the “ABC” of trading to dozens and dozens of interns each year are now hiring only a handful of trainees each year.
This article has been amended to make clear that BNOC was not a forerunner to BP.
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