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Financialisation and the microstructure of commodity markets: A qualitative investigation of trading strategies of financial investors and commercial traders

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  • Heumesser, Christine
  • Staritz, Cornelia

Abstract

The financialisation of commodity derivative markets, reflected in the increased presence of financial investors, and its effects on commodity prices and the fundamental roles of these markets, i.e. price discovery and price risk management for commercial traders, have been controversially discussed. This working paper provides an analysis of the microstructure of commodity derivative markets with a focus on the commodities coffee, cotton, wheat and aluminium. Two questions are in the center: firstly, how, in the context of financialisation, have the composition of traders and their trading strategies changed, and, secondly, how have the increasing presence and trading strategies of financial investors affected commercial traders, price discovery and hedging. The analysis builds on interviews with different types of market participants and relevant stakeholders. The paper finds that the increasing and often dominating role of financial investors has changed the microstructure of commodity derivative markets in terms of trading volumes and open interest positions, market participants, investment products and strategies, speed and complexity. The common classification of traders put forward by the US Commodity Trading Futures Commission seems to abstract too much from the reality in commodity markets given the multiple and interrelated roles of traders.Financial investors may have multiple roles, which include physical trading, and large commercial traders such as multinational trading houses typically pursue hedging and speculative trading strategies. Though financial investors are widely believed to increase the likelihood of excessive short term price fluctuations and commercial traders take into account their presence and strategies in their own trading behavior, they impact commercial traders in different ways. Large commercial traders seem not to be concerned about their increasing role or even perceive their presence as advantageous. But smaller commercial traders that do not have the resources and capacity to interact actively with derivative markets seem to find it more difficult to use markets for hedging given the increased complexity, speed and short-terminism and related higher risks and costs.

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  • Heumesser, Christine & Staritz, Cornelia, 2013. "Financialisation and the microstructure of commodity markets: A qualitative investigation of trading strategies of financial investors and commercial traders," Working Papers 44, Austrian Foundation for Development Research (ÖFSE).
    • Handle: RePEc:zbw:oefsew:44
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    References listed on IDEAS

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    1. Brooks, Chris & Prokopczuk, Marcel & Wu, Yingying, 2013. "Commodity futures prices: More evidence on forecast power, risk premia and the theory of storage," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(1), pages 73-85.
    2. Brunetti, Celso & Reiffen, David, 2014. "Commodity index trading and hedging costs," Journal of Financial Markets, Elsevier, vol. 21(C), pages 153-180.
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    Cited by:

    1. Küblböck, Karin & Staritz, Cornelia, 2014. "Regulation of commodity derivative markets: Critical assessment of reforms in the EU," Policy Notes 12/2014, Austrian Foundation for Development Research (ÖFSE).
    2. Österreichische Forschungsstiftung für Internationale Entwicklung (ÖFSE) (ed.), 2015. "Österreichische Entwicklungspolitik 2015. Rohstoffe und Entwicklung," Austrian Development Policy Report, Austrian Foundation for Development Research (ÖFSE), number 268194.
    3. Staritz, Cornelia & Tröster, Bernhard & Küblböck, Karin, 2015. "Managing commodity price risks: The cases of cotton in Burkina Faso and Mozambique and coffee in Ethiopia," Policy Notes 16/2015, Austrian Foundation for Development Research (ÖFSE).
    4. Antonio Pedro & Elias T. Ayuk & Christina Bodouroglou & Ben Milligan & Paul Ekins & Bruno Oberle, 2017. "Towards a sustainable development licence to operate for the extractive sector," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 30(2), pages 153-165, July.
    5. Cornelia Staritz & Susan Newman & Bernhard Tröster & Leonhard Plank, 2015. "Financialisation, price risks, and global commodity chains: Distributional implications on Cotton Sectors in Sub-Saharan Africa," Working Papers 2015/04, Maastricht School of Management.
    6. Staritz, Cornelia & Küblböck, Karin, 2013. "Re-regulation of commodity derivative markets: Critical assessment of current reform proposals in the EU and the US," Working Papers 45, Austrian Foundation for Development Research (ÖFSE).
    7. Staritz, Cornelia & Tröster, Bernhard, 2015. "Cotton-based development in Sub-Saharan Africa? Global commodity chains, national market structure and development outcomes in Burkina Faso, Mozambique and Tanzania," Working Papers 54, Austrian Foundation for Development Research (ÖFSE).
    8. Cornelia Staritz & Susan Newman & Bernhard Tröster & Leonhard Plank, 2018. "Financialization and Global Commodity Chains: Distributional Implications for Cotton in Sub†Saharan Africa," Development and Change, International Institute of Social Studies, vol. 49(3), pages 815-842, May.
    9. Staritz, Cornelia & Newman, Susan & Tröster, Bernhard & Plank, Leonhard, 2015. "Financialization, price risks, and global commodity chains: Distributional implications on cotton sectors in Sub-Saharan Africa," Working Papers 55, Austrian Foundation for Development Research (ÖFSE).
    10. Bierbaumer, Daniel & Rieth, Malte & Velinov, Anton, 2021. "The state-dependent trading behavior of banks in the oil futures market," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 1011-1024.
    11. Anseeuw, Ward & Roda, Jean-Marc & Ducastel, Antoine & Kamaruddin, Norfaryanti, 2016. "Stratégies globales des firmes et financiarisation de l’agriculture," Selected Book Chapters, in: Estelle Biénabe & Denis Loeillet & Alain Rival (ed.), Développement durable et filières tropicales. Estelle Biénabe, Denis Loeillet, Alian Rival (eds). (2016). Quae, Versailles, France. 336 pp. ISBN 97827, edition 1, volume 1, chapter 24, pages 265-279, CIRAD, Forest department, UPR40.
    12. Staritz, Cornelia & Heumesser, Christine & Küblböck, Karin, 2013. "Commodity prices, financial markets, and development: Effects of the financialisation of commodity markets and necessary policy reforms," Policy Notes 09/2013, Austrian Foundation for Development Research (ÖFSE).
    13. Daniel Bierbaumer & Malte Rieth & Anton Velinov, 2018. "Nonlinear Intermediary Pricing in the Oil Futures Market," Discussion Papers of DIW Berlin 1722, DIW Berlin, German Institute for Economic Research.
    14. Michael Hachula & Malte Rieth, 2017. "Identifying Speculative Demand Shocks in Commodity Futures Markets through Changes in Volatility," Discussion Papers of DIW Berlin 1646, DIW Berlin, German Institute for Economic Research.
    15. Tröster, Bernhard & Staritz, Cornelia & Grumiller, Jan & Maile, Felix, 2019. "Commodity dependence, global commodity chains, price volatility and financialisation: Price-setting and stabilisation in the cocoa sectors in Côte d'Ivoire and Ghana," Working Papers 62, Austrian Foundation for Development Research (ÖFSE).
    16. Tröster, Bernhard, 2015. "Global commodity chains, financial markets, and local market structures: Price risks in the coffee sector in Ethiopia," Working Papers 56, Austrian Foundation for Development Research (ÖFSE).

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