Commodities Trading Question

What is the difference between trading commodities at an IB and at a Physical House like Shell or BHP Billiton?

From what I gather:

1) Besides paper trading, you learn Physical Trading at a Physical House, which includes logistics, shipment, warehousing etc. You may not be exposed to all of these if you were working at an IB's Commodities Trading Desk.

2) As you learn more at a Physical House, it is more easier for a trader from a Physical House to switch to trading commodities at an IB, than the other way round (though it is not impossible.)

3) That being said, starting pay for traders at Physical Houses are much lower than those traders who started out at IB. For example, Physical Houses may send their newly hired graduates to handle operations and logistics before they can move on to a trading role. IB Commodities Trading Desks send their newly hired graduates to trading desks directly but they may be in trading assistant/trainee roles.

Learned this from talking to a Commodities Trader in an IB. He encouraged me to start my Commodities Trading career at a Physical House. Any comments to add on?

Comments (19)

 
May 18, 2012 - 9:28pm

Really good summary. Essentially physical houses make money by trading commodities that actually exist whilst investment banks are more paper-based. On a related note, GS has a great oil desk but majority of their traders are ex-BP. They don't have any presence in physicals though. MS on the other hand has a dedicated physical desk that do both crude and refined products trading. BarCap is also a huge player in commods, and JPM not far behind (acquired big LME steak post-MF Global and also bought some warehousing facilities from RBS few years ago. However they are lagging behind a bit in energy).

Even though a futures contract is physically deliverable, most positions are closed out before physical delivery needs to be made. They are not just trading a piece of paper that is worth 1,000 barrels. They literally trade barges of oil or oil in a pipeline that NEEDS to go somewhere.

Unlike a paper trader, physical traders have to worry about supply and demand in different regions. They also have to look at transportation cost, storage costs, refinery set ups, etc.

[quote]The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.[/quote]
 
May 19, 2012 - 3:11am

Only thing yall have really missed is that the size of the physical market >>>>>>> size of paper market. So ya, you're getting paid a lot less in order to learn a lot more and have transferable hard skills as well as way more knowledge on how the industry works, while potentially getting the opportunity to get paid the same, or more, if you become a trader, vs. being at an ibank trading futures.

 
May 19, 2012 - 7:07pm

I have posted on this topic many times before and will cut it short by saying as usual its really firm and product specific. As to your questions...

1) Lot's of banks have physical desks as well. Some banks are purely hedging and customer focused. Yes you may be exposed to more on a physical desk vs a purely financial one, but you also may not see the banking relationship part. For instance certain banks have 1 entire desk to manage all their energy hedging so they can offer a full service package to their customers including credit exposure. You won't get that at a physical shop.

2) Nah I would say equally likely to go both ways. Both firms teach you different skills.

3) Trader pay is the same as a physical shop vs a financial one, which all you should really care about. How you get to be a trader is totally a case by case situation.

Lastly, physical shops trade a ton of paper in certain products. Again it depends on the firm and product.

 
May 19, 2012 - 8:58pm

marcellus_wallace:
I have posted on this topic many times before and will cut it short by saying as usual its really firm and product specific. As to your questions...

1) Lot's of banks have physical desks as well. Some banks are purely hedging and customer focused. Yes you may be exposed to more on a physical desk vs a purely financial one, but you also may not see the banking relationship part. For instance certain banks have 1 entire desk to manage all their energy hedging so they can offer a full service package to their customers including credit exposure. You won't get that at a physical shop.

2) Nah I would say equally likely to go both ways. Both firms teach you different skills.

3) Trader pay is the same as a physical shop vs a financial one, which all you should really care about. How you get to be a trader is totally a case by case situation.

Lastly, physical shops trade a ton of paper in certain products. Again it depends on the firm and product.

Fair enough. Only difference I see between being part of a physical shop is if you work there for long i.e. Traf/Vitol/Gunvor, they usually reward their traders with ownership of the company. Look at how many millionaires came out of Glencore's IPO last year, this is more of an incentive than being part of a bank, at least IMO.

[quote]The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.[/quote]
 
Jun 10, 2012 - 6:34am

marcellus_wallace:
How you get to be a trader is totally a case by case situation.

If everybody has to go through ops, what would be the qualities looked for in a physical commodities trading operator? I am writing cover letters for ops jobs and I want to make sure I am highlighting the right qualities that fit my profile.

 
May 20, 2012 - 12:38pm

Physical traders tend to get a higher % of the book's PnL but please don't get up caught up in compensation between physical/paper shops until you land a trading gig and then establish a consistent PnL

Physical trading tends to have longer career horizons that are geared towards specific commodities/assets while BB trading positions can have more mobility between groups.

 
May 26, 2012 - 10:26am

Going to a physical shop in the hope of raking it in with an IPO is not all that likely to pay off IMO. While there is a lot of talk of trading houses going public right now, the ones that are still private have very good reasons to stay so. Physical trading seems to be the topic du jour here but things will calm down eventually, at which point pulling a Glencore will look far less appealing.

As far as the share of P&L being higher, just remember that the margins in established physical commodities can be razor-thin.

 
Jun 9, 2012 - 8:10pm

GoodBread:
Going to a physical shop in the hope of raking it in with an IPO is not all that likely to pay off IMO. While there is a lot of talk of trading houses going public right now, the ones that are still private have very good reasons to stay so. Physical trading seems to be the topic du jour here but things will calm down eventually, at which point pulling a Glencore will look far less appealing.

As far as the share of P&L being higher, just remember that the margins in established physical commodities can be razor-thin.

so physical houses are not as good as it sounds?

 
Jun 12, 2012 - 10:17am

actually i just realised many physical trading companies are not that hardcore on paper trading. they may use financial derivatives to hedge their risk but that is about it.

most of the money comes from the razor thin premiums from sellers to buyers, but profits get massive with enough volume. And you also need to source for alot of clients in this biz and handle their shipping, warehouse issues.

Not sure if I should persue something of this nature if I am really into financial markets instead...

 
Jun 12, 2012 - 1:48pm

Imperialian:
actually i just realised many physical trading companies are not that hardcore on paper trading. they may use financial derivatives to hedge their risk but that is about it.

most of the money comes from the razor thin premiums from sellers to buyers, but profits get massive with enough volume. And you also need to source for alot of clients in this biz and handle their shipping, warehouse issues.

Not sure if I should persue something of this nature if I am really into financial markets instead...

yeah most people come in wanting to sling it but it does not work that way once you are on the desk

 
Jun 18, 2013 - 7:05pm
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