Commodities Trading - Tons of post that S&T is downsizing

I've been seeing a ton of posts here about this, because it seems that now that BB S&T is downsizing everybody is looking for the next best thing.

I am addressing this because I think it needs to be said, and it seems to be what most of these threads come down to. This is definitely geared towards energy but the concepts apply for other commodities too.

  1. There are no books or guides like there are for traditional S&T. Yes, there are a few books that you can read that can make you not sound like an idiot when you go interview. That's about the extent of it. They want you to be smart, they want you to work hard, they need you to be personable, and they want you to have some passion for this. They know there's not much you can possibly know, and don't really fully expect you to.

  2. If you want to learn more, there are only a few ways. You can go get experience at an actual shop, or you can dive into EIA reports and the like. Both suck to do, both take a long time, both take a lot of further reading and time to fully understand. But experience is pretty much the only way.

  3. That being said, if you want to go into physical commodities trading, just about the only way to do so is to go and work in the "back" office for a few years. This is because physical commodity trading is almost nothing like the trading you're thinking of. You must know the scheduling/operations side. You must know the risk side. It helps to know the financing side. And that's just the beginning. That's before you'll even be considered for a trading role. I have seen a few exceptions to this, but an understanding of how those companies operate makes it make sense - but those guys also have their backgrounds at very top companies.

  4. If you are a student and you want to go into physical commodity trading, I have heard of two programs, and only two programs to do so out of undergrad. I can't even speak that well for either because I don't know much about them. One of them is at Texas A&M, and the other is at Tulane. From their websites, it looks like Texas A&M's program is geared towards undergrads. It looks like Tulane's is geared towards post-grads. I'll address this further in a minute.

  5. If you are a student, I'd say the best way in is not through Vitol/Glencore/Trafigura/Noble, etc. The people in the business will crush me for this, but it's the best analogy I have: the Majors and similar shops are like your bulge brackets and boutiques. Vitol/Glencore/Trafigura/etc are like the Blackstone/KKR/Apollos of the banking world. They are where you go once you get your experience. They have some training programs, but they are management focused rather than trading focused. Which is badass if you're interested in managing a physical trading shop (in my opinion it could be cooler than trading at one in terms of overall, long-term experience) but just keep that in mind.

  6. If you are a student, the word "target" takes on a whole new meaning. Your targets are now every major school in Texas. Of those schools, Texas A&M and U. Texas seem to dominate in terms of people placed each year, but that's probably because they are some of the biggest schools in the country. LSU and Tulane place very well also.

  7. Keep in mind it's a different set of skills they're looking for. They have quants, sure, but it's not like you need perfect math scores to get a job here. Yes, it does help - don't underestimate that. Yes, you need to be good at it. Do you need to know some of the shit I see on here for S&T? Not really.

  8. I'll add more as they come to me. Those who actually trade physical feel free to correct me as I'm sure this isn't entirely correct.

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Comments (26)

Oct 22, 2012 - 8:16pm

Just adding my 2 cpg on #5,

I would be more concerned with starting at a trading shop that provides you with better training and gets you to a desk rather than a name. Sure, Vitol, RWE, Gunvor or Glencore might impress your friends but they typically hire experienced traders rather than promote within. Of course they are exceptions but I know plenty of people who have been in operations or risk at these shops for YEARS and won't be trading--they make a pretty penny (especially at Vitol) but they won't be traders. Look for programs that either have structure and will eventually rotate you to a desk OR a small shop that will give you the opportunity. Once you start trading you'll typically deal with the guys from the other shops and you'll develop a reputation--name doesn't really matter, PnL does. Finally it seems that everyone is gung-ho about energy products but don't forget about grains, power, softs, metals and other commodities. Sure, everyone wants to get into oil trading since it's sexy but you'll be up against harsh competition; the lone guys that might trade lithium, railcars or other markets can be making a killing and will be the first guys poached when others want in on the action.

Oct 22, 2012 - 9:32pm
Tupac:
5. If you are a student, I'd say the best way in is not through Vitol/Glencore/Trafigura/Noble, etc. The people in the business will crush me for this, but it's the best analogy I have: the Majors and similar shops are like your bulge brackets and boutiques. Vitol/Glencore/Trafigura/etc are like the Blackstone/KKR/Apollos of the banking world. They are where you go once you get your experience. They have some training programs, but they are management focused rather than trading focused.

They are NOT management focused. All the training programmes are structured roughly the same, with only the length being different from firm to firm (LD is 1 year, Trafi 2 years, etc.). Will some people join operations afterwards, yes, but if what you want to do is move commodities from one place to another and you are smart enough, that's where you'll end up. The training programme is a mix of commodities rotations (where you take the phone and do execution for 6 months, or a bit of research, or whatever needs to be done, and the senior guys test your quality and teach you a few things) and back office rotations (like processing LCs in trade finance). If you do well during your commodities rotation, and they need more people, they will probably ask you to stay - and quit the graduate programme to join them full time. If you do well and they don't need more people, they will talk to the other senior guys on other desks and those guys will give you the usual 6 month trial, with same result if you fit in well with their team.

Where does that fit in your decision making? It's pretty much the same as for banking. The upside of being at GS and JP is the amazing brand on your CV (you can get hired anywhere afterwards), and the training and brain stretching from being amongst good quality people. The upside of a smaller shop is that if you are truly smart and driven you can rise a bit faster, as there's less competition, things are less well organised, etc. But I would have killed to go to Glencore or Trafi as my graduate programme, even though I rose faster in my smaller shop and had more exposure to senior folks.

You should apply everywhere and go for the highest ranked one you get in. Just like with banks. Or universities.

Caveat: the paper side looks good initially ("oh cool I will learn derivatives") but entering a paper path basically cuts you off from any further physical trading activities. Part of why I left.

Oct 22, 2012 - 9:46pm

I agree with EURCHF parity that not all rotation programs are management focused at the big players. I know that for Trafigura after the 2 year rotation, you can be nominated for a jr. trader position by a full timer if you performed well during your rotations and then start training to become a trader if you pass some tests. Some people realize they do not want to trade or find one of their rotations extremely interesting or rewarding and choose to move into a full time role in that instead of the trading route.

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Oct 22, 2012 - 10:02pm

I threw you an SB not only because I agree with most all of what you said, but it's refreshing to see folks go out of their way to offer unsolicited advice and insight. All these "did you hear back from Goldman's SLC uganda agricultural equities operations research phone interview round!?!??" posts make me want to commit, but that's another topic.

Regarding 1) that's true, because trading simulators are not readily available for most people--moreover, understanding commodity correlations is a different ballgame than equities and fixed income. You can't simply read a book, though there are some good resources on this website. A good place to get a good start would be here: //www.wallstreetoasis.com/group/books-about-oil-trading

3) 100% agreed. Being a marketer, trading assistant, risk analyst, or scheduler (most mid office positions outside of credit analysis, for that matter) is an invaluable experience if oil and gas trading is what you want to go into, and is a pre-req in many oil and gas firms. Several of these positions are all encompassing, and in a year or two will equip one with indispensable knowledge of a firm's inner workings--not to mention market and industry experience.

5) In spite of being in the industry, I agree with you here. I won't say you're better off, but I'll say both are very, very viable strategies. The risk analyst I came in under has been trading crude for a $5B California based fund for the past 1.5 years; one of my best friends is in Shanghai trading with Trafigura and wants to commit. To each his own, I suppose, but if you put your heart and soul into it, you'll learn and be the best.

I realize this is a vague, jumbled post, but I'd love to help out any people looking into this industry as well. Shoot me a PM and I can answer specifics and hook you with a research report or two.

Oct 22, 2012 - 10:53pm

I have said the same stuff repeatedly, people keep asking the same stupid questions so I do not care to answer anymore. Also Dodd-Frank in the air, as mentioned in that other thread not sure why everyone so gung ho, I did not reply in that thread but Dodd-Frank is a major concern for ALL energy trading, energy more than other areas is being hit with some of the worse measures and rules, not just banks I repeat ALL firms to some extent.

I disagree with #5, I do not like ranking/analogizing trading the way the bankers/PE folks do it. If someone cannot get that is not how things work in trading, they are an idiot and who cares do not need to make magical hierarchies for trading firms. Energy even more is unlike the above, there is desks at Noble and the like I would have no desire to work on. Also a lot of areas in those firms do not even "trade".

To expand on the last point, think of energy/commodities as the entire S&T non-commodity area of a firm. There is various products that require little var and are more relationship and sales based and there is various products that require a ton of "prop trading or VAR" and are huge huge data driven. Many desks at Glencore/Vitol/etc and some of their best ones have nothing to do with VAR/prop/data but yet are awesome places to work just like many sales jobs at BB rates desk is better than a lesser known firm trading job, but get this you will not be prop trading WTI 100 lots at a time and looking at how the WTI-Brent spread moves...you will not be.

Oct 23, 2012 - 10:52am

Correct me if I'm wrong--but disclosure measures are really all that Dodd Frank will affect in the energy trading sphere, and it only affects "swap dealers" themselves; not "end users." The swap dealers are the large financial institutions in London and NYC that write the options and swaps, while the majority of the end users are oil and gas companies themselves. Even then, it's just an added cost and hassle having to report on every trade considered a "derivative" by DF bore only by the banks. Unless your counterparty isn't based in the US, domestic o&g firms could give a shit less about banks disclosing more.

It's true that most firms don't "trade," because it often isn't proprietary trading. Most traders on floors in o&g companies are simply marketers. They schedule movements and sell product for the best market price possible--it really has nothing to do with correlations. It's the risk department that enters hedges and deals with VaR. Some (like Excel) have both.

Couldn't disagree more that a rates job at a BB is better than a firm trading job. BB sales people are absolutely useless and don't need to know the first thing about finance or the products they sell to do their jobs. A communications major from community college could do that shit

Oct 23, 2012 - 11:45am
CaR:
BB sales people are absolutely useless and don't need to know the first thing about finance or the products they sell to do their jobs. A communications major from community college could do that shit

What kind of salespeople are you dealing with? This is not my experience at all.
Oct 23, 2012 - 12:35pm
CaR:
Correct me if I'm wrong--but disclosure measures are really all that Dodd Frank will affect in the energy trading sphere, and it only affects "swap dealers" themselves; not "end users." The swap dealers are the large financial institutions in London and NYC that write the options and swaps, while the majority of the end users are oil and gas companies themselves. Even then, it's just an added cost and hassle having to report on every trade considered a "derivative" by DF bore only by the banks. Unless your counterparty isn't based in the US, domestic o&g firms could give a shit less about banks disclosing more.

It's true that most firms don't "trade," because it often isn't proprietary trading. Most traders on floors in o&g companies are simply marketers. They schedule movements and sell product for the best market price possible--it really has nothing to do with correlations. It's the risk department that enters hedges and deals with VaR. Some (like Excel) have both.

Couldn't disagree more that a rates job at a BB is better than a firm trading job. BB sales people are absolutely useless and don't need to know the first thing about finance or the products they sell to do their jobs. A communications major from community college could do that shit


Regulation changes should affect more than just the banks as regulators have decided physical traders will be affected to. The CME gave energy traders until the end of the year to convert from swaps to futures. That's a pretty major change. And calling traders "end users" is indeed a bit of a stretch. You could argue that the majors are producers but save for Exxon, a lot of their activity involves being an intermediary. Same thing for ag supply-chain players like Cargill or Bunge, it's not like you can buy canned corn branded Cargill at Walmart. For pure traders like Vitol, this holds even more. (Even tough I do think they have a legitimate case for the use of derivatives).

I think the BB rates sales example was to show that there are some great jobs out there which fall outside of the conventional wisdom on this forum. There are BB rates sales guys who function like the 'Alexander' guy in Liar's Poker and provided they have a strong franchise, they are making tons of loot, far more than a rates trader at a small bank might be. The trader at the smaller bank might be quite constrained VaR-wise and may not get to look at all the interesting stuff the BB sales guy is pitching.

If you extend the logic to commodities, you might be better off trading something really obscure at a leading player versus trading crude at a firm that's in the back of the pack.

Oct 23, 2012 - 3:56pm
CaR:

It's true that most firms don't "trade," because it often isn't proprietary trading. Most traders on floors in o&g companies are simply marketers. They schedule movements and sell product for the best market price possible--it really has nothing to do with correlations. It's the risk department that enters hedges and deals with VaR. Some (like Excel) have both.
t

Not sure which firms you're talking about by all the firms I know, the traders are prop trading and manage their own exposure.

Oct 23, 2012 - 4:00pm
whitemamba1309:
CaR:

It's true that most firms don't "trade," because it often isn't proprietary trading. Most traders on floors in o&g companies are simply marketers. They schedule movements and sell product for the best market price possible--it really has nothing to do with correlations. It's the risk department that enters hedges and deals with VaR. Some (like Excel) have both.
t

Not sure which firms you're talking about by all the firms I know, the traders manage their own exposure.

MWE, Pembina, Williams, DCP, Noble (Denver office at least) to name a few.

Oct 23, 2012 - 12:28pm

I couldn't tell you their exact titles, though distinctly remember having so many problems with Goldman, J Aron, and JPM that we almost rearranged our banking group. I know the Goldman guy was specifically commodity sales/transactions because I still have him in my iPhone for one reason or another. I suppose blanket generalizations like that are never good, so I'll redact saying they're all idiots. That was a bit foolish of me. IMO, I'd take a trader off the desk of Shell than a BB any day.

Oct 23, 2012 - 12:41pm

End user of a product = the person using that product. In theory, most of the volume in commo derivatives is supposed to be done by commodities traders hedging their physical position. What the guy does to justify his purchasing of the product - the derivative - does not really matter; point is the guy with a natural need for this stuff is called the end user.

Regulations are a funny thing and I'm sure the latest batch of paperwork will be as effective as the last. We didn't do it but we saw some ships leaving the US with Bandar-Abbas on the BL. Nuf said.

Oct 23, 2012 - 12:48pm

Or put it another way: if you do not hedge you take a position. For example, if my accounting currency is the USD and I am paying in EUR in 2 months, if I do not hedge that EUR exposure, I have taken a position on EURUSD. I am not entering that forward with Soc Gen because I want to make money with it. If my edge is trading corn in Southern Europe, I want to use my VaR for corn in Southern Europe, not EURUSD which I have no clue about.

The issue is not who is the end user but who controls the exchanges, and that is always the banks (which leads to some nasty behaviour especially on smaller markets). Part of the reason for recent regulatory moves - and particularly in Europe - has been hard lobbying by merchants to change this, using their title as "merchant" to level the paper playing field by giving the "evil speculators" as pasture to hungry populists seeking easy votes.

Oct 23, 2012 - 4:13pm
EURCHF parity:
Or put it another way: if you do not hedge you take a position. For example, if my accounting currency is the USD and I am paying in EUR in 2 months, if I do not hedge that EUR exposure, I have taken a position on EURUSD. I am not entering that forward with Soc Gen because I want to make money with it. If my edge is trading corn in Southern Europe, I want to use my VaR for corn in Southern Europe, not EURUSD which I have no clue about.

The issue is not who is the end user but who controls the exchanges, and that is always the banks (which leads to some nasty behaviour especially on smaller markets). Part of the reason for recent regulatory moves - and particularly in Europe - has been hard lobbying by merchants to change this, using their title as "merchant" to level the paper playing field by giving the "evil speculators" as pasture to hungry populists seeking easy votes.

Right, so dodd frank is more specifically aiming at derivatives trading, or entering into contracts to protect your physical position. What affect does the regulation really have on physical trading? Someone above seemed to think Dodd Frank was poised to ruin commodity trading as we know it. If it mainly affects swap dealers, won't traders be able to protect their books without adding the extra burden?

I was taught that the human brain was the crowning glory of evolution so far, but I think it's a very poor scheme for survival.
Oct 23, 2012 - 5:30pm

Man you folks don't waste anytime...lots to read, will try to follow up some of my points.

Dodd Frank - First off, no trading firm like the people you said you would hire over a BB sales guy is being considered an end user, the CFTC made that loud and clear that battle was lost ages ago. According to the CFTC, swap dealers are not just banks/DRW/Optiver/SIG but also BP/Chevron/Shell/Conoco etc...Next the physical market is only heavy liquidity wise in the short-term anything longer-term even 3-6months out is based on a swaps/financial market, has always been like that. Most of the major firms who utilize their VAR effectively and leverage it use mainly swaps and derivatives. Also the CFTC and regulators ain't stupid they are seeing what "physical" markets are actually speculative markets, where a majority of the trading is not with end-users but instead between trading firms, most of these are being asked to be called futures/swaps and go against position limits. Finally DF, is changing daily and a total mess and the DoJ has even ruled against the CFTC now so really who knows, nonetheless it is not a positive for any major energy trading firm.

Rates Example- Goodbread got my example the closest I could think of. My point was exactly that CaR, you may think that BB sales guy is a total moron but guess what he can sell and every deal he is doing is adding margin to that firm's books. Likewise a lot of these brand name firms have desks where the physical trader may have no idea what the S/D for crude is, where WTI-Brent spread is etc, but ask them to source something from XYZ blend with ABC and sell at 30% margin they could do it all day long and 90% of the customers would never have a clue. Just like BB sales rates guys who not only made $$$ coming into 2008 selling crap, but then made more money being "consultants" to most of the firms who owned that crap to unwind it, most of those guys would not know how a MBS product works but they held onto their customers in both scenarios. Being a smart prop trader is not the only avenue to riches. Heck if you read "King of Oil" you know that a majority of Marc Rich's success was never outright prop dating based on data but instead customers/relationships and getting a product to the customer when no else could this still exists big time in the physical arena today.

"MWE, Pembina, Williams, DCP"- I do not consider these trading firms or marketers. They are actually what I would call end users and the customers to a marketing/trading firm. My example went even further to a products group that may have specific assets in a region therefore does not really trade or use var, just trades around the asset optimizing the best to their ability and holding long-term customers.

Oct 25, 2012 - 9:40am
TheSquale:
Any book about Agri/soft commo trading ?
There is a lot of references for energy/oil trading books out there but I can't find anything for agri products.
I understand that as some said it won't teach me how to trade but I would like to know the basics.

I haven't read it but this sounds about like what you're looking for: http://www.amazon.com/The-Art-Grain-Merchandising-Edition/dp/158874955X…
Also, Merchants of Grain is a great read.
Oct 25, 2012 - 1:41pm

Merchants of Grain is great. The various books about Cargill (the official ones, and the critics) are also a decent introduction to the modern version of these markets.

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