Commodity Trading in the United Kingdom Dissertation

Commodity Trading in the United Kingdom - Dissertation Example This research study examines how two of the largest commodity traders in the world, Vitol and Glencore International, conduct their commodity trading activities through the commodity exchanges in the United Kingdom and in its OTC market. The pit trading system of the years gone by is now replaced by electronic systems that receive orders from traders through the Internet to match these orders with other orders for execution of a transaction. In an electronic exchange the clearinghouse regulated by a supervisory body and the government acts as an intermediary, to deliver lower costs, security, reliability and a global reach for trading in commodity contracts and commodity derivatives. The OTC market in the United Kingdom is less strictly regulated than the exchanges listing commodity contracts and commodity derivatives, but this market offers flexibility for those with needs that standardised commodity listed contracts cannot satisfy. A literature review and semi-structured interviews with commodity traders with expert knowledge assist the research together with the case studies for Vitol and Glencore International. The research concludes that it is likely that the United Kingdom commodity market will continue to attract interest from all around the world with a promise for delivering more for less even into the future. Contents Chapter 1 Introduction 1 1.1 Background 3 1.2 Objectives of the Research Study 6 Chapter 2 Literature review 8 2.1 The Impact of Electronic Trading on Commodities 8 2.2 Contracts on Commodity Exchanges 10 2.3 The Trading House and Trading Commission in Exchanges 11 2.4 The Financial Services Authority (FSA) 12 2.5 The London International Financial and Futures Exchange (LIFFE) 13 2.6 Trading on the LIFFE CONNECT 15 2.7 Buyers and Sellers on Electronic Exchanges 17 2.8 Types of Orders on the LIFFE CONNECT 18 2.9 Basics of Commodity Trading 21 2.10 Commodity Derivatives 22 2.11 Over-the-Counter Trades 23 2.12 Regulation of Commodity Tradin g 25 2.13 The Markets in Financial Instruments Directive (MiFID) 27 Chapter 3 Methodology 30 Chapter 4 Results of Semi-Structured Interviews 37 Chapter 5 Case Studies 44 5.1 Vitol Case Study 44 5.2 Case Study for Glencore International 47 Chapter 6 Analysis and Interpretation 51 Chapter 7 Conclusions and Recommendations 65 Appendix A - Questionnaire for Semi-Structured Interviews 69 Appendix B - Consent Form 74 Bibliography / References 76 List of Figures Figure 1: Change in Commodities Trading in the United Kingdom over the Years 53 Figure 2: Commodity Assets under Management in the United Kingdom 55 Figure 3: OTC Derivatives Trading in Commodities in the United Kingdom 56 Figure 4: Commodity Trading on Exchanges in the United Kingdom 57 Figure 5: A Comparison of Commodities, Stocks and Bonds in the United Kingdom 58 Figure 6: Breakdown of Exchange Traded Commodity Securities in the United Kingdom 60 Figure 7: Value of London Bullion Market Clearing 61 Figure 8: A Comparison of Lon g-Term Commodities Returns based on the Goldman Sachs Commodities Index 62 (This page intentionally left blank) Chapter 1 Introduction Agricultural commodities, minerals, crude oil, metals, natural gas and even energy in the form of electricity are among the fundamental inputs for production and consumption in all societies (Schaeffer, 2008, Pp. 1 – 5). Thus, resource commodity markets are vital for all regions and nations because these markets play a central role in economic development, international trade, and global economic and political stability. Commodity markets enable resource-producing nations to earn export revenues by linking