Sugar Market Report for 31 August

Those were the days

As retirement looms I am tempted to look back at my enjoyable and mildly successful career as a commodity derivative broker. It is exactly 40 years since I started in the City as a very green broker on the London Potato Futures Exchange floor located at the Baltic Exchange. Since then I have worked at three banks and the last 15 years at ADM Investor Services International. In that time there has been a seismic change in how business is conducted.

Unsurprisingly, the biggest change has been in technology. The trading floors have been replaced with trading screens and the sole Reuters screen with minimal information has been joined by a plethora of other information providers. Back in the day, the telephone was the only means of communication with clients, an idea that might fill the younger generation of brokers with horror. The demise of the trading floor was inevitable but, nonetheless, sad. No longer was the constant shouting heard across the City as bids and offers were hit. Now replaced with anonymous numbers. The markets can go into hyper-activity but the noise level remains disconcertingly quiet. The thought of clients actually executing their own trades was inconceivable. Back in 1983 one grain client used to send his GTC orders in on a postcard. Now we have instant messenger in its various guises which is rather impersonal but eliminates that heart-stopping moment after putting the phone down as to whether the client said buy or sell!

The age of screen trading has seen huge changes in the types of traders. The hedgers remain but gone are the floor ‘locals’ replaced by high frequency and algorithmic traders. Speed has become paramount. Milliseconds seemingly more important than a considered opinion. With these changes have come huge increases in trading volumes and longer market hours but neither seems to have added much to the market’s function. Nevertheless, now a market order is traded instantly. Previously, a busy New York coffee floor could mean that fills were reported hours later, assuming you could actually get a call through to the floor.

The client base has broadened. It used to be the trade houses that dominated the commercial space. Now producers, shippers and end-buyers have accounts allowing much more flexibility in their trading and hedging strategies. The available contracts have increased enormously. Now a sugar trader will hedge their physical purchases, their freight, their bunker fuel, their emissions and the treasury department will hedge their interest rate exposure.

Market information is now instant. An Ivorian cocoa farmer will know the day’s closing prices whereas 40 years ago they had to rely on the price given by the buyers of their beans – which might be rather fictitious. Fundamental news is relayed real-time on Twitter (X) and Instagram. Before, news of a catastrophic frost across Brazil’s coffee regions only reached European traders mid-morning the next day. Now a webcam will be set up next to a tree giving instant feedback on frost forming. Needless to say, this glut of information has not made predicting market direction any easier.

In the late 1980’s there was a very limited number of funds trading the markets so no need for a Commitment of Traders report. The traders were often quite happy to take the funds on in terms of volumes. Nowadays it would be very foolish to trade against the funds when in full flow. Either go with them or stand aside. Their net position are often bigger than the entire open interest of the past. Their ability to move prices considerably does enable producers and end-users to price at sometimes extravagant levels.

One of the biggest changes has been the growth in regulation. 40 years ago the industry was self-regulated which, basically, meant there was none. You could have lunch with a new client and be trading for them by the end of the afternoon. While there was a need for independent regulation many would argue it has become excessive but that is for another debate. The first regulator of the business was the rather enfeebled AFBD which was quickly replaced by the FSA and now the FCA. The growth in money laundering by criminals and terrorists means clearers have to determine every client’s Ultimate Beneficial Owners and all the information that is required. However, as has always been the case, the cornerstone of every broker’s mantra remains ‘Know your Client’.

While costs have increased due to compliance and technology commission rates have dropped although have bottomed out over the past few years. Gone are the days of minimum commission rates set for each commodity and it has been a race to the bottom for many. It’s a pretty rum deal that exchange fees are nowadays in many cases considerably more than the broker commission rates.

While the ways of doing business have changed the broker/client relationship remains as important as ever. Over my 40 years, I have made many friends and hope to carry these relationships into retirement. The markets continue to be exciting, frightening, sometimes boring and always unpredictable. An old boss told me that he was advised when starting his first job as a broker that he would be soon looking for another career as brokers would, very soon, disappear…that was 1958. In 2023 we still remain an integral part of the business and, I believe, will do for many years to come.

It just remains for me to say thank you to all past and current colleagues and clients for the last 40 years – its been a blast!