Commodity Trading Apps: Advantages Of Market Digitalization
5 Examples How Digitalization Is Driving Change in Commodity Market
- Contract management: optimization of document flow
- Supply chain planning: logistics optimization
- The counterparty verification procedure (KYC)
- Automatic calculation of Mark to Market
- Accumulation of data from several world trading platforms within one online platform
Financial markets are seeing an increase in the use of automated tools, however innovation is still low in the commodity industry. What exactly does digitalization mean in this business and why must market players embrace the digital future and start using the commodity trading platform actively?
Unlike derivative transactions, which are settled through clearinghouses, the physical commodity market lacks digital confirmation to reconcile prices, payment and delivery terms set by the buyer and seller - automatically and in real-time. This leaves the industry vulnerable to fraud, which can take many forms.
Another challenge is to use all the information that can help develop and protect the trading business. Can current commodity trading and risk management (CTRM) software collect and analyze all of this data to help market players make more informed trading decisions? Information alone is not enough, so it takes analytics to understand it.
Leveraging advanced data analytics with the help of the commodity management software provides the industry with long-term benefits, which we'll discuss next.
Commodity Trading Apps: Advantages Of Market Digitalization
Digitalization spans various commodity markets and creates significant opportunities for commodity traders to improve business processes. Let's take a closer look at these possible benefits:
- Positive impact on profit margins and saving time for traders to collect data contained in contracts
- Errors reduction, cost control and yield management improvement
- Ensuring organizational effectiveness
- The ability to respond in real-time to important changes and reduce operational risks
- The ability to create a more interconnected value chain
- Delivering significant improvements in communication, collaboration and decision making
- The ability to extract information with data analytics, to get real-time business intelligence and to reduce costs
The introduction of new technologies such as machine learning and blockchain for inventory management, quality management, logistics and operations with physical goods will significantly increase the efficiency and transparency of the market. Although, to make the best use of these technologies, companies need to first digitize their data and workflows with the help of online commodity trading platforms.
5 Examples How Digitalization Is Driving Change in Commodity Market
1. Optimization of document flow and reduction of bureaucracy: contract management as the basis of trading
The entire trading process begins with the signing of a contract between the parties - the buyer and the seller. But how long does it usually take from the moment of booking a deal between traders to the final agreement of all conditions and, as a result, signing the coveted document? How many employees are involved in this process and what risks may arise? How can the implementation of an online trading platform reduce these risks to a minimum, simplify accounting and minimize the time spent by employees involved?
After booking a deal between traders (usually by agreeing on conditions via a messenger), the data is transferred to the execution department. Often this information comes through dozens of chats, where responsible employees are included. Also, it can circulate by email, among hundreds of other letters per day. The Contract Desk accepts this information and begins to transfer it to the draft of the future contract, which, after all approvals, should be transformed into a printed form of the future contract. This is followed by sending this draft within the team, the corresponding clauses of the contract must be checked and confirmed by different specialists of the company: a lawyer, financier, risk manager, logisticians, etc.
Only after all internal approvals and endless transfers, the draft contract is sent to the counterparty for verification. The counterparty makes edits and returns the document back. The whole procedure is then repeated.
This process can take about a month, and if we are talking about physical delivery, the goods may even have been delivered, while the contract between the parties has not yet been signed.
This situation can also lead to a default on the contract for one of the parties. A contract not signed in time gives the right not to fulfil it. Imagine the following situation: company A committed itself to supply 10,000 tons of wheat to company B. Due to the manual processes of contract signing in both companies, the contract could not be signed within a week, and during this time the market price for wheat has increased by $15, which is not surprising in a commodity market with high volatility in prices.
As a result, company A refuses to supply the goods to company B, citing the fact that the contract has not been signed yet. Therefore they have no obligation to supply something to company B. Although it is unlikely that company A would abandon its obligations if it had signed the contract before the price went up. As a result, Company B lost in this transaction $150 thousand. There are a lot of such situations; they occur in commodity markets every day.
What decision can company B take to speed up the contract signing process and thereby insure itself against the risk of default on the other side? It is possible to hire additional employees, but at the same time the manual process and endless transfers of the draft contract will still remain, and the company will have an extra burden in the form of remuneration of these employees.
The correct solution is to automate and digitalize the entire process of signing a contract through an online platform. In practice, it looks like this:
- After the acceptance of the basic conditions of a future transaction, the trader transfers this data in 1 minute inside the online platform using a mobile application, and a draft of the contract is formed, the necessary information is pulled by the system automatically based on data from the trader.
- Then the draft is automatically redirected to a lawyer, financier, logistician through the same platform.
- Responsible employees immediately receive notifications, make their review, make adjustments and a draft is generated within the company.
- The counterparty also gets access to the platform and makes their changes there. In this process it is not necessary to use emails.
- After everything is agreed by both parties the contract can be signed through the platform integrated to DocuSign.
Result: thanks to the online platform, the contract was signed not in a week, but in a day, the manual process was minimized, as well as the risk of default, the employees involved in the process spent the minimum of time, which contributed to an increase in the productivity of the company as a whole.
What solutions do we have?
In the context of this situation, we have created a platform that recognizes typed or handwritten text and digitizes documents. The online version of the document is sent within companies, which speeds up the signing process. To better understand how it works, you can download part of the user interface of this solution right now.
2. Logistics optimization: efficient supply chain planning and quick strategic decision making as a method of generating additional profit and saving on direct costs
Modern commodity trading involves careful planning of the entire supply chain. Let's consider an example of a trading company with a volume of goods of 3 million metric tons per year. Imagine the following situation: at the same time about 100-150 contracts can be in an open position with the delivery of physical goods at different times. For this, cargoes are chartered for different months, and all this volume must be appropriately distributed between 4 to 5 ports of shipment.
The logistics department is faced with the task to organize distribution and combine long and short positions in order to avoid an excess of goods in ports and at the same time to prevent extra storage, as well as to quickly load the newly arrived cargo, thereby ensuring the necessary availability of goods for loading in advance. It is easy to answer these questions, having 2 cargoes per month, but what to do when there are 20-25 cargoes for several ports?
Such a large-scale problem cannot be solved by using Excel. The right solution is to implement an online platform for planning the supply of goods for actual shipments, which will be integrated with the port's warehouse logistics system. Such a platform will compose a shipment plan based on operational information from carriers, port brokers and forwarders. The system will calculate the accumulated volume of goods in the warehouse, goods in transit and undelivered goods, in the context of all ports and terminals. At the same time, the system will automatically compare the purchased goods with future shipments.
As a result, logisticians will understand for what kind of sale there is a lack of goods and transfer this information to traders who are planning a purchase program. Such a system completely eliminates the human factor in planning, structuring, selecting and collating the right data at the right time.
What solutions do we have?
To create an online platform for logistics optimization, we can connect via API to a suitable service like Tradelens and develop a customized solution for your business. We propose to make commodity trading software fully meeting the requirements of the business with convenient UI/UX design.
3. The procedure for checking counterparties as insurance against the risk of a possible default
A timely assessment of the counterparty's solvency is necessary in order to minimize possible commercial risks and ensure business continuity. To draw up a complete picture of the counterparty and its ability to fulfil monetary obligations under contracts on time, primary information is needed. The more information available, the more accurate conclusions can be drawn. Also, in the case of trading commodities, it is necessary to divide all counterparties into open limits for the supply of goods. This will make it possible to conclude contracts for those volumes of goods that the counterparty can physically supply to you.
The counterparty verification (KYC) procedure consists of several stages:
- collection of the necessary documents according to the requirements of the risk office
- checking the validity of these documents
- verification of the counterparty through various databases for open court proceedings
- determination of the limit in money for trading with one or the other counterparty
All this is often done manually, but with large trading volumes, only manual verification becomes impossible. An automated online platform integrated with databases makes it possible to speed up the process of verification and accreditation of a new counterparty as much as possible. Also, the system allows you to store the history of trading with a specific counterparty for several years, identifying problems that arose earlier in the process. Documents for each counterparty are stored within the system, which makes it possible to quickly find the necessary information for any user. Also, the online platform stores the established limits on an open position for each supplier or seller, thus automatically blocking a new contract when the limit is exceeded while notifying all users.
What solutions do we have?
A platform that connects institutional investors to digital lending platforms on a global scale, showing a unified credit score for each individual loan, and making the process of investment in consumer loans simple and transparent.
To better understand how it works, you can download part of the user interface of this solution right now.
Also, we can connect via API to any online KYC screener on a clients’ choice and develop a customized solution for your business.
4. Automatic settlement of Mark to Market as a method for the most accurate PnL forecast and selection of the optimal trading strategy
When trading on commodity markets, a daily (or even every second) revaluation of an open position on goods relative to current market prices is inevitable. Such revaluation gives the trader an understanding of when it is better to enter a position and at what point it is better to exit it. Financiers can assess the current state of affairs in the context of PnL without waiting for the actual execution of contracts. The correctness of Mark to Market (market revaluation) depends on two important factors: the correct display of the market price for revaluation and the control of the operational accounting of an open position in the context of all products and signed contracts.
Having a large portfolio of assets, as well as several products with forward and spot deliveries, makes manual control impossible or imprecise. Thus, an online platform comes to the aid of traders, which, on the one hand, accumulates the entire open position of the company, and on the other, integrating with the exchange platforms, it pulls up the market price in Live mode, thereby revaluing the open position relative to the current market price every second.
Such a digitalized method of control and planning allows a trader to control the situation as quickly as possible from any place and at any time, always be in the market, to get traceability of positions, thereby assessing the strategic prospects of their investments as efficiently as possible.
What solutions do we have?
The system that allows brokers to monitor traders' accounts for risk, using different methods of scenario analysis, and see to what extent the margin trader has approached the point when he cannot repay the debt.
To better understand how it works, you can download part of the user interface of this solution right now.
Also, we can connect via API to the online trading exchanges like Euronext or CME Group, and develop a customized solution for your business.
5. Accumulation of data from several world trading platforms within one online platform as a key tool for a trader when making a decision
Today, trading on commodity markets, with the high volatility of market prices for goods, becomes impossible without simultaneously tracking fluctuations in market quotes. But there are a lot of trading exchanges, prompting a need to integrate consolidated data from trading floors in one place. To achieve this goal, there is a solution - a consolidated online platform for future planning of exchange trading and tracking trends in selected markets and products. Such a platform will enable:
1) Integration directly with a trading exchange, where traders can get faster access to selected markets and products in real-time through the platform
2) Getting access to the latest quotes, historical and statistical data, while making a selection of only those assets that the company uses in its trading operations.
What solutions do we have?
The system that allows brokers to monitor traders' accounts for risk, using different methods of scenario analysis, and see to what extent the margin trader has approached the point when he cannot repay the debt.
To better understand how it works, you can download part of the user interface of this solution right now.
Also, we can connect via API to the trading exchanges like Euronext or CME Group and develop a customized solution for your business.
So, participants in the trading market have increasing access to digital tools and online platforms necessary to interpret and use data. Traders can take advantage of this innovation and ensure their competitiveness in a changing marketplace.
Market leaders will beсome those forward-thinking players who understand and embrace the transformative role of technology in data management, and who can leverage the most valuable commodity of all - knowledge.
Benefits of Digitalization for Commodity Trading
According to reports, the commodity market will be worth $131,300.00bn in 2024. Before we discuss commodity trading technology trends, let’s talk about its potential benefits. The following is a list of some advantages to expect when implementing commodities digital solutions:
- Help traders save time when collecting data and potentially boost profit. Commodity trade digitalization assists investors with gathering information faster. That could help with market analysis and making informed decisions, which could potentially increase profit margins.
- Improve cost control. It can be pricey to acquire the desired data since large amounts of information require significant resources. Analyzing everything manually could also take your focus away from actual trading, which could also have an effect on potential profit margins.
- Decrease errors. You can reduce errors by allowing computers to collect information and execute actions. However, it’s necessary to program the action you want the computer to perform carefully. As long as you achieve that, you’ll eliminate the risk of errors.
- Enhance team cooperation and communication. If you work with others, you can use digitalization to improve communication with other teams or staff members.
- Receive useful data in real time. Computers are faster in collecting data, and they can retrieve useful information in real time. Apart from computers gathering info, they can also analyze data. It’s possible to leverage AI to analyze large chunks of data and receive valuable information in a matter of seconds.
Commodity trading confirmation digitalization can help automate trade execution and avoid unnecessary bureaucracy. We’ll discuss that and other benefits in the following sections.
Blockchain Technology as a Solution in Commodity Trading
The main benefit of blockchain technology is supporting direct P2P trades without intermediaries. Leveraging this technology could speed up and simplify transactions in the market. Here’s how blockchains deliver useful commodities digital solutions.
The Smart Contract Concept – No Intermediaries and Unnecessary Paperwork
Blockchains like Ethereum support smart contracts. These are digital contracts with details stored on the chain as a code. The contract contains agreed requirements, and it will self-execute once the conditions have been met.
Using smart contracts for commodity trading confirmation digitalization removes intermediaries. Blockchains support direct P2P transactions that don’t require any third party, such as a bank. That makes the transactions more private, which many investors appreciate since they can preserve at least some anonymity.
Another crucial advantage of this commodity trading technology is that it eliminates unnecessary paperwork and minimizes bureaucracy. If you do things the traditional way, you need to draft a contract. It takes time to agree on the criteria and get all the details right. More frequently than not, you need to include experts like lawyers and risk management advisors.
You can speed up the process by using online-based smart contracts. They require traders to enter the necessary information into the web platform. You can usually do this easily via a mobile app or PC. The platform helps by entering the provided data to get the contract ready. Instead of sending papers to the other party, you can both sign them by using a specialized web-based signature service.
Reduce Costs and Time
Blockchain is a digital advancement that can help reduce costs and potentially increase profit margins for traders. For starters, trades will be confirmed automatically. P2P transactions don’t require an intermediary, so you don’t have to pay them a fee. Yes, there’s a gas fee for using a network, and even if you use a specialized service, the charges are likely to be lower than when picking traditional trading options.
Blockchain also speeds up transaction settlements. Automating everything ensures a particular transfer only takes seconds or minutes. That’s much better compared to hours or days, which is often necessary for completing a transaction using the traditional methods.
Improved Transaction Security and Transparency
Apart from optimizing document flow, commodity trade digitalization can also enhance transparency. In the past, the commodity market lost some reputation due to manipulation.
Here’s an example: there was a scandal where banks manipulated gold prices in 2014. Once the public revealed that, the trust in those banks and the market was shaken.
Blockchains can help eliminate any suspicions by maintaining maximum transparency and traceability. The transparency ensures that manipulation is almost impossible and that it’s easier to notice irregularities and report them to authorities. Many countries have been regulating the blockchain and digital trading market, which should help you meet any law requirements and look for protection if anything goes sideways.
The smart contract concept makes it very difficult to tamper with the system or the data on the blockchain. It makes fraud virtually impossible, which makes transactions more secure. Blockchains are famous for their high security levels, especially if you stick to major networks. The excellent blockchain security reputation is another thing that attracts investors, especially those who lost trust in banks and traditional trading options.
AI and Machine Learning as a Solution in Commodity Trading
Artificial intelligence has already found its use in many markets. From healthcare to smart mobile assistants, you can find AI-powered software everywhere. Machine learning is a way to apply AI, where mathematical data models assist computers in learning without humans giving them direct instructions. Instead, they learn based on experience from the data already gathered in the process.
In the following sections, we discuss the main ways in which AI and machine learning can help commodity trade digitalization.
Collect and Analyze Market Data
Collecting data by using computers can be an important commodities digital solution. For starters, it eliminates the need for an actual person to gather data from the market. Depending on how deep you want to go with your analysis, these could be huge data volumes.
It’s not easy for a human to collect that amount of information, especially on a regular basis. Even if you organize teams, it takes a lot of time and resources. If you have to pay someone to collect that data, you’ll end up spending money that could present a portion of your potential profit.
A much more sensible option is to use a computer to collect market data. The only requirement is to enter the desired pre-set conditions. Once you do, a computer can process significant data chunks per second. It can organize them into tables or text as your preferred way of receiving information.
Apart from processing more data per second than a human, computers can also analyze information. Let’s say you’ve analyzed a particular asset and received huge amounts of its historical price data.
It could take significant time for a human to analyze it, notice patterns, calculate averages, and assess other useful details. A computer could deliver that information much faster and without risk of error, providing you entered the initial instructions adequately.
While waiting for the data to arrive, investors can focus on detecting other potentially successful moves for their portfolio. Or they can sit back and relax while the computer does their job. They can rest assured knowing they’ll get reliable data that they can later use.
Predict Trends and Make Informed Trading Decisions
Artificial intelligence and machine learning could help predict trends in commodity and other trading markets. By using the data gathered and analyzing it, the computer can try to predict where the market will go in the coming weeks or months.
Predicting trends can help you know when to act and when to be patient and miss on a potential trade. The estimations won’t be based on guesswork but on analyzing large data amounts. And a huge advantage is that computers don’t have emotional bias. Humans might be subjective and have emotions toward a particular asset, which could affect reasonable judgment. Computers don’t have that problem because they only follow the pre-set instructions.
The greatest thing about leveraging machine learning and AI is that these will only get better in time. That means their speed and feedback quality will only improve. It will ensure traders even more actionable insights to use when making market decisions on the assets to add or remove from their portfolio. And together with commodity trading confirmation digitalization and other high-tech advantages, it would make the entire investor experience more enjoyable.
