Commodity trading is a trading strategy that involves the buying and selling of goods that are classified as commodities. Wile there are many similarities between commodity trading and trading of stocks and shares, one key difference between Commodity and Share trading has to do with the difference between what is traded. Another less apparent difference relates to factors which govern movements in the price of the different asset classes. The primary differences between a stock exchange and commodity exchange are outlined in this guide in addition to features associated with the INSCX trading platform.
Origins of Commodity Exchanges
The origins of commodity exchanges pre-date the organised financial centres we have today in society and were founded in the main by producers of the materials themselves in an effort to both finance production through forward sales mechanisms and to impose good order in the performance of buyer to seller. Forward contracts for example were first designed by corn farmers in the 1840s, while Exchanges such as the London Metal Exchange can trace their origins back to the original Royal Exchange founded in 1577. Today most of the world’s essential materials and resources; oils, grains, electricity, coffee, cocoa, sugar, metals and so forth trade on commodity exchanges and have done so for centuries. The concept of a commodity exchange is not therefore, new. What is relatively new is the development of commodity futures in the 1970s as a means to invite greater liquidity and participation in commodity groups hitherto strictly traded for physical delivery.
Processes employed by INSCX follow many of the conventions of both strictly physical and more recently, financial commodity exchanges, and are introduced for readers in this guide so they can become more familiar with common practices associated with trading on INSCX exchange and commodity exchanges generally. Much of the subsequent content contained herein relates to providing users with general market knowledge of both INSCX and the purpose of commodity exchanges generally in addition to factors which influence how these exchanges operate. Customers of INSCX can also avail of support provided by the Specialist Merchant of the Exchange (See Dealers) to guide them through the trade process on INSCX. The membership of INSCX are in the main producers, end-users and distributors of the materials the exchange lists for trade, and we do not expect these members to be “expert” in the field of live commodity trading. Customers are invited to use this document as a guide, and not a professional introduction to trading.
How INSCX Operates
INSCX operates as an electronic market with plans to upgrade to introduce intelligent synthetic interactions to the world of electronic trading in due course. Trades on INSCX are executed via the electronic platform which is downloaded to a web-browser interface. All members of the exchange, producers, end-users, distributors, traders and merchants are able to view the market live using a web-browser interface. The trade sequence to a bargain is supported by the Specialist Merchant (See Dealers Tab and Specialist Merchant) providing voice-broking service supports to customers, such as placing orders to instruction, confirming trades, maintaining the dealing platform etc., to members of the Exchange. On INSCX trade in the commodities listed is strictly for commercial purposes, either involving supply of the commodity or end use of same. In this regard we differ therefore, from exchanges that trade commodity futures and permit speculators to invest for gain in the commodities these other Exchanges list.
Defining a Commodity
A commodity is normally defined as something that is considered to be of value, has a quality that is more or less consistent, and is produced in large amounts by a number of different producers, or a commodity unique to one producer. When people choose to trade or invest in commodities, they normally think in terms of items that are resources that may be purchased for a wide range of uses. For example, corn is considered a commodity and is traded on the basis of the wide range of goods that can be produced using corn as a base ingredient. In order to trade commodities, it is necessary to participate in transactions usually conducted on a commodity exchange. Functioning in a manner very similar to a stock exchange, there are exchanges that deal directly with commodities all over the world. However, it is not necessary always to limit the commodity trading to one particular exchange. Commercial and non-commercial users, the latter category termed investors or speculative traders, are free to buy and sell on several exchanges if they so desire provided the commodity traded is recognised and formally listed by the exchanges used.
Many of the world’s commodity exchanges in a modern context trade a variety of commodities. Some exchanges such as the Chicago Mercantile Exchange provide trade facilities in diverse commodity sectors, although by and large historically these exchanges developed synonymous with particular commodity sectors. Chicago for example, became known as an agricultural or grain commodity centre, while New York developed an initial emphasis on agrigulture, cocoa, foodstuffs and more recently, oils and precious metals. Through INSCX physical trade in Polymers, Base Oils, Specialty Chemicals and more recently Nanomaterials, are the latest in a series of commodities to add to the varieties of oils, grains, metals, fibres and resources the world economy trades through commodity exchange systems.
INSCX is an exchange specialising in the trade of material categories strictly for physical delivery, materials that hitherto have not been formally traded on an exchange system. These are commodities such as polymers, base oils titanium dioxide and engineered nanomaterials. Some of these materials are commoditized (produced by several as opposed to one producer) while many such as nanomaterials or material brands are unique to single producer sources.
Who are members of Commodity Exchanges?
Two categories of participant are distinguished on a commodity exchange; Commercial and Non-Commercial. A Commercial user is a trade supplier or Purchaser of a commodity, whereas a non-commercial user is a description afforded and investor or market participant which either acts to accept the buy or sell instructions of a producer or user of the commodity as an Agent/Broker, or who holds a speculative as opposed to trade interest in a given commodity. Both distinctions of user have a variety of reasons for using the commodity exchange and the distinction is essential to ensure a neutral and fair marketplace.
Difference with a Stock Exchange
A stock exchange is a financial exchange where shares of corporations are listed for trade. These are classed as debt financial instruments. The investment community trades and invests in shares for speculative gain and income, the latter derived through receiving dividend payments distributed from the profits generated by the corporations whose shares are formally quoted on the stock exchange. Shares are not physical assets. When you buy shares you are awarded the ownership of the shares and receive a share certificate.
In contrast, a commodity exchange is where trade is conducted in commodities for physical delivery by commercial users (Trade Suppliers/Purchasers). Trade on some (but not all) commodity exchanges is permitted in futures contracts by the commercial and non-commercial community. Non-commercial members are generally, financial traders, investors, speculators or physical traders, holding no purpose in taking physical delivery of the commodity, favouring instead to trade movements in price for speculative and/or investment gain, or to act as a supply agent to end users.
Commodities do not pay dividends similar to shares although many of the assessments made by the trading and investment public as to the price direction of both shares and commodities relate to economic factors. Whereas a commodity is affected by supply and demand, and a share price generally is expected to relate to actual and forecast profit performance of the company in question. It can be easy to get confused as both exchanges; commodity and stock exchanges operate similar systems and all assets classes feed off each other in terms of factors which influence market sentiment.
For example, when shares fall, bond debt tends to rise as does gold as a safe-haven investment. When the US$ falls crude oil quoted in US$ dollars rises, when interest rates move, currencies move, falling currencies make cheaper exports, but risk import inflation. There are many factors which cause asset prices to move. However, the easiest way to distinguish between a Commodity and a Stock Exchange is to think of one facilitating trade in Commodities, the later facilitating trade in shares. A glance at the financial columns of a business newspaper can also help as the distinctions are clearly marked up between shares and commodities.
Market sentiment is a term used to describe the general mood of the producing, using or investment community, whether particular to an individual asset class, a common description for shares, bonds, commodities or commercial paper etc., or an influence derived through general appreciation of the overall economic climate and/or a combination of both. This sentiment is among factors that influence the price direction of all asset classes. Market sentiment explains why even a company exceeding profit expectations can witness a falling share price, particularly if market participants are more focused on a perilous economic climate. The same can be true for commodities. Suppliers are often perplexed as to why commodities fall in value where there is evidence of under-supply. In certain instances, the price a commodity commands places emphasis more on the general economic mood of the market as opposed to the particular supply/demand situation. For example, in a situation where economic forecasts predict a slowing economy, the price of Crude oil can be expected to fall. Why? Reduced economic activity will reduce demand from industry for fuel, power and transport, all refined from oil. The economic indicator forecasting this in the future is ahead of the curve so to speak with Crude Oil’s price now the lagging indicator.
Sentiment is not unique to just commodities we associate with trade on financial exchanges as sentiment affects the price direction of any material, good or service. Supply, demand availability of feedstocks, cost of production, consumer trends, spending are factors that in the case of all commodities, whether mass produced by several producers, or just produced by single suppliers that influence the price a given commodity commands.
The price of a commodity is directly affected by the relationship between supply and demand for a given commodity. Any factor that limits the supply may cause the value of the remaining quantities of the commodity to gain in value very quickly. For example, if a natural disaster wiped out a significant portion of wheat, the worth of remaining wheat resources would be in greater demand. As a result, the price for the commodity would rise and any commercial supplier or investor with supply and investments in the wheat market would stand a good chance of earning a substantial return.
At the same time, a glut of a commodity that exceeds the current level of demand may drive the unit price down. This could result in a loss to the commercial supplier or investor, but a gain to the commercial purchaser or short-selling investor, assuming the price falls below what was originally paid for the investment. Often, the commodities Supplier, Purchaser and Investor will have to decide whether to profit from a favourable move in price, or absorb the loss to prevent additional losses in the case of an adverse move in price by selling at the current lower unit price. If there appears to be no hope for the commodity to recover within a reasonable amount of time, the participant is likely to unwind the trade. However, if there are indicators that the commodity will recover and demand will rise within a short period of time, there is a good chance that the position will remain in place in hopes of recouping all losses at a later date.
Forward Pricing mechanisms
Forward pricing mechanisms are deployed by commodity exchanges not just for speculative purposes but rather to give producers, end-users and more latterly speculators the ability to both predict and safeguard against adverse movements in the future price of a given commodity. On more mature exchanges a producer of copper can sell copper for forward delivery, 3, 6, 9, 12 months or more in advance, as can an end user make a purchase at a fixed price for future delivery. These mechanisms are well established in commodity categories, such as grains, oils, metals, electricity and so forth, and were established by collaboration between producers themselves as opposed to being developed by investment banks, but hitherto no effective forward pricing mechanisms have been developed for major material markets such as the polymer sector or more recently for the emerging nanomaterials market.
Forwards on INSCX
To date there has been no effective forward pricing mechanism created for high volume material industries such as the polymer industry. INSCX exchange has created a template we feel both producers and end users can work with, and we will work to develop a similar mechanisms for the other commodity categories we list for trade. As such INSCX permits trade in polymers on a forward basis strictly for physical delivery for durations of, 3, 6, 9 and 12 months. This initiative represents the first truly effective means to provide producers and end users of polymers with an exchange system they can both understand and work with. The exchange specialist employs a series of mechanisms to quote indicative pricing for forward delivery in polymers according to their chemical family while permitting both producers and end users to instruct sell or buy instructions both on a spot and/or forward basis at their discretion. The objective is to provide producers and end users with a credible pricing mechanism they control and can believe in while enabling a means to conduct trade on a forward basis and to assess future price trends in the polymer marketplace.
Are the forwards futures?
No. INSCX is not offering polymer futures, but rather a means to provide producers and end users with a mechanism to sell or buy for forward physical delivery. We are not offering the ability to speculate or invest in polymers, but rather a means that first benchmarks an effective price mechanism for the physical polymer industry. Over time this may develop a basis for an effective speculative market in polymers; one where investors can buy/sell for gain as opposed to delivery, and we have a strategy to create such a future development. That said, our primary focus is on physical delivery for the foreseeable future as we recognise aspects that are unique to the polymer industry that warrant us giving producers and end users a pricing and forward trade mechanism they can learn to support and work with in their own interests before developing further complexity.
How Trade on a Commodity Exchange works?
The process of commodity trading is generally transacted using an Approved member firm of a commodity exchange, often referred to as a broker. In financial commodity exchanges; those where speculators are permitted, a customer opens a commodity brokerage account and uses the services of a Broker to place instructions for trade. The exchange clearing mechanism (the process of paying against delivery of a physical commodity) is usually structured Broker to exchange to Broker with Supplier and Purchaser either side of each Broker. The mechanism is structured to ensure market neutrality and as a means to safeguard against trade default and to underwrite the quality of materials traded. A producer for example seeking to sell will naturally always want the highest price, while a buyer will in contrast seek a lower price. This is why commodity exchanges distinguish commercial members (producers and end-users) from Non-Commercial members who act to accept the instructions from commercial members to buy or sell.
INSCX employs the Specialist merchant model as a means to ensure good order in trade and to bring both sides together quickly. The Specialist Merchant of INSCX exchange is a separate limited company fully owned by the Exchange. (See Dealers Tab) On INSCX the system asks both buyer and seller to instruct their buy and sell levels anonymously through the Specialist Merchant member of the Exchange to quicken the negotiation/auction process in a neutral and fair manner. The Specialist for example is not permitted to trade for price gain on their own account, and this is one of the key features of the INSCX commodity exchange process. As such the system employed guarantees neutrality, material quality and financial integrity of any trade executed through the platform.
Spot and Forward Contracts
INSCX provides both cash/Spot trade capacity across designated listed instruments. A cash/spot trade is one for immediate delivery, while a Forward trade is delivery each month at a fixed price agreed on trade for a duration of 3, 6, 9 or 12 months. Forward trade is restricted on INSCX to polymers only for the present, and the exchange categorises polymers not by application but by chemical family. Nanomaterials are traded on INSCX in research quantities via an online portal; https://inscx.com/shop/ with provision to list these materials on the main trade platform as several producers come to fabricate more common specifications according to Thermatic Class. Listed commodities are referred to as products or instruments and are sourced via producers registered and approved by the Exchange. instruments are graded, exchange, producer, mini and exceptional. Products listed are primary raw engineered nanomaterials (PNMs), secondary (SNMs) where specialist functionality is requested and combined (CNMs) where the exact functionality requirement is known at point of initial trade. Functionality will constitute an ancilliary service provided by the exchange and not trade as an instrument unless providers unite to list specific capacities on the exchange.
One reason to use a commodity exchange system is the system is designed to assure the good performance of seller to buyer and visa versa. In the case of a seller, to ensure the quality of product supplied through INSCX there are a number of mechanisms we employ. First, the Exchange enforces a registration process that vets the producer or distributor supplier before they are admitted to join the Exchange and to submit orders for sale. Second, INSCX agrees with sellers a process whereby any material batch found to be off-spec or damaged in any way is replaced quickly and without delay of litigation. In the case of nanomaterials, the Exchange insists on an independent inspection for any supplied material and holds as condition of payment that no commodity is paid for unless it meets specification. All purchases through INSCX are therefore “Good Quality” (CGQ) and “Assured Good Delivery” (AGD).
Just as the INSCX system acts to ensure product quality and prompt delivery, the system also provides assurance of payment to a producer or seller on trade agreement/dispatch. The very fact producers (sellers) are assured quicker payment by design acts to improve book-to-bill or working capital. The Exchange DOES NOT permit purchases on credit, but will subject to producer participation offer producers the ability to conduct fixed price sale/repurchase trade (termed REPO transactions) as a means to improve producer working capital levels during periods of plant shutdowns for maintenance. Equally, subject to buyer participation levels, INSCX will work to offer delayed payment terms to credit referenced end users through launch of an Exchange trade finance fund where the Specialist pays the seller against delivery accepting deferred payment from the buyer.
Understanding the Trade Platform
The INSCX trading platform is accessible to registered users via a standard web-browser. Once registered users simply select LOGON from the website and enter their USER ID and password which is issued to them on first registering with the Exchange. On LOGON this automatically brings the user to the commodity area they are permitted to view. The commodity categories that are available to view by subscription on INSCX are as follows:
EMEA Base Oils
* The majority of nanomaterials are listed on the INSCX Portal in research quantities while those listed on the primary trading platform are nanomaterials and/or nano-commodities that have qualified to be admitted to the primary trade platform based on the criteria of minimum number of producers and/or volume capacity.
The trading screen incorporates a number of features that are aimed to make the system easier to understand for users of the Exchange. Individual commodities are classed per category and referred to as Products. Each Product is listed with the following information and against each heading is a sample description.
Product ID: The product reference number or Code
Product Name: i.e. LLDPE C4
Term: Spot, Contract or Forward
Basis: The basis of delivery, either Freed Delivery (FD) or another INCOTERM basis
Currency: The currency in which the product is traded
Quantity: The Unit of trade
Origin: The country of origin
BID: The best buying price
ASK: The best selling price
BID Quantity: The number of units a buyer wishes to bid for *
ASK Quantity: The number of units a seller wishes to offer *
Close: The previous trading session closing price
Change: The change in price on the day
* If the BID or ASK quantity is zero, this is where the Specialist Merchant (Exchange Trade Desk) has placed a price indication buy or sell for the product concerned.
Each product once selected opens up a separate window termed a TICKET. The ticket serves a number of functions aimed at providing a more in-depth picture of a particular product. For example, the Ticket once selected opens up a new window for the product selected and listed on the ticket is the following information in addition to the information that is displayed on the main trading screen against each product listing.
The number, price and quantity of both BIDS (Buy orders) and ASK (Sell Orders) at different price levels that are live in the market for the product in question.
Volume Weighted Average Price (VWAP)
VWAP stands for Volume Weighted Average Price. This is an average price of the total number or buy orders (BIDS) and sell orders (ASKS) currently live in the market for the product concerned.
Last Trade (LT)
This is the price at which the product last traded.
Last Trade Volume (LTVOL)
This is the volume of the last trade reported.
Trade Weighted Average Price (TWAP)
This is the average price of all buys and sells daily in the product either reported or executed through the Exchange.
Placing an Order
To place an order to trade the use selects the Order Tab on the platform and completes the required information. On submission this instruction is received by the Specialist who will call to confirm the order and then place the instruction to buy or sell for anonymous display on the trade platform.
Cancelling an Order
To change, alter or cancel any order the user simply can select My Transactions tab to view their order history and cancel any order instruction they wish.
Daily Price Fixings:
At set periods during the daily trading session the Specialist will report in respect of Polymers an Average Price Fixing based on the number of trades executed through or reported to the Exchange. This average price will be published on the platform news section daily and be continuously updated live as the Trade Weighted Average Price on the individual product ticket. The system will allow polymer producers and end-users to assess better daily price averages based on actual and reported trade as opposed to being reliant on journalistic assessments provided by various agencies.
The Specialist posts market relevant news at intermittent periods during the day which is flashed initially by the scrolling ticker function on the platform. To view a specific news item the User simply scrolls over the item on the ticker which then opens the news post on the News Tab of the site.
To view technical data such as chart analysis, the User is invited to open the Technical tab on the platform and select the product they wish to view chart analysis on.
Guidance for Users
On registering to join the Exchange, our staff will set aside and schedule a platform walk-through to aid user familiarity with the system.
The exchange can be contacted during UK and North American business hours via the following means:
Telephone: UK Dial 0044 203 137 5187
Telephone: US Dial 0010 646 470 4911