Liquidity within commodity markets is expected to increase as a range of new entrants begins to move into the market, according to ABN AMRO. But the trading patterns of some types of investor will also bring the greater price volatility more familiar to financial markets.
Speaking at ABN AMRO's latest overview of the commodities market, David Phipps, Head of Commodities at ABN AMRO explained that commodities have now become 'fashionable' as an investment vehicle. Discussing the changing drivers to supply and demand of underlying commodities, he suggested that following the entry of hedge funds, demand could in the future be fuelled by pension funds in basket-type trades.
Another type of investor likely to move into commodities trading is the Professional Trader Group (PTG). Often formed by day traders to take advantage of economies of scale, PTGs currently operate widely within the financial markets. These groups represent up to 50% of daily trading volume in financials and could have a significant impact on liquidity.
Phipps explains: "All but two of the major European commodity exchanges have now made the transition to electronic trading; with lower barriers to entry it is
likely that PTGs will begin trading commodities.