Market Data: The Building Block for Commodity Markets

Commodity markets at all stages of evolution share one common factor: the need for data. Yet, by count, most commodity markets operate in the absence of all but basic fundamentals data, and even that data tends to often be too slow, irregular or occasionally too suspect to support market growth. Think about how many commodities are traded every day but are nearly impossible to access high-quality (timely, accurate and reliable) data for? The easy answer is that these markets are not liquid, but then you have to ask yourself if the markets are illiquid because market data is opaque and of low quality.

In this blog we will examine the types of market data that are useful in commodity trading and the rationale for market participants to encourage the creation and publication of high-quality market data.

First, what is market data?  Market data can be categorized into two broad streams:

Fundamentals Data:  The data that helps us understand supply and demand balance, including total production, total consumption, regional disparities, transportation availability and reliability, etc.

Price Data: The data that helps us understand the market reaction to the supply and demand balance, as well as the expectations for the future. This includes bids, offers, transactions, opening and closing prices, markers, indices, etc.

One important distinction to make here is the difference between market data and price forecasts. In many nascent markets the absence of actual market data leads to the use of price forecasts. Price forecasts are typically driven by analysts who use fundamentals data to estimate where the market price should, or could, be. While it is often easy to mistake these for market data, it is important to remember that price forecasts are simply educated guesses of market prices without access to market data to affirm those guesses.

Next, where does market data come from?  Market data, as the name implies, comes from the markets, but broadly it is usually accessed from a few key sources:

Traders:  Word of mouth between traders is a common source of market data.

Price Reporting Agencies (PRAs) and Other Media:  Reporters for media outlets will often obtain market data from traders to publish in their stories, and PRAs will often have a more regular and electronic means of obtaining market data from traders for price assessments.

Brokers:  Brokers are in touch with the largest traders on a regular basis and form liquidity pools which often provide an excellent aggregated stream of market data from a wide cross-section of market participants.

Marketplaces:  Online marketplaces and exchanges tend to make up the most accessible stream of reliable, consistent and auditable market data.

Why do we need market data?  Data is the lifeblood of all markets since it provides the source that enables market participants to make informed decisions, discover prices, determine trends, execute trades with confidence, manage risks, and comply with regulations. Not all data is created equal, however. The quality, latency, and transparency of data can vary significantly across different commodity markets, depending on the availability and accessibility of sources, the standardization and verification of formats, and the dissemination and distribution of outputs.

In illiquid or emerging commodity markets, data is often scarce, unreliable, or outdated, making it difficult for market participants to gain a clear and accurate picture of the market conditions, trends, and opportunities. This can lead to inefficiencies, uncertainties, and risks, as well as missed opportunities for growth and innovation that stifle liquidity. For example, without reliable data on supply and demand, producers and consumers may struggle to optimize their production and consumption plans, resulting in waste, shortages, or surpluses. Without timely data on prices and volumes, traders and investors may face challenges in finding counterparties, executing trades, and hedging risks, resulting in lower liquidity, higher costs, and wider spreads. Without transparent data on quality and origin, internal corporate governance and regulators may have difficulties in monitoring and enforcing compliance, resulting in lower trust and higher fraud that ultimately leads to more regulations.

The path to market evolution in illiquid or emerging commodity markets is through data. By improving the quality, lowering the latency, and increasing the transparency of data, market participants can benefit from a more efficient, reliable, and fair market environment where they can access more opportunities, reduce more risks, and create more value. Access to high-quality market data, in itself, will not make a market liquid. Without it, however, the market will never get there.

The Catalyst for Change: Data-Driven Insights

In the world of commodity trading, the distinction between established markets and those characterized as illiquid or emerging is profound. However, the trajectory of these emerging commodity markets can undergo a significant transformation with the strategic integration of high-quality, low-latency, and transparent market data. This evolution is not just theoretical; it's a practical necessity for the health and growth of these markets.

Bridging the Gap with Data

Illiquid or emerging commodity markets often suffer from a lack of transparency, limited market participation, and a general hesitancy from potential investors due to perceived risks. This is where data steps in as a game-changer. By providing high-quality, timely, and transparent market data, several key benefits unfold:

Enhanced Market Transparency: High-quality data illuminates market trends, price points, and volumes traded, reducing uncertainty and encouraging participation.

Improved Decision Making: Access to real-time (low-latency) data allows traders and investors to make informed decisions quickly, capitalizing on market opportunities as they arise.

Risk Mitigation: With better data, market participants can more accurately assess and manage risks, leading to more stable market conditions.

Increased Market Participation: As the market becomes more transparent and less risky, it naturally attracts more participants, including those who may have previously been deterred by the lack of reliable information.

Better Regulatory Oversight: Regulators can monitor market activities more effectively with access to comprehensive data, ensuring fair practices and protecting against market manipulation.

The Ripple Effect of Data Accessibility

The introduction of quality data into illiquid or emerging markets creates a ripple effect that extends beyond immediate market participants. Improved market data quality leads to better financial models and forecasts, influencing everything from individual investment strategies to macroeconomic policy decisions.

Overcoming Challenges

However, the path to integrating this level of data into emerging commodity markets is not without its challenges. These include challenges involving data collection and analysis, the need for technological infrastructure, and ensuring data integrity and security. Overcoming these challenges requires a collaborative effort among market participants, technology providers, and potentially regulatory bodies.

Conclusion: A Data-Driven Future

The evolution of illiquid or emerging commodity markets through the lens of data is not just a possibility; it's an imperative. As we embrace the digital age, the importance of data in transforming these markets cannot be overstated. It's a journey that requires commitment, innovation, and a shared vision for a more transparent, efficient, and inclusive market environment.

The future of commodity markets lies in unlocking the power of data. By harnessing its potential, we can pave the way for more robust, dynamic, and equitable markets, ultimately contributing to global economic stability and growth.