As banks retreat from commodity trading, a smaller London broker is eyeing an opportunity to win over their customers.
Marex Spectron Group Ltd, which runs the largest commodities dealer on the London Metal Exchange, plans to hire more traders for its new division that aims to help companies insure against price fluctuations.
The company is betting on capturing a market that promises juicy margins, but where few bigger name firms have succeeded.
The London broker created a new division called Marex Solutions in March and expects to make its first trade this week, said Nilesh Jethwa, who runs the unit.
Jethwa was previously head of markets at Leonteq AG, the Swiss seller of financial-investment products, and had worked as a trader at Lehman Brothers Holdings Inc.
“Big banks have been pulling out of providing tailored hedging in commodities and the few who remain tend to serve only their biggest, most profitable clients,” said Jethwa, who became chief executive of the solutions unit in March. “The cost of maintaining a large book of customers on dated legacy infrastructure means they need to make a lot of money on each trade to be profitable and there’s an increasing population of clients they can’t serve.”
Falling revenue and slumping prices are part of the reason why Morgan Stanley, JPMorgan Chase & Co, Barclays PLC and Deutsche Bank AG have cut back or exited commodities trading.
Goldman Sachs Group Inc is reviewing its commodities unit after the division’s worst start to the year in more than a decade.
Post-financial crisis rules have forced banks to hold more capital against long-dated derivatives positions and have curbed proprietary risk taking on trading desks.
Marex Solutions plans to offer tailor-made hedging products using over-the-counter derivatives to companies — sugar producers, for example — trying to protect against price declines.
It is to be active in agricultural commodities such as grain, coffee and cocoa, as well as metals and energy, Jethwa said.
The company is starting operations globally, including in Europe, the US and Latin America, he said.
The firm is also scooping up some big hires.
Christoph Schwarz joined Marex in April from NetOTC as chief technology officer, while Harry Benchimol, formerly at Leonteq, and Mireia Masip, formerly at Finex Capital Management in Sao Paulo, joined in May as senior product structurers, Jethwa said.
Mehdi Mlaiki is due to start this week as head of trading from UniCredit SpA, following Eugene Faller, formerly at Finex, as head of commodities in March, Jethwa said.
Technological advances mean Marex Solutions would save costs by outsourcing the quantitative analytics function rather than having dozens of expensive quants in-house, Jethwa said.
While smaller brokers are increasingly looking to win business with major commodity firms, the credit risks associated with large hedging trades can be difficult for firms with smaller balance sheets to manage, said Frederic Blanchi, an executive partner for structured commodity trade finance at Cofarco, a Paris-based brokerage.
To solve the issue, insurers have stepped in to provide protection against credit risks and counterparty defaults in trades such as multi-year airline fuel pricing deals, Blanchi said.
“Companies are becoming more sophisticated and want smarter hedging tools that are tailored to their needs alongside one-size-fits-all products,” Jethwa said.
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