Volatility and agricultural trading changes relative to real world challenge

Volatility and agricultural trading changes relative to real world challenge
25/08/2021 Maven

2021 has been a year to remember, in many ways. Lockdown has been lifted and we are finally seeing life, as we once knew, start to spring back. Similarly, trading in the commodities sector has sprung to life – prices, volumes and volatility hitting decade long highs as fear of inflation has driven the market narrative.

These markets have been stressed in the past 12-18 months by supply chain issues as global demand has surged since mid-2020. Corn futures have traded up to decade highs, reaching levels last seen during the 2012 drought. Volatility has sustained in the mid-30s while briefly trading into the high 40s. These have been rather unprecedented levels for the markets, which have only briefly seen periods of vol above 30 in the past 10-15 years.

Events like the Ever Given jamming up the Suez Canal have shocked the world, drawing global news coverage due to the widespread impact. This was completely unforeseen and added even more uncertainty to the supply chain and shipping industry that was so stressed, coming out of lockdown. As the situation in the Suez was unfolding, Maven traders were also following the news intently. While shipping and transport was already expensive and uncertain, this event only introduced more uncertainty on timelines and pricing.

During this event and others like it, it is critically important our traders are monitoring it closely and up to date on the latest news so they can model the risk and give the market the best pricing possible as the situation unfolds. With the Ever Given situation, it was imperative that our traders found the implications of the Suez Canal blockage to their underlying markets. Is there crude oil, corn, or other commodities that get shipped through? If so, how much on a daily basis? How long might the blockage last until we would see price dislocations in the futures and future spreads? Just like the shipping companies managing the delays, the contractor waiting on his building materials or the student waiting on his laptop sitting aboard the Ever Given, our traders needed to be able to adapt on the fly.

When news first broke of the ship being stuck, we sprung into action. We started to create contingency plans in case the blockage were to persist. Like the contractor waiting on his materials and starting to explore his other options, we needed to formulate projections for our vol term structure. Once we started to see signals in crude or corn futures, we knew how we would react. Communication and tooling to facilitate collaboration across our teams is key to making this process efficient. Our development teams and traders work together to create tooling and visualization and data-driven automation to streamline this, as much as possible.

As the days went on, it was becoming clear that the impact of the Ever Given was going to be very widespread. Ultimately, hundreds of vessels were stopped and countless people and businesses were impacted. At first, it was not so clear what might come of this. However, the impact was much more than the first order. While the impact was greatest to those closest to the problem, it is possible everyone felt it. This is similar to trading in so many ways, especially in commodity markets, which play a role in everyone’s day to day life.

All in all, it is really intriguing to see the problems we face at Maven overlap with current events. It motivates us to see that we can play a role in keeping markets efficient during turbulent times, all while getting to solve challenging technical problems.