Iron ore house of the year: Theme International Trading

Trading house expands desk and strengthens risk management systems to enhance offering in booming iron ore market

In order to deepen its reach into this market over the past year, Singapore-based quantitative trading firm Theme International Trading has expanded its ferrous metals trading desk and enhanced its back-office risk management systems to support its ability to provide fast, accurate pricing to counterparties. As the energy transition looms large for future iron ore market activity, the team is working to establish itself as the ‘go-to shop’ for global iron ore derivatives trading.

According to internal figures, these moves paid off for the trading house. Theme transacted more than 500 million metric tons of iron ore derivatives volumes between June 2020 and May 2021. It has provided liquidity in iron ore futures markets since 2019 and currently trades across global metals markets. The company is active in both the 62% and 65% fines, which denote the quality of the underlying metal – 65% contracts cover higher-quality iron ore.

“Our ferrous metals desk has a strong quantitative foundation backed with good physical knowledge, and we are confident, competitive and consistent in our prices to the markets because we trust our trading models,” says Zhang Changjie, chief executive officer of Theme International Trading. 

A growing recognition of Theme’s brand and reputation in the market has encouraged more counterparties to reach out to the trader over the past year, adds Giel Teo, Theme’s chief operating officer. “These counterparties recognise the value we bring to the iron ore derivatives markets via competitive pricing, quick responses and the ability to provide decent size quotes,” she says. “Big physical players understand that speaking to us directly allows them to hedge their cargoes more efficiently, compared to going out to the market.”

In a bid to become the “go-to shop for all quotes related to iron ore derivatives”, Theme made several changes to its offering in this area over the past year, Zhang explains. In addition to building its 65% iron ore fines offering, the trading house also added an experienced options trader to its iron ore desk in January 2021. “This has helped to improve our quotations on our options market-making [and has] also resulted in an extremely well-synergised desk with options and futures flow naturally offset within the team,” he says.

As a result, Theme has grown its presence in the iron ore derivatives space over the past year. It has not only maintained its market share on the 62% iron ore futures, according to Zhang, but has also become more active in the options market. The trading house has more than quadrupled the size of its options trades in 2021 over that of 2020.

A significant uptick in iron ore price volatility in recent months has led more counterparties to look for experienced, knowledgeable trading houses to help them understand the market, Zhang says. He adds that Theme has been able to help: “Through an increased focus on both physical and quantitative knowledge, we have been able to share our knowledge on market dynamics with our counterparties.”

To better manage its own risk, Theme also enhanced its back-office infrastructure in January 2021. “Our software engineers have built a better system that is able to both clear trades and send confirmations faster,” Zhang says. “As our volumes have grown, this system has also been used to ensure our traders’ positions are always accurate.” 

Zhang largely attributes Theme’s success in the iron ore markets to the company’s quantitative models, which he believes support its traders’ understanding of the statistical relationships between different tenor contract months. “We can hold trades for both the short term and the long term, unlike traders with very short-term holding power that need to offset their positions with minimal risk,” Zhang says.

Teo adds that Theme constantly reviews these models in a bid to ensure its pricing is accurate, and it remains ahead of its competitors in the iron ore market. “In addition, our quants are constantly monitoring our risk exposure with our in-house proprietary risk methodology,” she says.

Such vigilance is also likely to help Theme evolve alongside the significant volatility seen in iron ore markets in recent months, which is expected to continue. This activity has been driven by a supply/demand mismatch in the market, as iron ore production fails to keep pace with Chinese demand for the raw material for use in steel-making. 

Future market activity is likely to be significantly impacted by growing sustainability concerns and the energy transition. “Current goals [relating to] carbon emission targets [set by governments worldwide] will continue to have a profound impact on iron ore prices in the future. Mills would naturally use less imported ore, and such goals would also incentivise Chinese mills to utilise electric arc furnaces more, which [will] further dampen ore demand,” says Zhang.

As this issue causes market conditions to tighten, Theme’s growing presence in this space will enable the trading house to continue to be the go-to shop for iron ore derivatives trading.

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