Quant Ideas: market-making, risk and information in commodities

Persistent low liquidity in commodity markets is the result of the fundamental interaction of high volatility and noisy data sets. This fact has profound implications for the theory and practice of risk management in commodity markets

It is well-known that commodity assets and markets exhibit extreme volatilities. This is often dismissed as an interesting peculiarity that would mean we only need to put some bigger numbers into formulas we imported wholesale from the traditional financial markets.

This misguided confidence in the effectiveness of standard financial tools has led many a bank and trading operation into a whirlwind of sudden gains and equally unexpected massive losses. As the old adage in the business has it: it