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As banks retreat from commodities, a prop trader swoops in
October 20, 2015 / 9:34 PM / 2 years ago

As banks retreat from commodities, a prop trader swoops in

NEW YORK (Reuters) - As banks continue to pull out of trading physical commodities, one new player will jump into the physical arena and expand into ethanol and other niche energy markets: New York-based proprietary trader Vectra Capital LLC.

Vectra, a financial trading shop formed and funded in early 2013 by three energy veterans most recently at brokerage GFI Group, expects to begin trading physical commodities within three to five years, Managing Partner Michael Cosgrove said on Tuesday.

The move comes after tightening credit and increased regulatory pressure chased major banks like J.P. Morgan and Morgan Stanley from the physical commodities space.

“The banks would’ve continued to be very good places for traders to live and be well paid. But, regulatory changes have made many of these formerly comfortable homes far less hospitable,” Cosgrove told the Reuters Global Commodities Summit.

Vectra will start in the firm’s expertise of ethanol, namely around the U.S. hub of Argo, Illinois, as well as the New York Harbor. It could also expand into other markets similar in size and scope. For instance, Cosgrove sees opportunity in markets like natural gas liquids, which he called “similar to ethanol in their stage of development – unsuitable for high frequency trading and a little more old fashioned.”

(To see video interview, see: reut.rs/1M4vnOx)

Cosgrove has spent more than three decades in the energy sector. In 1981, he started at Amerex Oil Associates Inc. as a crude oil broker. At GFI Group Inc, he held a number of senior executive positions, including managing director, before he formed Vectra.

Vectra is already a heavy hitter in ethanol. In 2014, the company traded over half of the average daily volume of the CME Group’s Chicago ethanol futures contract. In 2015, that number is estimated to be around 20 to 25 percent due to fewer opportunities, Cosgrove said.

The shop comprises 14 traders and trades other commodities like gasoline, crude oil, metals and grains, as well as currency and equity.

In September, Vectra hired Lloyd Bloom, former managing director at Mitsui & Co Risk Management Ltd, and Tom Holland.

For a prop shop like Vectra, which includes high-frequency trading among its strategies, access to liquidity is always a concern. Now, liquidity in certain markets may be shriveling.

“When you get beyond 90 days and even within 90 days, if you need to execute size, it will move the market,” he said, citing exchange-traded markets like natural gas, electrical power and gasoline as problematic areas.

For ethanol though, Cosgrove sees liquidity as likely to grow, particularly with new players trading the gasoline-ethanol spread, or the CURL.

“We are in a rare period where ethanol is trading at a premium to RBOB.  It seems improbable that this condition will persist for too long,” he added.

(In paragraph 9, corrects name to Tom Holland not Tom Bloom)

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Reporting By Catherine Ngai and Chris Prentice in New York

Our Standards:The Thomson Reuters Trust Principles.
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