* Banks retreat from commodities operations
* Gold and forex similarities aid consolidation
* Automation set to displace traditional bullion traders
By Clara Denina and Jan Harvey
LONDON, April 23 The increasing use of
technology on financial trading floors is driving a trend for
banks to roll precious metals operations into their forex
businesses as a separate unit from other commodities activities.
Barclays on Tuesday followed similar moves by
rivals Deutsche Bank, UBS, JPMorgan Chase &
Co and Morgan Stanley by announcing that it would
keep its gold trading business while hiving off most of its
global commodities operations.
The consolidation of interbank gold dealing and foreign
exchange trading on electronic platforms is making it
increasingly easy for forex traders to execute precious metals
deals, allowing banks to ease cost pressures by moving the asset
classes into a single business unit.
"If you were to look at the size of the banks' trading teams
in foreign exchange (compared with) ten years ago, they are a
shadow of their former selves," one former banker said.
"The machines have taken over ... If you have gold, there is
no reason at all why you wouldn't include that as another
The uptake in electronic trading in the past few years has
been a key tool in banks' efforts to reduce costs and increase
Barclays added part of its precious metals trading to the
BARX FX platform in late 2012, citing the cost-effectiveness of
With regulatory scrutiny showing no signs of abating and
cost pressures on banks still elevated, industry sources said
that more institutions may drop out of commodities and stream
gold alongside forex platforms.
"We have to face (the fact that) the market has changed and
we have to make lower the cost of trading gold," Societe
Generale analyst Robin Bhar said. "(Banks) can do that by
cutting headcount and transferring trade to electronic
As global regulators press for greater market transparency,
banks have been required to move some of their over-the-counter
derivatives trading to electronic platforms where possible.
"There is a sea change going on because of regulation,
squeeze on capital, reputational risks. Banks don't want to do
certain things anymore, while what's left tends to be more
computerised," said Niki Beattie, CEO of consultancy Market
"Where you saw banks paying a huge amount of trading and
sales staff, (those) salaries could ultimately be going into
technical support roles. That's what happened in equities a
couple of years ago."
Trading gold alongside foreign exchange operations makes a
lot of sense. The metal is often regarded as a dual asset, both
a commodity and a store of value. Prices tend to be more
sensitive to factors such as U.S. interest rate policy,
inflation expectations and forex rates than the supply and
demand flows that exert a heavy influence on commodities such as
oil or industrial metals.
Gold is a highly liquid asset class, with daily trading
volumes comparable to some currency pairs, while its volatility
is more in line with foreign currencies, analysts said.
The client base is also different to that for other
commodities. For instance, banks that serve central banking
customers with large bullion reserves to manage will have a
greater need to offer gold trading and storage services.
"Banks still want to have a complete institutional product
offering, so as a result they need to retain precious metals as
part of their product family," said George Kuznetsov, of
analytics firm Coalition.
"Banks have been struggling with capital, so they've been
much more selective in terms of the products they're betting on
for the future," he said. "Commodities come with a big question
Coalition estimates that total commodity trading revenue at
the top 10 investment banks fell to $4.5 billion last year, less
than a third of the $14.1 billion they racked up in 2008 at the
height of the commodities boom.
Back then, a full-service bank would have been expected to
offer a full commodities service. That is no longer the case,
"After Deutsche pulled out, it's easier for Barclays to pull
out, and it'll be easier for whoever else wants to pull out
next," one commodities market source said.
"It seems the floodgates are open now. Once people were
piling into the market because they felt they had to be in
commodities. Now they're piling out of it again."
(Editing by Veronica Brown and David Goodman)