NEW YORK, Feb 10 (Reuters) - After a bruising few years roiled by scandals, increased regulation and higher trading costs, fortune seems to be shining once again on mid-sized commodity brokers such as INTL FCStone.
For banks and brokers that make money clearing and executing trades for clients from grain elevators and copper wire makers to hedge funds, scandals arising from the collapse of MF Global and Peregrine Financial Group hurt trading volumes, increased regulatory scrutiny and pushed costs higher.
Last year, lower volatility and concerns about waning demand for the world’s raw materials triggered an exodus of speculative cash, prompting some analysts to say a decade-long bull market had come to an end.
In the past six months though, those issues have taken more of a backseat as volatile energy prices and bumper crops have reignited an appetite for hedging among commercial users, boosting trading volumes and revenue for brokers.
INTL FCStone reported its best quarterly results in two years on Monday mainly on a 50 percent increase in commercial hedging, its largest business. That offset slumping securities income.
Chief Executive Sean O’Connor said no single factor was behind the increase, but rather a string of events: from oil’s second-worst rout to a bumper corn crop to the retreat of big banks from commodities over the past year.
“We don’t have any magic science to it,” he said in an interview on Tuesday.
“The world is a more scary place for people and that’s a good environment for (banks and brokers).”
With crude oil prices down more than 50 percent since June, companies that operate fleets of trucks and other fuel users have rushed to lock in low oil prices, while grain elevators holding big stocks have also shown an appetite for hedging.
Whipsawing prices have also increased interest in structured products, which typically use derivatives to allow clients to bet on market movements or reduce their risk, while widening bid-offer spreads have bolstered margins.
For INTL FCStone, the results mark a turnaround after a two-year “hard slog” resulting from benign price moves, intense competition and tougher regulation, O’Connor said.
With its focus on mid-sized hedgers, the company is less exposed to the retreat of institutional cash than banks such as JPMorgan Chase & Co.
Still the withdrawal of U.S. and European banks from commodities trading has handed it new medium-sized metal clients. It has also picked up business in China, the world’s top metal consumer, he said. (Reporting by Josephine Mason; Editing by Steve Orlofsky)