From its global outbreak in early 2020, the COVID-19 pandemic upended supply and demand for commodities such as oil and gas, and ushered in a period of volatility in commodities trading, with global gluts and shortages persisting. The most conspicuous, headline-grabbing illustration of this was in April 2020, when oil futures plummeted into negative territory for the first time.
Perhaps less conspicuous, however, are the heightened risks the commodities trading industry is facing in a world of remote, at-home or “virtual” trading floors—particularly those risks tied to data security and the diminished capability for the industry to enable that policies and procedures governing trading activities are, indeed, being properly adhered to and followed.
With keeping traders safe of paramount importance, companies with trading operations in oil moved swiftly, shifting staff from the trading floor to home offices. This involved a seismic logistical change—and considerable investment—in the deployment of equipment (e.g., laptops, monitors, printers, etc.). It also meant installing tools, including company audio and video communications, as well as shared documents to help replicate as closely as possible the traditional shoulder-to-shoulder pit culture.
As companies strive to best set up trading floors remotely, there are three main areas we believe need special focus: improving systems to sync up data, ramping up data security and narrowing the productivity gap.
Efforts to replicate the trading floors virtually were impressive, fast and furious. However, the road to virtual trading floors has been a bumpy one, and much is clearly lacking for traders working from home. Some key aspects of the traditional trading floor haven’t translated well to remote working—what was once real-time information sharing can now be prohibitively sluggish. Virtual calls, instant messaging or texts take the place of in-person working teams. For many traders, deep and readily available market data and research is either unavailable, or of lesser quality. There’s also much lacking compared to traditional oversight and tracking of trading activity—including the traditional monitors, controls, surveillance tools and squawk boxes that were fixtures on traditional trading floors. Such shortcomings can translate into lags in information and therefore action, and, ultimately, lost market opportunities. This imperfect arrangement can also make traders and companies vulnerable to data leaks, hacks and fraud. PwC’s Strategy&’s recently published 2020 Digital Operations study for energy, which surveyed over 200 respondents, revealed a dearth of digital acumen in the industry. Across three industry segments (Utilities, Oil and Gas, and Chemicals), 71% of the respondents described themselves as digital novices or followers. Only 8% described themselves as digital champions.
Clearly, for the industry, the idea of a trader ensconced in a home den with a blend of professional and personal communication technology at his or her disposal is a disquieting one. So are the cybersecurity risks posed as the number of unsecured Internet of Things devices rises—and the potential attack surface widens with remote trading configurations.
These new ways of working could very well persist. Therefore, companies will likely continue to focus on technology and digital upskilling to accommodate remote working. In particular, companies with virtual trading floors will likely continue to make technology improvements in deal capture, risk and position reporting, contract management, and settlements and financial reporting.
PwC’s Remote Work Survey of 120 executives and 1,200 office workers suggests that a permanent flexible workweek (and perhaps workday) is broadly supported. Most office workers (83%) prefer to work from home at least one day a week, and half of employers (55%) anticipate that most of their workers will do so even after concerns surrounding COVID-19 pass.
In fact, when asked about returning to work in a post-COVID environment, 72% of office workers favored working remotely at least two days a week, while 32% preferred a permanent remote arrangement.
Should virtual trading floors persist over the next year, companies will likely need to quickly address some pain points:
Increasingly, traders need to capture and share the “single version of truth.” For instance, it is not ideal for teams collaborating on ongoing deals or reports to use shared files. Additionally, it will be important to make it easier for traders in remote, non-system operations to carry out credit risk monitoring and reporting.
Improvements are not only wanting on the front office of virtual commodity trading floors. Our aforementioned survey also reveals the need for focused attention on middle and back office functionalities, as these groups are essential for a successful trading organization. When asked to assess technological capabilities of different business segments, survey respondents ranked pricing, sales and business development and trade entry as “highly capable.” Mid- and back-office functions such as market risk, scheduling, invoicing and contracts scored in the middle, while the remaining functions such as credit, risk and position reporting, accounting and trade surveillance scored lowest.
In-person office settings naturally involve numerous face-to-face interactions between the front office and middle or back office in order to quickly and efficiently resolve issues great and small. The ability for an organization to do so virtually is paramount. This means organizations should help enable a virtual middle or back office to seamlessly work with the front office.
There are many potential cybersecurity vulnerabilities in a remote setting, including off-network tools and non-standard hardware, which are outside an organization’s company ecosystem and thus need to meet high levels of security compliance. Additionally, companies will likely need to put in place procedures and technologies to record and timestamp all work-related phone conversations—whether made via mobile phones or personal landlines. Also, strict protocols must dictate the use of cameras, pictures, videos, sharing of screens, etc.
The ad hoc and speedy roll-out of virtual trade floors has been one of uneven success, with some traders and “floors” better equipped technologically than others—in the level, speed and quality of needed data and, perhaps more importantly, the security and protection of that data. A widening gap has thus been created between high and low performers, resulting in an inordinate amount of pressure and high levels of burnout for some traders.
This trend was highlighted in a recent PwC analysis based on PwC’s most recent CEO survey, and data from 2,000 users of the PwC Perform Plus tool.
In our analysis (see diagram), the bottom-line results show roughly steadily increasing productivity (represented by the solid white line). At first glance, this looks like good news; however, a closer look at the data shows greater variation around mean performance in the weeks after lockdown than before. The red bands (representing the range of productivity) widen as lockdowns are more widely enforced. This suggests that productivity has been buoyed by a cohort of superachievers (around one-third of the sample), offsetting a fall in productivity among the middling performers or underachievers.
It is likely that superachievers have superior technology and more efficient communications and support from middle and back office personnel than underachievers—and, therefore, fewer distractions and interruptions. Underachievers found things more difficult both on practical and emotional fronts and were likely more prone to stress and fatigue, which affected their engagement, performance and mental health. The challenge for leaders, then, is to find ways to help improve working conditions (and morale) of the underachievers so as not to rely on superachievers to shore up overall productivity.
Companies overseeing these virtual trading operations should hone in on those traders who need greater upskilling direction and more powerful technological resources, so they can spend more time doing their jobs and less time trying to resolve tech shortcomings and distractions.
Going forward, companies should adopt and formalize these remote operations to help mitigate risks in the same ways they have formalized traditional trading environments for decades.
Articulate clear policies, procedures and governance aligned to risk strategy, and enable all traders to understand their importance, especially when it comes to adhering to regulations and laws.
Define standardized business processes, especially for traders struggling with productivity or data security efforts.
Standardize and improve systems and tools with enhanced monitoring and reporting capabilities:
Determine how technology is used to enable finance and financial reporting (i.e. streamlining settlements)
Assess the technology available to assist in deal capture process
Consolidate information from Excel spreadsheets and analyst reports into a system for easier and faster access
Automate reports for contracts, cost and risk exposure within Energy Asset Management programs
Carry out a cost-benefit analysis of technology implementation
Implement productivity measures (and incentivize traders to follow them) including:
Creating a connected team
Defining the right set of KPIs
Developing the role of leaders
Building positive recognition
Using structure to deflect distractions
In our remote work survey, 44% of executives reported higher productivity among employees working from home; however, only 28% of employees said that was the case. The study suggests that employers have clearer insights into what is needed for their employees to become even more productive (and satisfied) in a remote work environment, and that these employers plan on driving action to achieve that.
Enable preventative and detective controls to enable a highly-monitored environment—including the recording and retention of all work-related oral communications (and, if that is not possible, taking written notes about details of any oral communications).
Creating a “virtual twin” of traditional commodity trading operations is a daunting task not only for organizations, but also for traders and other support personnel operating in an already stressful environment. However, deploying the right solutions on all fronts will likely make trading organizations more resilient and mitigate risk as traditional office restrictions persist. As painful as it may be, this transformation to virtual trading may have a silver lining: organizations will likely be able to mobilize more more swiftly and mitigate risk more thoroughly if or when another office-closing disruption hits.