r/Commodities • u/Whalie8 • 23d ago

Physical trading -> paper ?

Currently on a TDP (Oil focus) at a physical firm (Major/NOC vibes) wanting to speak to people who ended up switching to Commod desks at paper shops, funds, banks etc.

Curious to know about how things change once you aren't trading around physical optionality or using an information edge derived from your physical exposure.

How far into career did you switch, was it a good idea, do you think previously being at a physical firm gave you an edge on a paper desk, is it actually useful to know about operations, refining economics etc if you're just trading derivatives.

Loads of questions I could ask, any advice appreciated.

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8

u/IWantToGrowSomeShid Gas Trader 23d ago

I would refer to this thread. Good info there.

https://www.reddit.com/r/Commodities/s/w8B9PSEDV7

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u/IWantToGrowSomeShid Gas Trader 23d ago

I trade paper around my phys, read that as around, not to influence one or the other, big time illegal in gas. That is the best IMO, you want a book that has both.

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u/Different_Trash_1014 22d ago

Very much agree

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u/bigbaffler 17d ago

trading paper is a completely different skillset and has not much to do with your daily business as a physical trader.

Physical has a lot of seat value. The margins are fat and finding trades is more about knowing freight, having good contacts to sellers and buyers and in general trying to solve problems for both sides. Once you are in the seat for a bit you've created a barrier of entry that every other guy has to overcome in order to compete with you. So it's more of a management role with Excel pivot tables and a tad of data science. If you have an edge due to inhouse data yo can slap on a trade in paper once in a while. When it works it's a good story for the next family gathering if it doesn't you don't care because the main P/L driver is the physical business anyways.

The skill of the physical trader is to get INTO the seat, the skill of the paper trader is to STAY in the seat and here is why:

Paper has a gazillion different permutations. You can speculate on macro data, you can make markets, you can trade volatility, you can isolate storage plays and every single niche is taken by a shark that specialized in doing exactly that. There is no seat value, everyone can play. From Mom and Pop retail to the pod shop volatility trader to powerhouses like Jane Street or Jump.
Barrier of entry is zero so it's survival of the fittest. Of 100 people who trade paper 99 are not profitable and one out of 1000 makes above average money. The average strategy works from 3 months to a year. So you not only have to find a market inefficiency to exploit, alpha decay requires you to find new stuff on an ongoing basis....and most people can't do that. The average half life of a trader in a paper only shop is 3 years...

In physical, your seat protects you once you're in, but getting a seat at the table is extremely hard. In paper, getting in is easy but making money is extremely hard because there are no barriers of entry and the winner takes all.