Thursday, December 19, 2013

Commodities: Traders Seek an Edge With High-Tech Snooping

I've mentioned how one of my mentors used to detail me to watch the loading docks of companies he was interested in.
Same concept here, It's all about information asymmetry.

From the Wall Street Journal:

A growing industry uses surveillance and data-crunching technology to supply traders with nonpublic information.
CUSHING, Okla.—A helicopter lifted off recently from an airfield in this remote oil town, scudded low across the flat industrial landscape and trained a heat-sensitive camera at the huge storage tanks below.
Its mission: Gather intelligence for Wall Street. 

The grainy, infrared reconnaissance images betrayed how much oil was in each tank. That gave Genscape Inc., the company that conducts the flights, a remarkably accurate preview of a market-moving U.S. government report on oil supplies. Traders, hungry to get a jump on the official data, are willing to pay a hefty price for that intelligence.

Genscape is at the vanguard of a growing industry that employs sophisticated surveillance and data-crunching technology to supply traders with nonpublic information about topics including oil supplies, electric-power production, retail traffic and crop yields.

The techniques, which are perfectly legal, represent the latest advance in the longtime Wall Street practice of searching for every possible trading advantage. But the high cost of much of the new information—Genscape's oil-supply report costs $90,000 a year—means that some forms of trading are becoming even more the province of firms with substantial resources.

Genscape Chief Executive Matthew Burkley says such surveillance brings transparency to markets long dominated by energy giants. Although some energy companies aren't happy about the information gathering, he says, "no one can stop us from doing what we do."

Besides monitoring oil supplies in Cushing, Genscape tracks oil shipments leaving European ports using 800 antenna stations, videotapes railcars of crude oil and follows them to their destinations, calculates the amount of coal burned in the U.S. and western Europe, and even studies crop yields using, among other things, satellite imagery.

Other companies are in the game, too. Remote Sensing Metrics LLC in New York has teamed up with satellite companies, such as Colorado-based DigitalGlobe to analyze sales at major retail chains such as Lowe's and Target by counting cars in parking lots. DigitalGlobe also uses satellites to assess crops and damage levels at disaster sites.

"With new sources of intelligence available, people find new ways to exploit it for an advantage," says Tony Frazier, a DigitalGlobe vice president.
Two images of fields in São Paulo, Brazil, 
the bottom one taken in infrared. Darker 
red areas may indicate how recently crops 
were watered, and generally reflect their health.  
RS Metrics (analysis); Astrium (image)
Andrew Lo, a finance professor at Massachusetts Institute of Technology, says advances in technology can make markets more efficient but also can raise questions of fairness. "It can drive less-informed investors out of the market," he says. "Is the information so valuable, and so hard to get, that only a few people can get it? That creates a barrier to entry."

Cushing is the delivery point for U.S. contracts for the benchmark West Texas Intermediate, a light sweet crude commonly refined into gasoline. When there is a buildup of oil in Cushing it indicates that there is an ample supply, and prices tend to drop on the New York Mercantile Exchange. When stocks are declining in Cushing, prices tend to increase. 

Every week, the U.S. Energy Information Administration, or EIA, releases a survey that includes Cushing storage levels. Genscape typically releases its report two days before the EIA survey. Between July and late November, Genscape's reports predicted the direction of every change in the EIA report.

Even EIA officials consult Genscape's report before publishing their own survey. When government officials have spotted big discrepancies, they have double-checked with oil companies that submitted data and occasionally discovered errors.

"We just sort of do it as a sanity check," says Douglas MacIntyre, the agency's director of petroleum and biofuel statistics.

During the recent U.S. government shutdown, when federal officials delayed the release of the EIA report, Genscape was a main source of information for investors about the Cushing supply. Genscape released a free version to the general public on the day the government report would have come out. By then, its paying customers had already had it for several days....MUCH MORE