Top Traders Unplugged: Commodity Arbitrage and Systematic Trading

Featuring: Anan Jaa, Founder and CEO of Greenland Investment Management

Introduction

• Host: Neils Costr Larson
• Series: Open Interests
• Guest Host: Moritz Sebert
• Guest: Anan Jaa, focuses on commodity arbitrage strategies
• Key Theme: Systematic commodity arbitrage and spread trading

Background of Anan Jaa

Personal Background

• Third-generation in a family of commodity merchants
• Grew up around a physical commodity trading atmosphere
• Degrees in finance and computer engineering from the University of Pennsylvania
• Worked at AQR on global stock selection as a researcher and PM
• Co-founded the first onshore hedge fund in India

Greenland Investment Management

• Founded in 2013
• Started as a prop trading firm
• Initially focused on high-frequency trading (HFT) and commodity arbitrage
• Currently, AUM over $1 billion
• Primarily uses systematic approaches for trading commodity spreads

High-Frequency Trading Setup

• Set up HFT systems for FX Market making
• High complexity including colocated servers globally and custom-built tech stack
• Importance of maintaining low latency systems
• Utilizes HFT systems in commodity arbitrage as well

Trading Strategies

Systematic Commodity Arbitrage

• Fundamental-driven systematic trading strategies
• Focus on transportation costs, currency adjustments, and physical movements
• Example: Arbitraging gold between COMEX (New York) and Shanghai
  • Factors considered: fungibility, air freight costs, currency adjustments, insurance
  • Execution relies heavily on HFT for low slippage

Expanded Arbitrage Example: Copper

• Trades across Shanghai, LME, and COMEX copper
• Complex due to multiple warehouses and transportation routes
• Relies on proprietary data from the family’s commodity merchant business for shipping costs
• Tight fair value estimation crucial for profitable trading

Portfolio and Risk Management

• Trades 25 unique relationships globally
• Portfolio usually has positions in at least 13-14 relationships
• Maintain independent risk management per spread
• Automated drawdown control to mitigate tail risk

Key Advantages

• Proprietary data on transportation and insurance costs
• High-frequency systems minimizing slippage
• Dynamic, multifactor models incorporating supply-demand, sentiment
• Diversified portfolio across multiple commodity classes and sectors

Closing Thoughts

• View world from the perspective of physical commodity traders
• Use a systematic approach to trade
• Focus on continuous system and process improvement

Additional Summary Points

• Impact of significant market events such as COVID-19 on trading
• Adjustment for real-time changes in the physical ability to arbitrage (e.g., air freight shutdowns)
• Importance of diversification to manage sector-specific and global risks
• Ongoing investment in systems and data as integral to strategy success

Contact: Listeners can reach out with questions via email ([email protected])

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