Iron ore house, Asia: Theme International Trading

Energy Risk Asia Awards 2020: Market-maker quickly becomes go-to liquidity provider thanks to speed, consistency and competitive pricing

CJ Zhang

Most commodity prices took a dive in 2020 as Covid-19 hit demand. This is reflected in the Bloomberg Commodity Index which, by November, was down 10% for the year. Yet iron ore bucked that trend, soaring 27% to $117.63 a tonne over the same period as a result of booming demand in China and the pandemic disrupting supply in Brazil.

Theme International Trading, a Singapore-based commodities market-maker and proprietary trader, has followed a similarly impressive trajectory since its launch at the start of 2019.

Clients have quickly come to rely on the company’s iron ore derivatives pricing – with many seeing it as a go-to liquidity provider for certain futures and over-the-counter contracts. This acclaim secured it Energy Risk Asia’s iron ore house of the year award 2020.

Market players praised the competitiveness, speed and reliability of Theme’s quoting and said it had further improved its offering this year – despite the challenging environment.

A Singapore-based energy trader and a Hong Kong-based energy trader both agree that the company frequently presents the best price on iron ore derivatives, with the latter saying: “Theme can often provide very close two-way quotations, and most of the time those are better than those provided by the other market-makers.”

Theme has already come to heavily dominate liquidity provision for certain contracts, such as Singapore Exchange’s (SGX) 62% iron ore futures. It averaged a monthly market share for the product of over 30% in the year to September, says fund manager and lead trader at Theme, ‘CJ’ Zhang Changjie.

He stressed the firm’s focus on helping the iron ore market to develop – including by supporting less liquid contracts, such as the SGX MB Iron Ore CFR China (65% Fe Fines) Index Futures. Launched in December 2018, the product is dominated by physical traders, and Theme is the only prop trading and marketing firm so far to trade and make markets in it, Zhang says.

The firm has also “dabbled” in trading the SGX Platts Iron Ore CFR China (Lump Premium) Index Futures market, he adds.

Underpinning Theme’s swift rise has been its huge investment in developing algorithmic trading models that allow it to assess absolute and relative values across iron ore products. Zhang feels this gives the firm an edge over market-making rivals in both voice-brokered and electronic markets.

“We constantly review and enhance our models to tackle changing market conditions so as to consistently provide liquidity for outrights, spreads and options,” he says.

Clients are certainly impressed with Theme’s reliability. “They are more likely than other firms to take a trade even when the market moves,” says the Singapore-based iron ore derivatives broker.

Some counterparties’ level of confidence in Theme is such that they have approached it directly for quotes, and the firm has started to trade more directly in the past year or so.

“This has proved useful for clients,” Zhang says, “as they are able to get quick competitive pricing in good volume, particularly given the turbulence of the past year or two.”

The Hong Kong-based energy trader says working with the market-maker as a direct counterparty had made it easier to transact much needed hedges.

Theme has achieved all of this despite this year’s tough conditions. “Operating an agile and nimble team for 15 hours a day was demanding even before the onset of the pandemic,” Zhang says.

“It was most challenging for our night desk, as we decided to only have one trader in the office. The back-office and software engineer worked from home while the traders went to the office on a rotation basis.”

On top of that, the huge market volatility between late January and April stress-tested Theme’s market-making models. “We had to quickly review and enhance our risk-management process and technology to continue providing consistent liquidity to such volatile markets.”  

Its efforts appear to have paid off.

“During this year [Theme has] been able to quote faster with more sizeable positions and added depth in the option markets,” says the Hong Kong-based trader.

Theme expanded its team and bandwidth as the market became busier, confirmed the Singapore-based trader: “The market is made richer by their activity.”