Don't Play the Q1 Blame Game
We are heading towards the end of April, but the aftermath of Q1 is still looming large for many trading desks and the inquest into what went wrong is in full flow. We know there was a whole host of reasons for the dramatic nature of the price collapse, but in the end the main one was quite simple, people had their fundamentals all wrong. A lot of the market had massively overstated Asian LNG demand and China in particular didn’t turn up for the expensive looking party.
For companies, trading mangers and for traders themselves there are two large problems that undoubtedly need to be urgently addressed.
In the short term lots of traders P and L’s have been badly damaged and desks need to reassess their risk appetite for the rest of the year. In the long term everyone is now acutely aware of China’s ability to diversify away from LNG, with the $64 million dollar question being at what price and when do they return to the table!
I imagine desks will go for a halfway house approach of a temporarily lower risk appetite accompanied by a deep dive into the analytics to put the desk in a much stronger position going forward.
So the big question is how we go about the deep dive and the inquest into why this went badly wrong for so many desks globally. I will simplify things for the sake of people’s time and that gives us 3 main options:
1. Get your stick/bat out and chastise the analysts to within an inch of their lives.
2. Get rid of whichever analyst/analysts are to blame and replace them with better ones.
3. Everyone takes responsibility for their own part in the problem and work collaboratively to ensure that lessons are learnt and we are a much stronger unit going forward. The group analytics improve and adapt to the new world, managers become better managers, traders become better traders and the analysts become better analysts.
Now you don’t need to be Poirot to guess which one of the options I think is the best, but I will go into a bit more detail about why!
· Lots of trading desks all over the world got this wrong, so the issue is clearly much larger than just your desk. The best desks will learn the relevant lessons and use them to get better.
· The relationship between trader and analyst should be one of equals and not a dictatorship where the trader takes the credit when they are right and then dishes out blame when they are wrong. Analysts need to have a voice and two way dialogue should be positively encouraged on a daily basis.
· As mentioned in my article a few months ago, good analysts are in very short supply and so replacing them with better ones is going to be extremely expensive or not possible at all.
· Traders need to take responsibility for their part in the loss and not just let their ego blame someone else. Hindsight obviously makes things far easier, but there were so many warning signs that traders chose to ignore or didn’t dig deep enough because things were going their way. As a trader ask yourself this question honestly, “would you have even listened to your analyst if they had sounded the alarm?”
· Many analysts are young and at the start of their careers. By blaming, shouting or screaming at them you will damage their confidence, the relationship and probably everyone’s performance.
· If you treat an experienced analyst badly, they will just leave to the highest bidder, because analysts are in short supply you know!
What makes a good analyst?
Hopefully the above offers enough evidence that the blame game is destined to failure and we are far better working collaboratively to build up both our analysis and the people that are responsible for it. But what makes a good analyst and how can we help them develop?
Must Have’s
1. Errrrrrrrrr Strong Analytical Skills: The ability to interpret complex data, identify trends, and make informed predictions is crucial. Analysts often use statistical models and econometric tools to forecast market movements.
How to Help: It is an absolute prerequisite for any analyst to have strong analytical skills and so hopefully this was sorted during the interview process!
2. Market Knowledge: A deep understanding of gas and power markets, including supply and demand dynamics, geopolitical factors, and economic indicators, is essential.
How to Help: This is the area where experienced traders can help the most. Set an agreed time aside each day if possible and pass on as much knowledge about the market and what moves it as possible. Encourage the analysts to read journals, explore Bloomberg and Reuters, listen to Podcasts and do as much research of their own as possible.
3. Attention to Detail: Precision is key when analysing data, monitoring market conditions, and preparing reports.
How to Help: Attention to detail tends to go hand in hand with analytical skills and probably isn’t something that can be easily learned. Any analyst with potential should be able to demonstrate this in abundance.
4. Good is Enough: One of the traits of analysts and detailed people in general is that they want to take their time and get things 100% right, they tend to be perfectionists. As traders we are inpatient and want everything delivered yesterday and therefore we have a fairly large gap between the two sides that we need to bridge. We also need to consider that the gas market is now global and it is highly unlikely that our analysis is going to be 100% correct.
How to Help: Traders and analysts need to have two-way dialogue and work out what is good enough for the traders to make decisions from. Traders need to encourage the analysts to be forthcoming with information and reassure them that they won’t be annihilated when things do go wrong. After the initial discussion, the analysis team can then go back to work on fine tuning the data to make it even better.
5. Python: Familiarity with trading platforms, financial modelling software, and data visualization tools is a must and at the moment that primarily means Python.
How to Help: It is highly unlikely that any junior analysts or trader would have made it through the front door without python or strong coding skills. Analysts should be encouraged to keep developing their skills and to stay on top of any coding and AI developments that might benefit them and the desk.
6. Neutrality and Strength: The analyst team should take complete responsibility for their own balances and data and should not be influenced by the traders or their positions.
How to Help: This is a massive point and I believe is what many desks are lacking. It takes time to develop and is difficult, especially with young analysts. The personality profile of most analysts makes them introverted and so they tend to shy away from assertiveness and confrontation whether positive or negative. As traders we need to encourage them to take responsibility, to speak up, let them know we value their data and their opinion and crucially listen to them and not just dictate. It is their data, not ours!!
7. Counter Views: When mutual trust and respect are established a trader can work collaboratively with the analytical team to try and find reasons why a trade wont work. If no reasons are found, the trader can be much more confident in their trades chances of success.
How to Help: Once we have got the analysts fully up to speed, taking responsibility for their data and we have mutual trust and rapport, the next step would be to work with them and ask them for reasons not to put a trade on. I was lucky enough to have brilliant analysts throughout my career and it worked brilliantly. It helped to build my confident in myself and my trades and made me size up when they couldn’t find anything against the idea. It also stopped me from entering the wrong trade on many occasions.
8. Adaptability: Commodity markets have always been volatile and the last 3 months have taken things to new extremes that don’t look like they will be disappearing anytime soon. The ability to adapt quickly to changing conditions is vital.
How to Help: This is something that analysts might struggle with, as it works against their natural tendencies and personality type. We need to encourage them and play a key role in passing on information related to challenges and changes and just be supportive of them.
9. Communication Skills: Analysts need to present their findings clearly and effectively to stakeholders, whether through reports, presentations, or discussions.
How to Help: We need to encourage analysts to speak out and engage in constructive two-way dialogue and not just dictate to them. Blaming and shouting at them when things go wrong and congratulating ourselves on a great trade when they go right, is also a big no no!!!
There may well be a tendency to add too much detail and information in reports. This will waste valuable time that could be better spent elsewhere and may mean that a busy trader misses something important buried deep within a report that they got bored reading. Work with the analysts to get reports in the best format possible for you as a trader.
10. Continuous Learning: The willingness to stay updated on market trends, new technologies, and regulatory changes is important for long-term success.
How to Help: Encourage, encourage and encourage some more. Analysts investing time and effort in their own development, is also investing time and effort in your P and L
11. Analysts Shouldn’t Have a Book: I will remain adamant about this until the day I die and I am removed from planet earth. As soon as you give anyone a trading book, their primary focus will be on their own position. That key element of producing the best possible unbiased data is lost forever and will never return!
How to Help: Don’t give them a book!! If they want to be a trader, let them be a trader once the next analytical talent is ready to step up or has been sourced externally. The one possible exception would be a be a very lean hedge fund with 2 or 3 people in the team, but the above point is still relevant.
12. Macro: European gas trading tended not to swing about with macro moves and traders an analysts tended to look mainly at gas fundamentals. Unfortunately that has changed recently has made the job of traders and analysts even harder.
How to Help: Maybe consider hiring a macro specific analyst within the team? As traders we must improve our own macro knowledge and start to include it into our thinking a lot more than previously. We should also encourage to analysts to do the same.
I love helping individuals and trading teams improve and I am very good at it. DM me if you want to have an informal chat about how we can partner up and go about making some positive changes.