'There Will Always Be Rogue Traders'

INTERVIEW
"There Will Always Be Rogue Traders"

Raj Bagri, the CEO of the Metdist Group, describes the real role that traders play in international commodities trading.

By George Skaria

Raj Bagri, CEO, Metdist Group He has a heart of metal. 68-year-old Raj Bagri, famous as the first non-Anglo Saxon Chairman of the London Metals Exchange (LME), has spent 40 years trading. In a rare interview with BT's George Skaria, the chairman of the Metdist Group, whose net worth is estimated at Ł80 million, explains the nitty-gritties of managing in the dynamic commodities trading business:

Q. Mr Bagri, the world of commodities trading is, globally, rather dangerous. In the 40 years that you have been in this business, how have you ensured that you don't get hurt?

A. Commodities-prices, by their very nature, are highly volatile. And people are tempted to speculate in them. So, the most important issue is that of managing the risks. No matter how good your systems are, if you allow them to be over-ridden by your greed or gaming instincts, you are heading for trouble. For, sooner or later, you will get hurt. My own philosophy is that the key job of a global trader is to add value--and not to, what we call, lift a leg. Which means that you go long or short, and then, over the medium term, cover it up in either direction at a better price in order to make your margins. I do not believe that is good and prudent business; you should always structure your business in such a manner that you do not have to lift a leg.

But, as a trader, can you really do that?

Well, the best way to do that is to create a place for yourself between a buyer and a seller, and provide a service that is useful to both of them. In the metals business, both producers and buyers have goals and aspirations, but different ones since their interests are hardly identical. We can come in and play a role in satisfying both their needs by taking up the risk-element from both sides. However, it is critical that you do not retain it yourself, but use an international hedging-medium--like the LME--to offload that risk.

You have been the Chairman of the LME for 6 years now. Has it changed in recent times?

Business on the LME has increased a thousand times in the last decade; its daily turnover is nearly $10 billion (Rs 42,000 crore). LME contracts have been regularly updated to keep them relevant to the needs of global industry. For example, the scope of our options contracts has been widened: we are now introducing a new silver contract, and another which will permit trading in an index made up of a range of metals traded on the LME.

How exactly do you manage risk to everyone's benefit?

When you, as a trader, try to satisfy the aspirations of both the buyer and the seller, you do not do that by carrying that risk yourself. For example, you do not start gambling on the price of copper in the hope that it will go up. The aspirations of both the buyer and the seller may be different at that point of time: the producer may want to get paid quickly, and the customer may want the maximum credit. It will be your ability as a trader to get both done. That is the risk, which you will have to bear. However, it is not a price-risk; it is a risk related to your knowledge of the customer and what he will do. You are acting like a banker to him; if you do not have such a facility, you should discount it with a bank. But carrying market risk is a cardinal sin in our business. In Metdist, for example, we do a lot of physical trading activity, but we use our seat on the LME to manage and understand what the risks are. We also use the experience on the commercial side in our manufacturing side but, again, not by taking a market view.

What is the one factor that is critical to being a successful trader in the international commodities business?

You must always hedge your risks. Even in unstructured markets, there are ways to structure your business so as to remove the elements of gambling. For instance, you should always spread the risk across markets, customers, or a portfolio of metals. There is no magic formula; it is instinct, experience, and discipline. In this business, people get into trouble because they get mesmerised. Why did Sumitomo Corp. lose $2.56 billion (Rs 10,752 crore)--not petty cash for even a company of its size--in 1996? It happened since its management shut its eyes to the speculative profits that were being generated. In the process, it loosened its managerial and operational discipline.

In this context, may I ask why it is that scandals have rocked international trading--be it stocks, commodities, or metals--in the 1990s?

Trading is big business, and there will always be attempts to try and manipulate the markets for short-term advantage. This imposes an obligation on exchanges to have strict and transparent rules on what is--and isn't--acceptable behaviour. However, the responsibility also lies with the senior managers of the participant-companies. Most scandals are a result of the greed of individual managers, and the lack of internal controls within companies. If managements exercise proper control, the chances of scandals fall.

What should the Indian trader do in the new environment?

With the liberalisation of India's export-import policies, the trading business has fundamentally changed in this country. In the case of metals--like aluminium, copper, and zinc--domestic production capacities have increased. This has, obviously, reduced the need for traders because producers are dealing with users directly. So, Indian traders have no choice but to adapt to these changes. They have to make themselves relevant to the needs of producers, fabricators, and consumers.

Is it imperative for a trader to integrate backwards into manufacturing?

Not necessarily. There are a number of commodities-trading companies, like Cargill, which do not have any manufacturing-bases. However, gradually, companies do move into it because that is a logical extension. But you must be clear that if you want to go into manufacturing, you must have economies of scale and the best technology. Sometimes, it is extremely difficult to move away from the short-termism of a trading operation to the long-term view that is necessary for a manufacturing-base. In this process, it is critical that you are able to transfer your strategic thinking.

More importantly, the trading business is a people's business. Those you trust are employees who share your philosophy; who are not gamblers by instinct, but have an in-built ability to manage risks. At Metdist, since I spend a lot of time at the LME, most of the day-to-day operations are managed by my son, Apurv, who, in turn, delegates authority to a team of professionals. It is a family-owned business, but not a family-managed business.

How do you disseminate your values and culture across the business?

We do not believe in paying somebody and then, doing his job for him. We have a strict recruitment process to take in only the right kind of people.

How do you ensure discipline among your traders?

The top management should ensure that the line-instructions are clear. If you tell your people right from the beginning that what you want is to add value, not gamble; create a culture for doing so; and then, make sure that the systems are there, there is no place for abuse. I have learnt from years of experience that you can never prevent a fool from parting with his money; you can only delay the process. While the regulatory mechanisms are trying their best to help people to trade correctly, from time to time, there will always be rogue traders.

Issue Contents Write to us Subscriptions Syndication

Š Living Media India Ltd