The Secret Club that Runs the World

Commodity players can appear pampered – even lazy – and they certainly know how to spend their money.

However, when it comes to trading raw materials they are an indomitable bunch and for the moment at least, the contracts that they trade are so loosely regulated that the correct combination of money and skill still creates irresistible opportunities for them.

That's the conclusion of Kate Kelley in The Secret Club that Runs the World, an interesting look at the sometimes secretive world of commodity traders.

The title arguably oversells the proposition and she cannot resist telling us about the off-the-record interviews with subjects who feared retribution should they be identified but she has produced a colourful enough account of a world upon which the spotlight is not often shined.

Kelley is a broadcaster for CNBC, a former Wall Street Journal reporter and author of New York Times bestseller Street Fighters so she knows this patch well. She reveals that she became fascinated about commodity trading having met a crude oil trader from a New York hedge fund. His withering take on his own profession, one that he felt was dominated by a bunch of men with emotional issues and irrational penchants for risk, had piqued her curiosity.

Commodity exchange based on future deliverables can be traced back to ancient Rome but the modern business really began with the opening of the Chicago Board of Trade in 1848. That started a century and a half of more sophisticated virtual trading.

Eventually it became its own niche, serving a useful purpose as a form of insurance against price volatility. During the noughties it exploded, fuelled by an increase in prices and a very convincing sales job by Wall Street.

During the bubble, a core group of traders were siphoning off profits, using a mix of strategy and resources to play the markets. Kelley stops short of suggesting that they were manipulating those markets by organising cartels or buying up commodities to create shortages – a classic commodity swindle known as cornering.

Rather, she says that their intimate knowledge of nuanced industries, their access to closely-held information and their enormous resources gave them tremendous advantages that few others had.

Even when they bet wrong, they were still so rich and well-connected that they could usually return the next day and begin to make their money back.

This is a tale of those personalities and Kelley spends most of the book detailing some of these key figures and their firms. The book is prefaced with an anthology of characters from firms such as BlueGold Capital Management, Glencore International, Goldman Sachs and Morgan Stanley.

We get the inside track, for example, on how BlueGold's Pierre Andurand, a French-born speculator, made fortunes betting on rising crude oil prices in the period leading up 2008 but cannily called the turn of the market and made money on the dramatic slide in prices too. Extravagant in his choice of homes and cars, including a $1.5 million Bugatti sports car for cruising around town, he hired Elton John and the Bolshoi Ballet to perform at his wedding to a Russian model.

He speculated billions of dollars in the market every day, exposing himself to potential losses other traders would not stomach.

Despite his self-made millions, Kelley observes that Andurand could be “flaky”. He made high-risk decisions daily yet he couldn’t remember a doctor’s appointment without his wife’s help.

In a business notorious for its toughness, where junior traders would get aggressive dressings down when they had made mistakes, his inability to handle confrontation was unusual. Rather than upbraiding an employee who was screwing up, he preferred to have a “nice chat” about what was going on.

However, he possessed a remarkable ability to predict movements in the market using a modicum of research and gut instincts.

This was possible because the fundamentals of the oil market’s supply and demand are constantly buffeted by geopolitical events.

War or civil unrest in Nigeria or Libya could cause a spike in oil prices. Andurand studies these developments and backed his bunches which proved correct much more often than not.