(Bloomberg) -- Swiss commodity trader Mercuria Energy Group Ltd. has entered a partnership with Nasdaq Inc. on gas- and power-market contracts by offering liquidity and access to financial clients as the trading house takes on a role traditionally held by big banks.
Lenders from Deutsche Bank AG to Barclays Plc have exited or scaled back their commodity businesses in response to diminishing returns and increased regulatory scrutiny. Geneva-based Mercuria, whose top management ranks are peppered with former executives of Goldman Sachs Group Inc., is looking to fill the void.
Mercuria, which bought the bulk of JPMorgan Chase & Co.’s physical commodity unit for $800 million in 2014, will expand its sponsored access business through a new agreement with Nasdaq Commodities. The trader’s London Financial Conduct Authority-regulated entity will offer clients, such as U.S. hedge funds, access to new Nasdaq gas and power contracts in markets from Germany to Spain.
“As investment banks have retreated from this space, it is an opportunity for Mercuria to step up and provide liquidity and services they might otherwise have done,” Chris Harding, managing director of the trader’s London unit and a former JPMorgan executive, said in an interview on Wednesday. The company will provide clients with physical gas and power market liquidity and access in Mercuria’s name, he said.
The core business of trading houses, including Mercuria, Gunvor Group and Trafigura Group, involves the transport and storage of commodities in search of profits from arbitrage opportunities such as regional price differences. In response to shrinking margins from physical trading, however, some have purchased assets such as refineries and pipelines to complement their trading operations. Others, such as Mercuria, are looking to expand their financial roles such as market-making by providing liquidity and matching bids and offers for exchange-cleared contracts.
In addition to offering clients sponsored access to Nasdaq European gas and power contracts, which will include about 1,000 new instruments covering everything from day-ahead to multi-year contracts, Harding said Mercuria also plans to serve as a market maker for some contracts.
“To ensure the market doesn’t become dislocated between purely physical players and purely financial players, someone has to step up and provide that seamless bridge between the two and that’s what Nasdaq and Mercuria are trying to do,” Harding said.
The Nasdaq-cleared contracts and instruments have Commodity Futures Trading Commission and European regulatory approval, the companies said in a joint statement announcing the agreement.
The partnership with Mercuria will “drive efficiency and liquidity within European energy markets,” Bjoern Sibbern, global head of Nasdaq Commodities, said in the statement.
China’s largest chemical company, China National Chemical Corp., known as ChemChina, purchased a 12 percent stake in Mercuria in January.
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