Why is Wall Street fighting so hard to retain and expand their physical commodity operations?
For the same reason that they purchased mortgage origination and servicing operations in the years leading up to the financial crisis -- information.
Not just any type of information, but information that is the equivalent of having tomorrow's news today.
For example, mortgage originators provide information on both the mortgages they fund and the mortgages they decline and someone else funds. It is useful to know who funded loans that did not meet your credit standards if you would like to short the market and not use mortgages you originated.
For example, mortgage servicers provide current information on mortgages because their data reflects all observable events that have occurred with the mortgages through the close of business yesterday. This data provides an informational advantage when investors access to this same data lags by several days.
"The truth of it is that having access to the physical markets is about optimization and knowledge - it gives you the visibility of the market to make far more successful proprietary trading decisions in both physical and financial markets," said Jason Schenker, President and Chief Economist at Prestige Economics in Austin, Texas.
"That's why for many years the most successful traders had access to both markets, and why we've seen little sign they're moving quickly to divest these assets now. It's trading with material non-public information - the difference compared with equity markets is that it's perfectly legal."