Increased automation and a new generation of hybrid trading systems are making it far easier for institutional investors to trade commodities ranging from energy and agricultural futures to emissions contracts. Systems developed and refined over the past half-decade enable portfolio managers to set criteria that route trades to be executed either automatically or by voice contact with a broker, whichever is likely to get the best result.

An easier-to-use trading environment could lead to “significant growth” for global commodities over the next several years, says Vincent van Lith, vice president of BHF-Bank, a German private bank that is one of the largest players in the European energy markets.

Two developments account for the wave of innovative hybrid trading systems, notes van Lith. First, the migration of almost all commodities contracts from traditional pit trading to the OTC market, essentially moving them into an electronic environment. The other factor was the 2008 global markets collapse, when many equity strategies crashed but commodities investors prospered.

That sparked new interest in commodities from pension funds and endowments, hedge funds and trading companies. For instance, IntercontinentalExchange, a firm that operates regulated global futures exchanges, clearing houses and OTC markets, recently reported average daily volume across all of its futures exchanges of 1.37 million contracts in November 2010 – up more than 25 percent from November 2009.

The problem was the very different configuration of the commodities markets. Most contracts are traded largely in one place, rather than across a variety of exchanges, dark pools, and other platforms, as with equities. Some commodities boast deep, highly liquid markets with thin price margins, lending themselves to sophisticated algorithmic strategies aimed at capturing those margins. Others are thinly traded and less predictable, requiring the judgment of a human trader.

Beach Horizon, a London-based futures manager that trades global commodity, financial, and foreign exchange instruments, has dealt with the configuration problem by developing its own screens that enable it to split its trades into three groups. One set of trades is “fully automated,” says Paul Netherwood, a partner at Beach Horizon, meaning orders are routed directly for electronic execution. A second group is “trader-led,” going first to a trader who makes a call on liquidity, after which they may be routed either for direct electronic execution using an algorithmic program, or electronic execution via the screens. A third set of trades, mostly in thinly traded contracts, go straight to a broker for voice execution.