Dicker: Why JPMorgan Is Ditching Physical Commodities

Tickers in this article: GS JPM MS

NEW YORK (TheStreet) -- I was talking with senior reporter Dan Freed today about the announcement JPMorgan Chase made about exiting its physical commodities business.

From the 1980s up until the late 2000s, the trend for investment banks was to buy various physical assets in commodities in order to augment the financial proprietary trading that most of the big banks were engaged in.

That may sound complicated, but the idea is simple: You can be a more successful trader in the financial instruments related to oil, copper, aluminum and gold if you also have the insight from a connection to the physical trade of those commodities.

Sometimes it's as simple as having a place to store a product and take delivery of a financial contract, and sometimes it's being able to take advantage of a "carry-trade" opportunity because you own a transport vehicle, like a pipeline.

For much of the last two decades, many of the bank commodities trading desks were helped to enormous profits because of the physical assets the banks held. But with scrutiny in Washington becoming more intense and the profit margins for many of these physical businesses drying up, there's a trend for the banks to move to more traditional businesses to grow profits.

I talk more about the flight of JP Morgan and other banks away from physical ownership of commodity assets with Dan in the video above.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.