Automated Trading in
Energy Markets
By Ben Thacker
AUTOMATED AND ALGORITHMIC trad- Inspiration Not Replication
ing has enjoyed almost exponential Thefirstpointtorememberisthatalthoughfinancialmarketslead
growth in some of the most liquid and the way in terms of using this kind of technology, energy markets
heavily traded financial markets. cannot simply import the same solutions and accompanying
Properly implemented, automated processes into their own operations. The finance markets can be
trading applications offer almost seenasamodeltobeinspiredby,ratherthantocopy.
instantaneous execution of thousands The reasons for the disparity in technology are found in the
oftransactionsperhour,whilecomplex underlying differences in their structure, the unique constraints
on-the-fly algorithmic analysis can cre- facedbyenergytradersandtheparticularnatureofenergymarket
ate significant new insights into the incumbents. Although comparable on the surface, initial similari-
behaviourofthemarket. ties in structure between financial and energy markets do, in fact,
We are, therefore, in the early stages of
what might best be described as a
technological arms race
Incontrast,theEuropeanenergysec- hide some important differences that have strong implications for
tor is yet to see a widespread move the way in which energy participants can and should deploy new
towards this technology. But that situ- trading solutions.
ation is likely to change. As markets The relative homogeneity of equity trading rules contrasts strong-
develop and increased liberalisation is lywiththevariousregulatoryenvironmentsinwhichEuropeanener-
accompanied by growing levels of liq- gy traders operate. And although differences can be found among
uidity, more and more players will look financialtradingprocesses–forexampleinclearingandsettlements
to automate high volumes of trades. – energy transactions are also subject to a far greater number of
Weare,therefore,intheearlystagesof variableconstraintssuchasschedulingdeadlines,qualityconversion
what might best be described as a calculations, system balancing requirements and transmission and
technological arms race, with incum- freightconcerns,amongothers.
bents weighing up their options and Furthermore, it is almost self evident that a vertically integrated
lookingathowbesttomaintainacom- energy trader will adopt a more conservative approach to trading
petitive advantage in a post-spread- strategycomparedwithadedicatedtraderinequitiesorcurrencies.
sheetworld. Theneedtomanagephysicalassets,alargecustomerbasethatcan
However,wholesaleandill-considered approachtensofmillionsandavaluablebrandandmarketidentity
adoption of any new technology is that often incorporates a position as national ‘champion’, all pro-
rarely successful: automated and algo- videagreatincentivetoadopta‘wait-and-see’approachtomaking
rithmic trading solutions are no excep- radicalchangesintradingstrategy.
tion. So what are the key points for Because of their greater experience with these systems, therefore,
market participants to consider when it is the banks and non-physical participants in the energy markets
lookingattheoptionstheyface? who hold all the cards at this stage. They are the ones with the in-
56 SEPTEMBER 2008 COMMODITIES NOW
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