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PTRM
PTRM in Energy Markets
Pioneered in equities and then derivatives, PTRM now has a significant presence in FX and fixed income markets and has
morelatterlybeenusedincommodities.WhilstPTRMsolutionsarethoughttobegeneratingapproximatelyhalfthetradeflow
onleadingstockexchanges,PTRMincommoditiescurrentlyaccountformoremodestproportions.
ThereisalsoacontrastintermsofPTRMtake-upwithindifferentcommoditytypes.Adoptionhasbeenstrongerinmetalsand
soft commodities when compared to energy in general. Notable exceptions are crude-related contracts and North American
naturalgas.FromaEuropeanperspective,ithasbeenobservedthatissueswithmarketfragmentationandinter-connectivity
havenothelpedtobuildmarketdepthinlistedgasandpowercontracts.However,progressisbeingachievedregionally,albeit
ataslowerpace.Similarly,thenewermarketsinemissionslookinterestingastheyexhibitstronggrowthintradedvolumes.
Programmatictradingthrivesishigherfrequencytradingenvironments.Soafairquestionmightbe:isPTRMrelevanttothe
physicalenergymarkets?Basedonthegroundswellofinterestapparentamongphysicalenergymarketparticipants,theanswer
must undoubtedly be “yes”. Power traders talk of “missing a price” when trying to execute on exchange. This is anecdotal
evidencethatmanualtradersarecompetingagainstmachine-executedordersandfeelingtheimpactintradeprices.
Thereisalsointerestinmoreprosaicelectricitytradingactivitysuchassubmissionofpre-gateclosurephysicalnotifications
topowersystemoperatorsand,likewiseforbid-offerpairsintobalancemarkets.Whilstthesetaskswillnotbeseenaskeyprofit-
making opportunities, many participants have suffered penalizing imbalance charges due to avoidable manual error.
Programmaticsubmissionswillreducethissourceoferrorandcost.
Whilst the physical gas and power markets have been challenged by the lack of homogenous, well connected distribution
networks,itisinterestingtonotethatthecreditcrisishasactuallydrivenmanyparticipantstoengageinmoreexchange-listed
trading and cleared OTCs. Historically, many energy traders preferred to deal in bilateral OTC agreements giving greater
flexibilityinhowtradesarestructuredandavoidingexchangeexecutionandclearingfees.Thiswasfineinamarketdominated
by participants trading with AA credit ratings. However, credit risks are now perceived to be much greater and the insurance
premiumpaidtoacentralcounterpartytoclearatradenowlookslikegoodvalue.
Energyexchangesthatobservedtradingactivityslowinglastyeararenotingaresumptionofvolumegrowth.InEuropeat
least,themarketsarebeinghelpedbyaconvergenceoftheenergyexchangesthemselveswhorealisethattheyhavetooffer
moreconsistencyandlowertransactioncoststotempttradersawayfromtheirmorefamiliarOTCbusiness.
Issuesregardingcredit,internationaltransmissionandlackofstoragearenotgoingtodisappearfromgasandpowermarkets.
However,liquidityhelpstomoderatevolatilityinenergycommodities.Certainlythefrontmonthsinmanygasandpowerlisted
futurescontractsnowexhibitthesortofmarketdepththatisidealforprogrammatictrading.Itisalsoevidentthattheoilmarket
isalreadymakinggooduseofPTRMtools.
PTRM Use Cases
Figure 7: Spread Trading
ItshouldbenotedthattherangeofusecasesforPTRMisnot
limited to intricate algorithms for high frequency markets. In
a simpler guise, PTRM can be applied to the automation of
straightforwardlimitordersandstop-lossrules.
Buy-side energy companies tend to be long or short at
variouspointsinthesupplychain.Forexample,anoilrefinery
isnaturallylongcrack-spread(thespreadpricebetweencrude
oil and refined end products). Conversely, the same refiner
may be short the crack spread during periods of plant
maintenance if they have off-takers with annual contracts.
The refiner’s profitability is directly correlated to this pricing
differential and they typically wish to hedge exposure to this
spread. Buying or selling this spread can lock-in some
guaranteed revenues so a spread algorithm that monitors
crack spreads for forward delivery periods and optimises
tradingwouldbeofinterest.
Spread Trading Risk Management
Similarly, a power distribution company is typically short the As mentioned earlier, risk management is another excellent fit
spark-spread and dark-spread assuming they are sourcing gas- for programmatic modelling. A Risk Framework can continuously
and coal-fired power, respectively. They will wish to hedge this assesstheexposureofopenpositionsthroughoutthetradelifecycle
exposure based on demand forecasts. Many power utilities are and across different slices of a portfolio. In the risk firewall
now vertically integrated in that they operate both generation example(Figure8)everytradesignalgeneratedprogrammatically
and supply companies. However, they are unlikely to be in is assessed against pre-defined limits before a trade order is
perfect balance and will wish to trade any imbalance in their generated. This ensures that a new order will not breach pre-
assets. A spark-spread trading algorithm (Figure 7) will monitor determinedlimitsbytrader,counterpart,book,etc.
spreads versus the moving average of standard deviation (or The same trade and the portfolio to which it is booked can be
Bollinger) bands. This can be parameterised to trade around a monitored post-trade as an open position. Any threshold breach
long or short set-point across multiple spreads or to trade flat if will immediately generate an alert. Depending on the severity of
thetradingisdiscretionary. thebreach,thealertcanbesenttothetrader,headofdeskorrisk
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