PTRM
Figure 8: Risk Firewall
manager to warn of unauthorised risk exposure. Limit breaches
can also trigger other workflow actions, e.g., a stop-loss trade. The
risk framework should record and archive any breach event for
historical analysis and auditing purposes.
Another risk use case is auto-hedging. For example, many
structured energy deals are long-term which creates residual
exposures to foreign exchange or interest rates. The risk logic can
be used to buy FX and bond instruments to hedge out these
exposures.
Smart Order Routing
Energy traders now have a choice of execution venues for many
traded products. This expands the possibilities open to traders but
requires them to explore more permutations in order to determine
the best execution strategy. This is an ideal application for a smart
order routing sweep algorithm such as the one illustrated in Figure
and where to monetise these assets.
9. This monitors or ‘sweeps’ the pricing and market depth
If the supply and demand sides of all these assets are traded in
available from alternate trading venues and determines the best
isolation, the firm incurs trading fees, credit risk (or clearing fees)
execution strategy which is often to split the order over more than
and the cost of buy-sell spreads. These can be avoided if an
one venue to capture the best bids/offers from each.
internal market is formed to cross the supply-demand imbalances.
In markets where trade depth is irregular or even absent further
This has additional benefits such as keeping sensitive production
out on the price curve, a similar approach can be used to monitor
information confidential. It also allows companies to concentrate
venues and seek out liquidity by synthesising the illiquid contract
their trading domain expertise in one central team.
with combinations of adjacent or similar instruments. As an
To achieve the most profitable operating strategy, assets must be
example, assume that a participant is short baseload power for Q4
optimised versus the market. In volatile trading conditions, mid-
2011 and there is no offer for this calendar period. The long trade
merit generation assets could be operating with variable costs per
required could be synthesised by buying Cal 2011 and selling Q1,
MWh which exceed the spot buy-price. If the asset is flexible, the
Q2 and Q3 2011.
operator might elect to shut the generator down and buy the power
in the market. In order to make this decision, companies must
Internal Market Crossing monitor their asset supply/demand levels and external market
Many buy-side energy companies own assets throughout the prices in real-time. A PTRM platform can model the asset topology,
supply chain from upstream production through distribution, monitor asset production (Figure 10) and market prices to drive
storage and supply. Whilst some own assets in all parts of the internal market trading rules.
chain, they are unlikely to have perfect symmetry in terms of asset Another example is shipping logistics. Oil majors are
scale and location. For example, a company which operates continuously moving hundreds of large crude and LNG cargos.
nuclear power stations might also own a power supply company. Their traders survey the markets to spot freight and location
The power production level is quite predictable but the demand arbitrages that they can exploit by re-routing cargos. In this
will vary to create an imbalance that must be traded within the instance, the logistics of shipping is being driven by trading
market. This same company might also own a mix of gas-fired arbitrage opportunities. By re-routing they are creating new long
generators plus gas production and storage assets. Integrated asset and short physical positions that can then be traded for profit. This
owners have to monitor long and short positions at each can only be fully achieved if trading is at the nexus of the
supply/demand point in the value chain and decide how, when operation process.
Figure 9: Sweeping For Liquidity Figure 10: Asset Monitoring
92 worldPower 2009
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