Reducing Costs & Improving Risk Management
With the shift to electronic trading, participants in worldwide commodity markets have become accustomed to the streamlined workflows and improvements in risk and auditability that real-time trading platforms offer.
By Richard Everett T
he opportunity now exists to internalise the benefits that real-time trading platforms provide, to improve efficiencies, reduce costs and improve risk management. An internal matching platform allows real-time matching
of internal orders, unifying internal positions before going to market, and reducing market costs. Real-time distribution of internal pricing and orders between business departments also minimises price movement risk. Validation and auditability reduce risks from errors and omissions and enforces transparency. Trayport has worked with clients to build a solution that
meets these requirements. The solution known as Internal Marketplace has been released to some of the industry’s largest energy participants who are now reaping the benefits the platform has to offer.
The European Model Over the last five years the number of markets, products and
volumes traded in the European energy complex has continued to grow. At the same time, utility companies have grown both organically and through mergers and acquisitions at an even more accelerated rate, creating larger, pan-European trading organisations. Within these utilities, growth has
occurred both horizontally and vertically; horizontally by providing access to new customers and markets, and vertically by creating or strengthening upstream and downstream operations. Both offer different opportunities and challenges to the trading organisation or desks within these companies. Horizontal growth has led to the enlargement of trading
operations as multiple trading floors have joined to become a single trading entity to the external markets. This has resulted in desks specialising in specific commodities, either centralised or regionally separated. Vertical growth has increased the size of the portfolio
management, structuring, origination, and the sales and marketing departments that interact directly with the trading floor. With this growth, the volume of interaction between these departments (and traders) has continued to grow, as traders look to either utilise physical assets, to improve their trading strategies, or provide hedging and market access services. Traders are often in direct contact with downstream sales and marketing operations throughout the day, operating in the external market on their behalf or directly providing assets from their own positions to cover their requirements.
70 Alongside this growth, an expansion in proprietary trading
has also occurred. Utilities have looked to benefit from the market knowledge and experience their position gives them and have augmented this with additional traders with more traditional financial backgrounds. One visible result of this is the growth in cross-commodity trading. Often these desks have no direct market access but use the access and flow provided by other desks to trade the correlations between commodities. The volatility seen in many of these traded commodity products has also encouraged banks and hedge funds to increase their presence in trading.
The Problem – Integrating Internal Trading This growth puts trading at the core of many European
... the number of markets,
products and volumes traded in the European energy complex has continued to grow
utility operations by acting as a service provider – servicing the trade requirements generated by upstream and downstream operations and as a sophisticated propriety trading entity. These requirements, along with the importance of managing trading risk and growth in cross-commodity trading, have defined the organisational structure of the trading floor. Within the trade floor itself, separation of trading desks has taken place to optimise external trading by creating unified external positions from multiple internal sources. If not already in place, participants are now looking to limit external market access to specific desks that specialise in that
commodity in order to maximise value. This not only creates market specific specialists but also unifies the company’s position for that commodity by stopping desks acting against each other’s positions in the external markets. These specialist desks become the ‘internal market maker’ providing other desks with commodities from their internal portfolio or going to the market to satisfy any internal requirements. For most organisations this order flow is facilitated by people
calling their requirements from desk to desk or on larger floors or separate regional trade floors using instant messaging or email. Live market prices provide transparency to both sides of deals. As well as providing this ‘internal market maker’ functionality
to other desks within the trading team, desks also provide this service to upstream and downstream operations. Here, a wider range of communication tools are often used such as email, phone and instant messaging. From initial request, orders are then matched internally or externally and then manually entered into ETRM software. However, transparency
worldPower 2010
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