French liquidity declines as banks reduce activity
French electricity volumes traded over the counter (OTC) have declined throughout 2013 to date, with market sources pointing to increased risk aversion as speculative traders move into new roles at funds. Volumes have recently halved for the front month and almost been wiped out for some peakload contracts.
According to one French trader, liquidity has suffered as a result of big investment banks no longer trading on the French market. “[There are] almost no banks anymore on this market. And lots of players will be leaving soon,” he said.
The source said now only a few utilities and hedge funds are trading on the French power market.
Investment banks are exiting the physical commodity markets on the back of increased regulation, and sources say they now often focus on offering services such as sleeves – facilitating credit lines – to hedge funds.
Less liquid markets, such as France, are likely to be particularly hit by this, traders have previously said.
One source said the exit of banks means the more aggressive traders who worked on their energy trading desks have moved to weather funds or hedge funds which focus on the German power market.
Volatility from renewable energy output and greater market transparency makes it easier to make money on the German market compared with France, he said.
“It’s hard to trust the flow of information on the French market,” said the source, adding that the dominance of one big player – state-owned utility EDF – also hampers liquidity.
Nuclear availability predictions provided to French grid operator RTE in recent weeks have illustrated this, with successive delays in bringing plants back from maintenance reinforcing concerns over a lack of transparency and predictability on the market.
This September just under 37TWh traded on all French OTC electricity contracts, down 14% from 43TWh in the same month last year.
As an example, 4.6TWh traded for the front month baseload delivery in September and October, less than half the 10TWh volume for the equivalent contracts last year.
Increased risk aversion has made the decline sharper on less liquid contracts. On the second-quarter out peaks contract, 27GWh traded in September, down 84% year on year from 173GWh. Beatrice Mavroleon
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