An obligation on the UK’s Big Six energy companies forcing them to place bids and offers on electricity curve contracts is heralding a fresh battle for market share among trading platforms.
The liquidity intervention, which falls under energy regulator Ofgem’s secure and promote (S&P) licence condition, will require the Big Six to market-make on a range of products out to the fourth season on the forward curve during two hour-long trading windows opening at 10.30 and 15:30 London time. It takes effect from 31 March ( see EDEM 20 November 2013 ).
The licence conditions include a number of clauses within the market-making obligation, including reload times after a trade has been executed, net volume caps, maximum bid-offer spreads and extensive quarterly reporting requirements.
Ofgem has not prescribed a platform, leaving the market to decide where to fulfil the obligation.
This, combined with the new requirements, has seen trading platforms vie for the additional volume that the intervention is certain to bring to the market.
Curve trade has traditionally been dominated by over-the-counter (OTC) volumes traded on the four established broker platforms via trading services firm Trayport, with around 98.5% of volume dealing in this manner.
But the Nasdaq OMX exchange is pushing its financial derivatives model with seasonal peaks products to be launched in the first quarter, while a third platform, Griffin Markets, will also vie for market share.
Trayport offers access to the main energy market inter-dealer brokers as well as connectivity to all the exchanges that make up the European energy markets.
“We want to provide optionality, so people can choose, and the market can decide where to market-make and where the liquidity is,” product manager Richard Everett said.
“Reporting and compliance tools for market makers are very important,” Everett added. As such, the company is building a system that works across broker and exchange markets. The “joule product” will enable traders to maintain and monitor their activity against regulatory requirements, Everett said.
Similarly, Nasdaq OMX is working on monitoring software that will feedback to participants if obligations are not met.
The exchange has adapted its market maker supervision application to provide a trade and report service for the obligated parties. In addition its roster of products is being increased to include peak seasonal contracts to meet the technical requirements of secure and promote.
“For new entrants the bilateral physical model is difficult and expensive to get involved in with GTMA [grid trade master agreement] set up and BSC [balancing and settlement code] assignation serving as a daunting barrier to entry,” UK power and gas manager Jason Hall said.
“In our view this is the prime reason why the market has contracted in recent years both in terms of the number of participants and recorded volumes.”
‘In the spirit’
The most recent platform to enter the European market, Griffin, said its UK power offering, which launches in the first quarter of next year is “much more in the spirit of what S&P is trying to achieve”.
“Whereas it is important to provide the six obligated parties with an efficient way of fulfilling their obligations, it has got to be a lot more than that,” Griffin’s Richard Black said.
“The market is made up of more people and there is a responsibility here to try and promote and develop a healthy, competitive market structure – the type that will produce longer term benefits.”
Like its competitors, Griffin will also offer market surveillance software that will take care of obligated parties’ reporting requirements. “It’s very easy for us to do, that is already in place, but obviously that is much more important to the Big Six,” Black said. Jamie Stewart