Total traded volumes of EU allowance (EUAs) rose year on year in 2013, but exchange trading continued to swallow liquidity from the over-the-counter (OTC) market – a process which could lead more brokers to scale down their carbon desks, sources think.
EUA trade on ICE Futures Europe – where the bulk of exchange trading takes place – and the London Energy Brokers’ Association (LEBA) – which groups brokers Evolution Markets, GFI, ICAP, Marex Spectron, Tradition Financial Services and Tullett Prebon Energy – rose by 10% year on year to 7.6bn EUAs.
But volumes traded via brokers fell by 22% year on year to 1.9bn EUAs. And of this, 90% was subsequently cleared by a clearing house.
Only 25% of trade took place on the brokered market in 2013, compared to 35% in 2012 (see graph).
“It’s difficult for OTC brokers to offer fees which are competitive to exchange fees,” said Mark Meyrick, head of carbon at Eneco.
The costs for trading with a broker vary, as different counterparties have different brokers’ agreements. According to a second trader at a trading house, fees range from 1 cent to 1.75 cent per EUA dealt.
“But you also have to consider that most brokers put their numbers into Trayport, and that has an additional cost on top of brokers’ fees. If you are a utility with a power and a gas desk, then you can pay that cost. But if you are a carbon trading firm and you have to pay the access to Trayport only for trading carbon, that’s quite a high cost,” said Meyrick.
A second reason for the OTC volume contraction is that some trader desks have withdrawn from the market, particularly with banks having a lower risk appetite for proprietary trading ( see EDCM 17 October 2013 ).
Last but not least, in 2013 more supply became available via daily auctions, Meyrick argued. A total of 826m EUAs were sold on ICE and the European Energy Exchange.
As a result of the loss of liquidity, GFI scaled back its presence in the carbon market ( see EDCM 18 October 2013 ), and others could follow in the future, LEBA predicted.
Back-loading to help?
This is because it will be difficult for brokers to cut rates more, without pulling into question the financial viability of brokering emissions permits, Derek Willis, a consultant at LEBA said. The scaling down of carbon desks at brokers is “very likely” to continue, Willis added.
“Liquidity migration to exchange is an irreversible process – once the OTC loses ground, it never gets it back’,” said the source at the trading house. “The only reason why you would go to a broker and not to the exchange is to understand who is in the position of buying and selling a certain amount of permits.”
Some more optimistic views came as back-loading – a measure aimed at supporting prices by delaying some of the scheduled auction supply – will be implemented.
“In 2014 I think it might get slightly better for OTC liquidity, as when back-loading will start there will be less supply available at daily auctions and people will still need to find EUAs,” Meyrick said.
Price developments could also have a say, said a third source at another trading company.
“If prices are higher and there is more business and the market is more volatile, then brokers’ levels will pick up,” he said.
Overall, traded volumes are likely to increase in the future as the EU emissions trading system matures, said Matteo Mazzoni, carbon and power analyst at Italian energy consultancy Nomisma. He put the rise seen in 2013 down to industrials making greater use of the market while adopting a more strategic approach to their carbon position. Ben Lee and Silvia Molteni