UK market-making spreads still too wide – source

An initiative by the British energy regulator Ofgem to improve liquidity and transparency on the curve of the UK wholesale electricity market should be taken further, according to a market source concerned that current bid and offer spreads are still wide enough to prevent participants accessing fair market value.

The mandatory market-making initiative, which obliges the Big Six energy suppliers – Centrica, EDF, E.ON, RWE npower, ScottishPower and SSE – to place bids and offers on monthly and seasonal contracts during two one-hour-long trading windows, came into force earlier this year ( see EDEM 28 March 2014 ).

As part of the rules, the Big Six players are required to post bid and offer spreads on broker screens no wider than 0.5% on the front two months, quarter and two seasons of the baseload market during the two windows that occur between 10:30 and 11:30 London time and 15:30 and 16:30 each day.

This would mean that a bid of £50.00/MWh posted on a contract would have to be matched by an offer no higher than £50.25/MWh, enabling a maximum spread of £0.25/MWh.

“The bid-ask spread is kept very wide in bearish and bullish markets and you’re offered either a low or high price depending which way you are going,” said the participant from a power purchasing company.

But another trader from a commodities trading house dismissed the concern, arguing that current spreads provided an indication of fair value.

“If the market is £50.00/£50.25 (/MWh) and no other players choose to tighten that up, then that is actually where the market is,” he said.

“Every large player in the market will know where ‘value’ is on these products and it’s always inside the spreads put out by the Big Six.”

The source added that it was difficult to assess if the Big Six were adhering to the rules but said the market is consistently tighter on the seasons than Ofgem’s regulations impose.

Participants tied to the market-making process are also allowed to withdraw their spreads on a particular product if it results in traded volume exceeding 30MW in a particular direction in a single window.

Most licensees are only obliged to trade in a maximum clip size of 10MW, which the source hopes will be increased in the future to provide even more transparency.

“Maybe in the future it will be a more open place where any clip size can be traded on a clearing screen,” he said.

A spokeswoman for Ofgem said the regulator would be publishing the first couple of quarters of data next month, although it had noticed a narrowing of bid and offer spreads posted along with increased churn in the market.

“But we can’t say that the reforms have generated these signs of increased liquidity,” she said, adding that a formal assessment of the impact of market making will not be made earlier than next year’s annual state of the market report. Henry Evans