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Nick Henfrey |
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Order | ||
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An Order is an instruction sent to an Exchange or a Broker to execute a trade unconditionally, or when or if specific criteria are met Detail A Market Order is the simplest, unconditional, type of Order. It is a simple instruction to buy or sell a specific volume of a product or commodity to be executed immediately at the best price available A Limit Order is an instruction to buy or sell a specific volume of a product or commodity if the price of execution is at or better than the Limit Price specified with the Order An Order may combine, in a single instruction, a number of transactions that are required A Fill or Kill Order requires all transactions to be carried out, or none. Partial execution is not permitted Exchanges handle all types of Order internally Other organizations or parts of organizations may accept combination Orders, and then route different parts of the Order to different Exchanges, Brokers or other parts of the organization For example a large trading organization may have several desks issuing Orders that overlap. An internal order routing capability matches internal orders as far as possible before routing the unmatched orders to external organizations (brokers or exchanges) Bids and Offers are types of Order
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Origination | ||
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Origination - the negotiation and conclusion of bespoke contracts, and structuring of non-standard products to offer for sale Detail Origination teams and originators in energy trading organizations are about putting together large integrated contracts, outside standard master agreements. These might involve: Structured long-term procurement deals particularly for oil and gas Virtual Assets - Virtual storage, virtual power plants, virtual refining | ||
OTC | ||
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OTC - Over-The-Counter Generally used to refer to any trade not executed with an Exchange Detail Over-The-Counter trades may be executed by a broker, or directly bilaterally between two parties. The resultant trade, whether brokered or not has the following characteristics: The trade details may be anything the parties agree - compared to the standardized contracts offered on an Exchange The agreed trade price is private to the parties - although either may report it to a market data service to increase price transparency Delivery, settlement, and all credit risk is entirely between the two parties | ||
P&L | ||
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Profit and Loss (P&L) is a finance and risk reporting term to describe the profitability of an individual trade, a book, a desk, or a company. Whilst the P&L of a company includes all activity, and costs (offices, staff etc.) the trading P&L is a measure of the profitability of a single, or a set of, trade(s) Detail P&L is a change in the value of something, or a set of things between two points in time You will often hear people refer to the P&L of the trade in terms of its value - the value at any point in time is effectively the difference between the value at that point in time, and the value before the trade was executed. We usually refer to this as the Lifetime to Date P&L or LTD P&L Often we are interested in the change in value, the P&L, from the start of the year, from the start of the month, or from the last valuation. These are respectively known as:
As an example, let's say we bought some shares in a company for £60, and a year later we sold them for £100, then it seems obvious that we made £40 profit, assuming there were no cost of buying the shares, or selling them, nor indeed any other costs directly associated with the buying or selling
Before continuing we will align our example with a more normal energy trading example.
In general traders don't buy a commodity, and then sell it later because of the difficulty and cost of storing energy commodities - see Storage
In general traders enter into a Forward contract, that is to buy the shares at fixed time in the future, at a fixed price
The other advantage of Forward contracts is that the trader can enter a Forward contract to sell, as well as buy, at some time in the future. This is known as taking a short - i.e. negative - position
In March 2018 we will give £60 to the seller of the shares. This is called the financial side or leg of the trade. It has a known cash value: £60
We call this the physical side or leg (it's physical because it's not cash, even though the share certificates are electronic, we still call this physical)
In general the first method is preferred because it is simpler, we may have to use the second method when we are not sure the position is entirely closed out, or we know some is, and some isn't.
if the first method sounds odd, think about buying and selling a house, once you've bought a house you're very interested in how much you paid for it, and how much it's currently worth. Once you sell it however, you're only really interested in the price you paid and the price you sold it. You have little real interest in the current price
P&L that may result in a cash flow in the future is often discounted back to present day value
We may refer to undiscounted, and discounted P&L
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P&L atttribution | ||
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Let's say we added up the P&L of all our trades today, and then did the same tomorrow - the two values would probably be different - but why? Some reasons:
P&L attribution calculates the change in P&L for each of the above individually - and any other factors - so that the effect of each cause may be understood Detail The exact calculation is rather complex, for example if we want to know the effect of new trades, do we value them against yesterday's curve price or today's? If we use today's then in effect we have partially attributed some P&L change to the new curve price In general the P&L of each trade, or a netted exposure across a portfolio is is recalculated individually for each change that might affect the p&l (forward curve, fx rates etc), keeping each other effect constant Because each change is taken in isolation the the sum of all P&L attribution detail does not add up to the overall change in P&L... P&L attribution is often called P&L explained or P&L explainer | ||
Party | ||
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A party is an organization, or part of an organization, which is legally involved in a trade Detail Every trade has at least two parties: a buyer and a seller Our organization, or part of organization, is referred to as the first party, the other organization, or part of an organization is the counterparty There may be a broker who introduces the buyer and seller - the buyer and seller are not known to each other until the trade is executed If our organization executes a trade on an Exchange then the Exchange is the counterparty | ||
Physical | ||
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The attribute, or adjective, physical usually refers to trades and business process that results or involves in the physical delivery of energy or a commodity Detail A trade is physically settled when it will result in the delivery of an energy or commodity. This is in contrast to a trade that is financially or cash settled Physical business process involves the activities around Scheduling delivery of electricity and gas (Operations) Logistics of moving and delivering other commodities by ship, barge, train, plane, truck etc. including loading and unloading and inspections | ||
Portfolio | ||
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A group of trades Detail Trading organizations group trades in order to simplify position management, risk reporting and settlement. By grouping trades that have a common or complementary purpose, traders can focus on the performance of the portfolio as a whole, rather than the individual trades that make it up Note the similarity to a trading book | ||
Position | ||
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All physically settled derivatives imply either an obligation to deliver, or take delivery of, a commodity at a location at some time in the future The obligation to deliver a commodity is called a short position of that commodity at that location and time in the future The obligation to take delivery of a commodity is called a long position of that commodity at that location and time in the future Detail Traders sum the position of a set of trades to know their net position across that group of trades - usually called a portfolio, a book or a strategy. This is known as the traded, or trader, position Traders take a long position if they believe the value of the commodity at the time of delivery will be greater than the contract, or strike, price Traders take a short position if they believe the value of the commodity at the time of delivery will be less than the contract, or strike, price. Taking a short position is sometimes known as shorting Each time a trade is executed the trader's net position changes. Most traders update their net position as each trade is executed | ||
Position Reporting | ||
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Traders make, and lose, money by taking positions, either short or long at various points in the future Open positions in the future imply a risk that needs to be managed very carefully as changes in the forward curves affect the value of the net open position It is therefore critical that traders know their up to date position at all times This is the purpose of Position Reporting by means of Position Reports Detail | ||