Detailed Glossary


A Detailed Glossary of Energy Trading terms for registered users



Trading

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nick

Arbitrage

by Nick Henfrey - Wednesday, 15 April 2015, 7:31 AM
 

The difference in cost of achieving the same outcome through different means

Detail

This is easiest explained as an example:

To buy a particular new car in the UK costs £27,000

The identical UK-spec car costs £22,000 in Belgium

It will cost you about £1,000 to have it shipped to the UK, plus another £1,000 costs for delivery, any inspections, your time to manage all this etc.

Cost of buying the car in the UK = £27,000

Total cost of buying the car in Belgium and having it delivered to your home = £24,000

There is an arbitrage opportunity of £3,000

In general, in a liquid market, with minimal market constraints, traders will exploit any arbitrage, and the arbitrage values should all tend to zero

In our example if everyone chose to buy the car in Belgium:

the price would probably go up in Belgium because of the higher demand

the cost of shipping might go up (because of demand and the realization it's valuable)

the price of the car in the UK would probably fall (because they weren't selling any)

When the market acts to reduce arbitrage to insignificant values then we describe this as arbitrage-free

Arbitrage-free is a powerful method in many valuation tools: it implies we can value an Instrument or trade by looking at alternative ways of achieving the same outcome

For example the value of an oil forward contract in six months time, should not be significantly different to the spot price of oil, plus all of the costs of storing that oil for six months

nick

Auto Trade Capture

by Nick Henfrey - Thursday, 28 August 2014, 5:22 PM
 

Auto Trade Capture is a capability in most trading organizations (and many have an application called ATC) that allows trades executed on an electronic trading platform (usually exchange or broker) to be automatically downloaded to our organization's ETRM

Detail

ATC usually works by accessing an Instance of Trayport GlobalVision which is a proprietary product.

Trayport provide broker trading platforms to most common Energy Trading Brokers and some Exchanges, and also acts as an interface to many Exchanges running their own trading platforms

Trades executed on compatible platforms may be accessed as XML and mapped into the local ETRM

It is normal for trades to be entered into the ETRM in a status that requires a trader to "validate" or "approve" the trade as having been executed

Trades may also be received from other platforms, often in the form of FIX format messages

Most ATC systems consist of:

  • A set of download adapters
  • A maze of mapping tables
  • A set of ETRM adapters
nick

Baseload

by Nick Henfrey - Wednesday, 29 October 2014, 7:52 AM
 

Term used in power (electricity) trading and operations to describe continuous delivery (24 hours a day, 365 days a year)

Detail

Baseload is the most basic type of power profile

Baseload may refer to generation - nuclear power plants provide excellent baseload generation - but cannot easily be switched on or off so are no use for other profiles

Baseload may refer to trading - a contract for delivery in 2024 may usually traded as Baseload, Peak or Offpeak

Peak and offpeak are related profiles that (as their names suggest) deliver during the set of hours that are defined as peak (e.g. 07:00 - 19:00) or offpeak (e.g. 19:00 - 07:00 the next day)

in general

Baseload = Peak + Offpeak

which is to say if we sell the same volume Peak and Offpeak for the same period then we have effectively sold Baseload

If we buy Baseload and sell Offpeak, then we have effectively bought Peak

nick

Bid

by Nick Henfrey - Thursday, 19 March 2015, 7:24 AM
 

A Bid is a type of Order; a trader bids to buy a product or commodity at the Bid price

Detail

The trader bids to buy a product at a particular price

Bids are normally submitted to a Broker or an Exchange

If a bid is matched by a subsequent offer by another party, then a trade is executed

If the bid matches an already quoted offer then a match is made and a trade is executed

See also Offer

 

nick

Blotter

by Nick Henfrey - Thursday, 19 March 2015, 7:25 AM
 

A Blotter is a traditional term for a form on which trade details are recorded by a trader as trades are executed

Detail

Original blotters were pre-printed forms with a row for each trade, in which the trader wrote by hand the trade details in defined columns

Traders often use a spreadsheet to capture trade details as a form of electronic blotter

Trade details from blotters are either subsequently re-keyed into a trade record system (ETRM), or may be electronically uploaded into an ETRM

Many ETRMs have trade blotters built into them to allow trades to be recorded directly as they are executed

Deal ticket is a similar term for a pre-printed form on which trade details are recorded. Typically a blotter allows one trade per line to be recorded, whereas a deal ticket - designed for more complex trades - usually has one trade per page

 

nick

Broker

by Nick Henfrey - Wednesday, 22 January 2014, 5:45 PM
 
A broker acts as an intermediary in the trading process
 
Most energy execution brokers operate a trading platform, that allow Orders to be submitted on a variety of standardized trading Products or Instruments
 
When Orders are matched then a trade is executed, and the parties making the matched Bid and Offer are each notified that a trade has been executed
 
The trade is legally executed between the respective parties
 
Detail
 
There are three types of brokers commonly involved in energy trading:
 
  • Execution Brokers - usually operating an electronic platform - brokering OTC trades
  • Exchange Brokers - Act as broker for trading companies on Exchanges on which the trading organization is not a full member
  • Clearing Brokers - Clear trades executed on an Exchange on behalf of the trading organization
Generally all brokers charge a fee, usually based on the total volume of the trade
nick

Capacity

by Nick Henfrey - Thursday, 19 March 2015, 7:32 AM
 

Capacity is a type of commodity associated with gas and power, and gives a trading organization the option to "move" gas and power through the respective networks (pipelines and grids)

Detail

Capacity may be bought in short or long-term auctions directly from the Transmission System Operators (TSOs), or may be traded bilaterally

Ownership of capacity entitles the owner to transport gas or power from one part of a network (location) to another

A trading organization does not need to buy capacity to buy and sell a commodity at a location, it does if it wants to transport the commodity to a different location 

For example capacity on the Interconnector France-Angleterre (IFA) entitles the owner to transport power from the UK grid to the French grid or vice versa

As capacity may be used to change the location of a commodity, it is somewhat similar to an option on a (physically settled) location spread and is usually valued as such

 

nick

Carbon

by Nick Henfrey - Thursday, 19 March 2015, 7:35 AM
 

Gas, oil and coal all contain carbon - when they burn the carbon is oxidized to carbon dioxide.

Carbon dioxide, as we all know, enters the atmosphere, and is generally believed to cause global warming

There are various schemes to reduce the emission of carbon dioxide, called emissions schemes, and these require major emitters of carbon dioxide to provide certificates matching their emission of carbon dioxide. These certificates may be acquired in a number of ways, and there is a market for organizations with surplus certificates to sell, and organizations who need more certificates, to buy

Detail

Naturally wherever a market exists to trade anything, speculators attempt to profit by buying and selling - in this case - carbon (in the form of certificates)

nick

Cascading

by Nick Henfrey - Thursday, 19 March 2015, 5:26 PM
 

The process of decomposing longer tenor Exchange traded derivatives (futures and swaps) contracts for the equivalent shorter contracts

Detail

Let's start with an example - a trader buys a futures contract for delivery for the whole of 2018, a so-called Cal-18 contract

Every day that contract is available to trade, and the Exchange publishes a settlement price for that contract that determines daily margining

At the time of trading (2014) the Exchange does not offer any other contracts covering 2018 - months or quarters for example

At the end of 2017 the trader wants to keep the position open, but the Exchange can't continue to publish a Settlement price for the 2018 yearly contract because it can't be traded (the delivery period has already started)

By this time the Exchange is offering Quarters contracts covering the whole of 2018, and Month contracts covering at least the first three months of 2018

So the Exchange, the Clearing broker and the trader all cascade the year contract into four quarterly contracts; Q1, Q2, Q3, Q4 2018.

Q2, Q3 and Q4 are all still tradable, but the Q1 position needs to be closed out, or itself cascaded into three months, January, February and March

As you've probably realized the January contract will very soon be untradable, so it needs to be

  • Closed out - the trader flattens his position in that contract
  • Taken to or exchanged for an equivalent physical contract 
  • (for financial futures) taken into financial settlement

By cascading longer contracts into shorter contracts shortly before the longer contracts begin delivery the Exchange can effectively offer a small set of monthly, quarterly and yearly contracts, that have monthly granularity in the short term, but cover a period of years into the future

As an example EEX are quoting the following Phelix Futures contracts at the time of writing (11 November 2014):

  • Months - usually current month + next nine months - November 2014 to August 2015
  • Quarters - next eleven Quarters - Q1 2015 to Q3 2017
  • Years - next six years - 2015 to 2020

(If you're wondering why November 2014 is still being quoted then that's because it is financially settled through the delivery month - the contract is not tradable in November)

nick

Clean Spark Spread

by Nick Henfrey - Thursday, 19 March 2015, 5:30 PM
 

A clean spark spread is the spread between the value of power (electricity) on the one hand and the value of the gas needed to generate that power, and any associated carbon costs of generation

Detail

The term clean spark spread may refer to


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