Dark Energy Consulting
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Detailed Glossary
Detailed Glossary
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Power | ||
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In Energy Trading terms Power is almost always synonymous with Electricity In physics terms power is a measure of the rate of energy conversion per unit time Detail In SI terms energy is measured in Joules One watt = one Joule per second 1 kilowatt (kW) = 1,000 joules per second Since power is energy per unit time (energy divided by time) it follows that energy is power multiplied by time Frequently energy is measured in these terms: 1 kWh = 1 kilowatt for an hour = 3,600 * 1,000 joules = 3,600,000 joules | ||
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 | ||
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 | ||
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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Market Maker | ||
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A market maker quotes prices at which they are prepared to buy or sell a commodity - usually on an Exchange or with a broker Detail A price at which a party is prepared to buy is called a Bid (they bid to buy the commodity) A price at which a party is prepared to sell is called an Offer (they offer to sell the commodity) By offering continuous bid and offer prices, Exchanges encourage traders to take positions, secure in the knowledge that they can always close them out. This is another way of saying that they improve the liquidity of the market There are usually benefits to the market makers themselves from offering this service | ||
Execution | ||
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Trade | ||
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A trade is a legally binding contract between two parties A physically settled trade requires one party to deliver one or more commodities to the other party at a time and location specified in the trade terms, in return for one or more cash payments A financially settled trade requires both parties to agree the value of one or more underliers, and make one or more cash payments dependent on those values In general, trades have the following dimensional attributes Delivery period Trades also have the following non-dimensional attributes Price See also Execution | ||
Location | ||
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Location is one of the key dimensional attributes of all physically settled, and many financially settled, trades Detail Location is usually a description of where the delivery a of a trade will take place Although this sounds fairly straightforward, in practice location means different things for different commodities. This is because the delivery location simply defines the lowest level of distinguishable information about the delivery, and this lowest level varies with the commodity So let's look at some commodity locations to see what this means: Natural Gas The location of the majority of gas trades in the UK is the NBP The NBP isn't even a real location, it describes the UK-wide gas pipeline network called the National Balancing Point On the day of delivery, a seller of gas has an obligation to deliver gas at the NBP The seller may deliver it from any other location that is physically connected to the NBP, it doesn't matter where that is. The buyer may take delivery to any other location that is physically connected to the NBP Gas traded locations such as the NBP are called hubs. Some hubs require the buyer and seller to identify the physical connection point of delivery - these are physical hubs Other hubs, like the NBP do not require the buyer and seller to identify the connection point - these are virtual hubs | ||
Forward | ||
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A Forward, or Forward Contract, is an agreement to buy or sell a commodity at a fixed time in the future Details A Forward Contract involves two trading parties: a buyer and a seller. Our organization is one party, the other is the counterparty A Forward Contract can involve almost any terms for quantity (Volume), quality, commodity, delivery period, delivery location, pricing and settlement A Forward Contract may be executed directly with a counterparty, or through an intermediary (a broker) Whether brokered or not, responsibility for delivery and settlement of a Forward Contract is usually directly with the counterparty (see Clearing for an exception) Forward Contracts may be executed at a fixed price, or at a floating price:
Forward contracts may be physically or financially settled:
A financially settled Forward is often referred to as a swap A Forward is usually settled bilaterally between parties. Forwards may be included in a netting agreement Forwards may be included in a margining agreement A Forward may be given up for clearing
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Book | ||
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A book is a collection of trades, usually grouped by a trading strategy Detail Note the similarity to a portfolio, the two terms are often used interchangeably, and sometimes together, in which case a book is usually a grouping of portfolios | ||