Detailed Glossary of Energy Trading terms

In trading terms execution is the act that makes a trade a legally binding contract between the trading parties

Detail

A trade may get executed in a number of different ways:

• Two parties agree a trade directly between themselves. Trades executed this way are described as bilateral, or Over the Counter (OTC)
• One party makes a bid or an offer and another party accepts it, usually through a broker
• One party makes a buy or sell on an Exchange

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

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

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

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

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

1 megawatt (MW) = 1,000 kW

1 gigawatt (GW) = 1,000 MW

1 terawatt (TW) = 1,000 TW

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