Unlocking Trader Productivity in Power Markets
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
www.allegrodev.com
Unlocking Trader
Productivity in
Power Markets
Most energy companies today still rely on spreadsheets or patchwork systems to
An Allegro White Paper run their trading & risk management functions. This means that most trading
www.allegrodev.com organizations could be doing more to maximize the productivity and profitability
of their trading team. This paper describes systems, processes, and metrics to help
increase productivity for power traders. Advanced trading and risk management
software is available today and provides a significant competitive advantage to
trading organizations.
© 2011 Allegro Development. All rights reserved.
Any firm that trades power is hugely impacted by the productivity of its traders. If each trader spends
much of their day focused on mostly clerical tasks and the remainder of their time actually assessing mar-
ket information and trade strategy – this is not the most productive or optimal use of a trader’s time.
Generation asset owners need to optimize, value, and settle fuel and power transactions – and trade
around physical assets. This includes real-time reporting of the P&L, managing credit exposure and
other metrics, as well as automated settlement of power transactions while maintaining regulatory com-
pliance. Term, spot and evergreen contracts need to be managed, including flexible pricing formulas
with discounts and premiums to spot index prices or other benchmarks. Real-time valuation of energy,
capacity, ancillary services, structured transactions, derivatives, swaps, and physical positions is needed.
Many trading organizations are also concerned with physical power scheduling, transmission and actual-
ization. These include energy producers and load serving entities that move physical power, such as gen-
erators, utilities, municipals, cooperatives, energy marketers and merchants. Traders need to have full
support for multiple currencies and the ability to schedule across time zones. Schedulers need to view
transactions in real-time, as they are entered by traders. Systems need to be able to handle user-defined
power products, such as peak and off-peak, and user-defined transmission periods that can account for
the details of holidays and daylight savings time.
Traders and power schedulers also need to be able to accurately value their transmission assets along
with the ability to utilize them with seamless integration from trading to scheduling physical power.
Communications with grid operators (ISOs), exchanges, and various regulatory agencies must be effi-
cient and accurate. In a nutshell, power trading involves a level of detail and complexity not seen in any
other energy commodity market.
Anything that can be done to automate this work for a trader and streamline their participation in the
power markets, means that the trader can spend more time finding the best price in the market and
putting together superior trades. It almost goes without saying that the most successful traders focus on
markets and information, rather than on clerical tasks. Almost.
The reality is that many energy trading organizations could be doing more to maximize the productivity
and profitability of their trading team. From the trader’s perspective, it means that they could be achiev-
ing superior performance – and being appropriately compensated for it.
www.allegrodev.com Unlocking Trader Productivity in Power Markets Page 2/10
The Burden of Spreadsheets and Disparate Systems
Allegro recently completed a market research study regarding the preparedness of the energy sector.
Over 250 survey responses were received from risk managers, traders, finance, logistics, and market-
ers in energy companies. Three quarters of them were in trading, risk, and finance departments.
The fascinating result of the study is that the majority of energy companies today still rely on spread-
sheets or in-house developed systems to run their trading and risk management business. That’s 2
out of 3! Only 1-in-3 make use of today’s highly evolved commercial software for energy trading and
risk management (ETRM).
For organizations still relying on legacy systems, the impacts to productivity are serious. When
traders input trades into spreadsheets or legacy systems, data entry can often be cumbersome. Such
systems often don’t provide much in the way of error checking. Templates for common trades may
be unavailable. Templates for complex trades may be non-existent, or such trades may require inef-
ficient “outside the system” workarounds to be accurately captured.
Error correction is also a concern. If a mistake is made during trade entry, all of the processes
Spreadsheets that follow are impacted. Then errors propagate so that valuation, scheduling, and accounting all
An in-house developed system
experience the errors as well. This causes the need for error correction, exception reporting, re-
work, and re-checking.
A commercial system
Another problem is that with multiple systems that don’t “talk” to each other, traders are often re-
quired to enter the same trade into multiple systems. This inevitably yields differences in different
systems, and creates the need for the different trades to be reconciled – another process that takes
time away from identifying trading opportunities and analyzing the market.
The overall problem with these approaches is that organizations lose valuable trader productivity
because they are spending time trying to get trades into inadequate systems. Simplifying processes
and reducing errors with the right systems is positive for a trading shop – both in terms of efficiency
and profits.
www.allegrodev.com Unlocking Trader Productivity in Power Markets Page 3/10
Achieving Increased Trader Productivity
Today’s commercial energy trading and risk management systems can make a real difference in the
way that traders do their day-to-day work.
Accurate, timely positions with grid computing.
Traders are concerned with knowing the current price, if they are long or short, and seeing all of the
trades that have been done today and in the past. In other words, power traders need perfectly up to
date information. Traders need real-time valuation of energy, capacity, ancillary services, structured
transactions, derivatives, swaps, and physical positions to execute quickly and with confidence. In
Allegro ETRM, accurate timely positions are provided with grid architecture so that traders have
what they need in real-time.
Real time integration with trading exchanges.
A great deal of trading in power is done on exchanges such as clearing exchanges like ICE, NYMEX,
EEX, and others; and trades often require communication with system operators (ISOs) and region-
al power pools. In each of these cases, organizations need to transfer data between the exchange or
the ISO and their trading system. Allegro ETRM provides a direct interface between the ETRM
system and the exchanges or ISOs. For example, this means that every time a trade is input through
ICE, that trade is fed directly back into the Allegro system. It also means an important productivity
gain for power traders – as it both improves accuracy and save traders’ time.
www.allegrodev.com Unlocking Trader Productivity in Power Markets Page 4/10
Quick, easy trade input for simple trades such as block power term trades.
When trading power, many trades are very simple and involve very high volumes. Traders need the
ability to take simple trades and put them in the system very quickly. If you limit the number of
data elements that must be input during trade entry, then traders can get through a much higher
volume of trades in a shorter period of time. An effective ETRM system will provide trade templates
for entry of routine trades, and automatically populate them with known trade information. This
limits the data that needs to be manually entered and eliminates certain non-value-added activity
for the trader.
Intuitive, heuristic based input for complex trades, such as Heat Rate Spread Options.
An effective ETRM system also provides templates for simplified trade entry, even for complex
trades. For example, a trade may have a heat rate spread option, or may be shaped based around
generation. When entering more complicated information for such trades, traders need templates
that make it easier to capture all relevant data. Allegro provides templates for thorough and ac-
curate trade entry for a wide range of complex trades. This enables traders to use their time more
efficiently when they have a solution that captures this data and automatically populates the trade
template.
www.allegrodev.com Unlocking Trader Productivity in Power Markets Page 5/10
The bottom line is that traders need a format that allows a complex trade to be entered without re-
dundant data entry and with the least effort possible. Allegro’s ETRM system is designed to address
the complexities of power markets – for the straightforward handling of both simple and complex
trades.
Getting There: Key Performance Indicators
Effective energy trading and risk management solutions can help power trading organizations un-
derstand their performance and drive improvements. The visibility into key performance indicators
(KPIs) – made possible by ETRM systems – can help firms track efficiency gains and increased
profitability for individual traders and for the team as a whole:
Daily volume by trader (mwh).
Some traders trade more megawatt hours than others, and while that is not unusual, organizations
do need the ability to monitor how closely each trader is achieving their team’s objectives. Gener-
ally speaking, power traders fall into three major categories. Origination or long-term traders try to
get the maximum pricing advantage on long-term trades, generally one year or longer. The second
group is those who trade around that position with medium-term trades (one month to a year) that
are generally done with less structure and commitment than long-term trades. Finally, there are
real time traders who trade same day or day ahead power and trade in short markets. These trad-
ers are not aiming to clear a large margin, but to make sure everything balances properly to meet
business requirements. Visibility into daily volumes allows the business to assess if the right deals
are getting through the system. It also enables the organization to measure efficiency gains and
determine if they are getting what they need from each individual trader.
www.allegrodev.com Unlocking Trader Productivity in Power Markets Page 6/10
Hourly power balance by tradebook.
Organizations can also look at different trade books, such as the real-time book, day ahead book,
mid-term book, balance by ISO market, and more. This performance indicator outlines on an
hourly basis the net balance of generation that a company has to sell, for example.
Net value of trader positions.
This metric shows what position each trader is carrying, including their net quantity position and
net value of their book – which will be either short or long. It offers a rapid way to determine who
is running a positive or negative book. Managers can then quickly assess if the quantity and value
of the book are what the manager expected.
www.allegrodev.com Unlocking Trader Productivity in Power Markets Page 7/10Mark to market comparison with value at risk.
There are two important measurements to evaluate when it comes to decision making: Mark-to-
Market (MtM) is what your product’s position is worth, while Value at Risk (VaR) is the amount you
can possibly lose in a day’s turnover at this position. Traders want to determine whether or not the
value they can make on their power exceeds the risk they’d take to make it. When mark-to-market
is lower than the VaR, you are risking more money to take that position than you can make in that
position. This is very useful in examining traders’ productivity and overall performance. You want to
see a MtM that is larger than the VaR. When these measurements are inverted, that can indicate a
poor level of trader productivity. With Allegro ETRM, you can evaluate these key metrics on a trader
by trader basis.
Daily profit and loss by trader.
With movements in the power markets, each trader’s overall book is either going to make money or
lose money on a daily basis. Managers need to see how productive their traders are and who is making
money -- who is seeing volatility, making money off short positions or long positions. If this is in line
with what a manager is expecting, that’s good news. If not, then the manager can see where adjust-
ments are needed. The organization needs to understand what good traders are doing to get a better
MtM and P&L, and what the poorer traders are doing that can be improved. Managers need insight
www.allegrodev.com Unlocking Trader Productivity in Power Markets Page 8/10into each trader’s portfolio performance, not just for the current day’s trades, but also insight into the
price movements and value movements for trades that have been done previously.
Profit and loss for each trader by delivery month.
Managers need to understand and manage profit and loss for forward delivery months, even a year
or more into the future. Effective ETRM systems enable a view of profit and loss by the month of
delivery or any other timeframe. In commodity trading there are two important dates – the date of
the trade and the delivery date. Successful trading organizations need to understand and report on
both of these. This puts them in a better position to understand what trends that the company is
experiencing and how these impact the business with a forward look at profits – what does profit-
ability look like in every delivery month.
Total Business Benefits
Effective ETRM solutions provide traders with better real time information for better market deci-
sions, while cutting administrative tasks to a minimum. This enables the entire trading organiza-
tion to spend more time on the markets – identifying and capturing the most profitable trading
opportunities.
An important overall metric is:
• The average market value that each trader is carrying in the book, times
• The number of traders, times
• The percentage increase in trade profits.
The product of these three terms is the value of implementing a trader productivity solution.
If you have an average market value of $2 million per trader and a staff of 10 traders, then even a
conservative 1% increase in trade profitability results in an annual gain of $200,000 per year. In
practice, the value of better market decisions can be much higher. The intangible benefit of iden-
tifying additional opportunities for better trading can also be substantial.
A benefit sometimes overlooked is that world class systems can have a positive impact on recruiting
and retention of top traders. If traders have a very efficient system to work with that provides better
information and a competitive edge – you’ll get better traders and they’ll make more money.
www.allegrodev.com Unlocking Trader Productivity in Power Markets Page 9/10Advanced trading and risk management software is available today and provides a significant com-
petitive advantage to trading organizations. We invite you to contact Allegro to learn more.
About Allegro
Allegro is a global leader in energy trading & risk management solutions for power and gas utilities,
refiners, producers, traders, and commodity consumers. With more than 27 years of deep industry
expertise, Allegro’s enterprise platform drives profitability and efficiency across front, middle, and
back offices, while managing the complex logistics associated with physical commodities. Allegro
provides customers with agile solutions to manage risk across gas, power, coal, crude, petroleum,
emissions, and other commodity markets, allowing decision makers to hedge and execute with
confidence. Headquartered in Dallas, Texas, Allegro has offices in Calgary, Houston, London,
Singapore and Zurich, along with a global network of partners.
For More Information Contact: Christie Lindstrom; Media & Analyst Relations Manager,
Allegro Development at media@allegrodev.com or call +1.214.237.8117.
For more information go to
www.allegrodev.com
or call us at +1.888.239.6850
North America +1.214.237.8000
Europe +44(0)20.7382.4310
Asia Pacific +65.6236.5730
www.allegrodev.com Unlocking Trader Productivity in Power Markets Page 10/10You can also read
