As market participants continue to look for ways to manage risk and operate effectively in an increasingly complex energy trading landscape, Stanislav Ermilov (CEO of Tallarium) explains why data harmonisation is essential for creating efficient, transparent, and compliant markets.
The structure of energy trading is dramatically evolving . The industry is going through a major transition from localised bilateral trading flows to increasingly global markets. While trade flows between Europe and Asia have historically been the largest in terms of global energy trading, market participants are now increasingly trading between North and South America, as well as Asia. On top of that, we are talking about a market that is predominantly traded off-exchange, where there is no standardised price or common marketplace for market participants.
The question is, from a data perspective, are the current ways of working set up to best serve energy traders trying to navigate more geographically dispersed markets? Not really, if we are honest. For too long now, the lines of communication between energy trading firms and their brokers have been fragmented – resulting in data scattered all over the place. This has created a basic problem because it leaves each trader having a different idea of pricing from the number that the risk department has. Crucially, this is not something that is siloed in its impact to purely the front office – poor data practices at a group level effects essentially every area of the business. Indeed, looking at the accounts desks of major energy companies, they currently have about three layers of price verification before the company wide P&L can even be established.
Due to current processes that lean heavily on manual spreadsheet entries, it is nigh on impossible to have an accurate snapshot at any one moment in time. . This can be highly problematic, as it is crucial risk teams have full visibility into company positions during major market moves so they can initiate conversations with traders quickly. This in turn enables them to better gauge the degree of risk involved with a trade and avoid unexpected losses or breaching limits – particularly important during periods of market volatility.
Energy trading firms, by definition, rely heavily on rapidly delivered, accurate information for decision-making. A lack of timely and accurate data can lead to missed opportunities, and as a result either smaller profits or greater financial losses from the front office – especially during periods of elevated market disruption. Energy trading involves significant financial, as well as regulatory risk. As a result, traders need reliable information to evaluate and mitigate these risks effectively.
They also require accurate and reliable reporting and business controls, as sound trading operations are often what distinguishes the winners from the losers. Large revenues and small per-trade margins make it crucial to be precise with price data and ensure cheap access to funding based on lower risk and better trading operations. This is what differentiates the largest most successful trading companies from their competition – relentless focus on business efficiency in critical areas.
Ultimately, these trading, compliance, and operational challenges can only be overcome if firms have the exact same data sets across the front, middle and back-office. Currently, a huge amount of resource goes into collating data and verifying that data. Following that a substantial amount of company time goes into constructing a reliable market picture, where each company replicates the exact same process in-house. This is done based on a combination of multiple sources, raw data, company front office excel and whatever other sources they can obtain.
This means that, right now, traders at world’s largest companies are creating their own view of the market in Excel by collating data from market sources by hand. They are then using this insight to decide on how to steer energy flows and mitigate risk via financial contracts. In excess of a staggering $5tn worth of contracts’ are currently being managed in such a manner – spanning markets such as liquid energy, LNG, biofuels and many more.
This all points in one direction – that of the fabled ‘single data source’ that, in reality, every market participant would benefit from. However, this is arguably most keenly felt in this space, where energy traders need to make split-second decisions based on market data every single day, on account of the volatility that these markets experience generally. Having harmonised data ensures they are working with the most up-to-date and accurate information, enhancing their ability to make informed trading, as well as operational, risk and compliance decisions. The thing that is currently lacking in global energy trading markets for 99% of firms is a reliable source of systematic data which can be trusted and easily disseminated to all who require it – those generating the returns in the front office, those managing risk in the middle office, those managing the balance sheets in the back office, to name but a few.
As energy markets become increasingly globalised, traders, risk, and compliance officers can ill afford to rely on historical ways of working. Rapid access to verifiable, independent data that reflects the economic reality of the underlying markets they are attempting to capture is key to realise evolution in these out-dated, but rapidly developing, markets. Given how much conditions are changing, and often unexpectedly on a daily basis – getting the front, middle, and back office to sing from the same data hymn sheet must be a priority.
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