Over the past few years we have spoken to a broad range of traders in the OTC energy trading space to inform our product development at Tallarium. Across the more than 200 traders we engaged with, we saw one consistent challenge emerging time and time again: getting a view of the forward curve for a wide number of benchmarks.
As markets become more volatile and trading becomes more sporadic in response to macroeconomic news, there are major benefits to having fast and constant access to markets’ forward pricing. Such information arms a trader with the means to take advantage of trading opportunities and eliminate risk – whether that’s by better understanding market fundamentals, evaluating alternative, cheaper supply sources, or enhancing their hedging strategy.
Unlike markets that trade on an exchange however, there is no standardised and centralised platform in OTC markets where traders can easily discover all the necessary forward curves to inform trading decisions. To construct a good view of all the required forward curves currently, traders tend to do the following:
- Copy and paste prices from broker end-of-day sheets in the morning and follow-up for price runs throughout the day to fine-tune their curves.
- Manually tracking incoming quotes from brokers via voice and various chat apps and pasting those into Excel, which is a cumbersome and time consuming process.
Aside from the above method being labour intensive, it has limitations with providing a truly accurate and objective picture of the market. It is also extremely difficult to properly manage the volume of broker pricing – even when dealing with just a handful of brokers, it often still means a lot of valuable pricing information.
Furthermore, liquidity can be sporadic and constrained during certain market periods (see Figure 1). In these instances, traders have to ‘guesstimate’ curves based on available pieces of pricing data in adjacent markets or exchange quotes.
Some products only have 10% total volumes traded on-exchange (e.g. Ebob gasoline and Nap NWE crack). It’s clear that exchange data won’t do much to solve the problem of forward price visibility in such markets.
If you’re trading markets that are totally off-exchange, you are therefore left to rely on multiple broker quotes to manually recreate a view of the forward market. This means traders need to be actively trading a market to get a decent view of where “value” is within it, and they have to trust that those broker quotes represent large enough of a sample to be truly representative.
Translating these quotes into a market view is still a labour-intensive process which becomes especially strained in volatile markets, no matter which way you cut the current methods.
This challenge has been one of the key drivers that has informed our product development. We see it as a key problem for traders and trading firms in OTC energy markets, and believe it will continue to constrain traders until it is finally solved.
By providing a view of forward curves in the OTC energy space we enable companies to capture more trading opportunities and arm them with strategic insights, whilst preserving their efforts for higher-value activities.