Tom Mee and Benjamin Nordwick discuss the future of E/CTRM systems in commodity firms
Trading within the gas and power markets has been challenging, due to supply and demand uncertainty, prise rises and volatility. In the first quarter of 2022, European gas prices increased by around 70% in a single day on two occasions. Volatility at this magnitude is fundamentally linked to the cost of trading and the energy markets have seen record high margin calls of up to £1 billion as a result. Many commodity trading firms have now implemented additional billion-pound credit lines to manage these wild swings.
Dependence upon E/CTRM systems has increased notably due to these rises in trading activities and the increase in the variety of commodity products that are being traded. Due to this, the roles of the CRO and the CTO within these commodity trading firms have never been more aligned. We are seeing CROs champion risk related technological innovations, and as such they have a firm grip on the direction of travel.
Given the recent growth of the spot market, many believe there is a real need to create custom products for more exotic trades. “Many of these systems have robust architecture, but they are too slow for the needs of trading teams,” reports a Head of ETRM source. With Russia limiting natural gas supplies within the EU, many have turned to LNG as a result. However, LNG is a very complicated product for any E/CTRM system to compute due to the intricacies with the life cycle of LNG (liquefaction, shipping, off-loading, regas and distribution processes.)
With COP27 taking place and government regulations set upon firms to decrease traditional fossil fuel consumption, there will only be more demand from firms needing innovative and more flexible E/CTRM solutions to adhere to this directive. This, combined with current geo-political tensions, has de-railed much of the progress made within the energy markets and there is an increased pressure to identify appropriate solutions and fast.
Unfortunately, many E/CTRM vendors do not have the answer, and as a result a proportion of the larger commodities trading firms have been building their own bespoke systems to address these issues, including Vitol and Trafigura. For firms without the enterprise behind them, “buy and build” has been the route taken by customising instances of their E/CTRMs through modifying source code with Python as an example.
Increases in volatility and price within the energy markets are driving a desire to understand the impact of said volatility and any potential future implications on a firm’s portfolio.
“It’s challenging to find a E/CTRM system that is equipped with an extensive range of functionality to factor in various markets and that is cloud based,” reported one of our CRO contacts.
Firms need to respond rapidly when there’s a lot of volatility, and therefore they need flexible tools that allow them to be agile. Firms want greater insights into their risk exposure, with emphasis on how risk managers respond to extreme volatility.
For companies that have recently made the decision to move into the LNG markets, most are discovering their current E/CTRM systems lack the capabilities required to manage complex LNG/natural gas distribution supply chains. As a result, many current solutions are on the verge of becoming sub-optimal and firms are seeking innovative technologies and architectures within the cloud to gain better insight into their risk exposures and to properly understand the risks and opportunities of these new market dynamics. Many believe what is needed is a move to real-time data that will help enable event-driven methods of calculating risk.
For firms looking to implement E/CTRM technologies, the marketplace is a replication of the commodity markets at present, more challenging than ever. The E/CTRM market is in growth mode due to the continuing evolution of markets such as European Power and the inevitable upgrades of monolithic E/CTRM solutions.
Given these factors, there are new entrants taking up market share with purpose-built solutions addressing some of the challenges listed above. And for the E/CTRM vendors that have proven solutions for managing those complexities, the next year or so should prove to be lucrative.
From a talent perspective, there are increases in hiring within multi-strategy Hedge Funds, Utilities and Commodity Trading merchants. ETRM Developers, ETRM Architects, Business Analysts and Project Managers are in high demand. These individuals are prioritising the firms that are early adopters to these innovative solutions. The impact that technology is having upon and influencing commodity trading is very apparent and the rate of innovation will keep accelerating to meet the demands put upon them. To compete you need the best talent.
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