Never Run Out of Gas: The Benefits of Automation in Gas Trading
Electricity markets, especially intraday markets, are often in the spotlight. Over the past few years, we have witnessed price jumps and negative prices, while things have been relatively quiet for gas traders. Lately, however, this has changed dramatically.
Dutch gas futures (TTF) surged to a new European high of 97.50 Euros per MWh on October 1. On the same day, GASPOOL and NetConnect Germany merged to form the only nationwide gas trading hub in Germany. Speaking of trading, soaring prices caused natural gas traders to face massive margin calls – demands by clearing banks that counterparts deposit further cash or securities to cover mark-to-market swings, i.e. potential losses – on their positions a few days later.
Many analysts have described the current situation as a perfect storm – a combination of a new gas year, high demand for LNG, depleted European gas storage, and high demand for gas-to-power. That clearly shows that the energy transition would require reliance on gas as a transitional technology and a capacity buffer for the more volatile renewable energy sources.
Even though the current gas crunch will be over at some point and markets are bound to settle, some of the underlying causes for volatility will remain.
Algo-trading in the gas markets
Even during less volatile periods, gas markets are simply too fast, and executing trades manually is ineffective.
It’s not unusual that by the time a trader has selected an order and is about to confirm the trade, the order is no longer available because someone else – likely a machine – has snapped it up.
This is where algo-traders such as automated trading solution LGES come in. LGES is developed by Likron, which recently joined the Volue family.
In LGES, you enter your limit price, and once the most favourable order is on the market, the solution executes it with minimum latency.
The amount of time a trader has affects spread trading, too. Trading a spread often relies on the trader monitoring two market locations or products, and when a specific price difference is reached, the trader executes the trades.
This process, however, is slow and laborious and prone to errors. Since LGES monitors spreads around the clock, traders can rest assured that execution takes very little time or effort and is always reliable and within risk limits.
In addition to time pressure, traders face more challenges. One such challenge is having to potentially deal with negative P&L and/or compliance responsibilities – which only increases the pressure they are already under, essentially robbing them of the little time they have left.
Low staffing levels can only add to the pressure. By creating strategies and letting them run throughout the trading day (and night), LGES provides much-needed time relief and allows traders to focus on more complex tasks.
Often, traders can pay attention to a limited amount of information and a finite number of signals, which poses a significant risk. And even though companies and managers have risk policies in place, adopting them can be a slow process. By automating risk policy implementation, LGES offers an automatic workflow of a complete position closing (hedging).
For many companies, risk minimization currently means reducing the size of their position that may be susceptible to market swings. As a result, traders often assume the role of risk reducer. Setting up an automated process to trade out open positions is an extremely efficient method with LGES. Customer-produced position files can be read in production-tested workflows, and you can devise strategies and execute trading based on the position files.
It shouldn’t take a major market crisis to realise the benefits of automating your gas trading.