TT Connects with Tim Greenwood, Managing Director Exchange and Director Sales at EEX
European energy markets are attracting a new generation of algorithmic traders as financial firms move into power, while established energy companies change how they trade. For EEX, the shift is creating a virtuous circle of rising volumes and liquidity. We spoke with Tim Greenwood, Managing Director Exchange and Director Sales at EEX, about why power markets are attracting new market participants, how they are changing the market and what is next for power markets.
How has the makeup of participants in European power and gas markets changed in recent years, and what timeframe are we talking about?
Over the last few years, we have seen a significant influx of algorithmic traders into our power markets. This comprises two different groups of market participants. The first are established physical energy companies that have always been in these markets but have evolved their trading strategies to incorporate algorithmic trading. The second are financial firms that are starting to trade energy. These two types of company bring very different types of algo activity.
How has this growth in algorithmic trading changed the market?
The clearest indicator for us is the messaging volumes on our futures markets. Over the past two to three years, the TT Caverage number of daily messages grew exponentially, increasing by a factor of around 40x. That is a massive change, and it has been driven primarily by the financial trading firms coming to the market.
What factors have led these companies to look at energy markets? Was it the volatility of 2022, or are there broader structural forces at play?
The volatility in European energy markets following Russia’s invasion of Ukraine in 2022 certainly played a role, but the broader picture is more structural. It’s important to highlight that power markets have always been seen as exotic and complex by firms outside the market. For example, even in Europe, there is not just one power market but a whole host of regional markets, each with different fundamentals.
Our markets have a wide variety of contract structures as well, from long-dated forward contracts all the way down to 15-minute intraday contracts. These differences made power markets feel overly complex for many financial firms.
However, financial trading firms now have traders who know these markets and have taken the time to understand the nuances and how to create opportunities. As the early pioneers moved in, others followed. These markets are also attractive because they have significantly lower correlation with traditional asset classes. When returns in their core markets become harder to replicate, firms start looking elsewhere. Power markets offer something genuinely different.
Power spot seems to be at the end of that adoption curve. Why is that?
They are definitely more complex. Power and gas spot are not only 24/7 markets, but their volatility profiles are also very different. For example, a power contract could be worth several thousand euros and a couple of hours later be deeply negative. The nominal contract sizes in spot are smaller than in futures, which means firms need to do more trades in smaller blocks to build meaningful exposure.
For these reasons, the typical path to spot trading is to first establish a presence in the more liquid, less volatile futures contracts. Then, once comfortable with those products, participants move into less liquid products, shorter maturities and eventually to spot markets.
How has the liquidity profile of these markets changed as new participants arrive?
The liquidity profile has changed significantly. The sheer volume of messages shows how much the order book is moving compared to a few years ago. But there is still a minimum level of liquidity that financial algo firms need in order to operate. In European power markets, high liquidity levels can be only seen in the major markets, such as Germany, France and perhaps Italy at the moment.
In addition, a lot of European power and gas markets remain OTC-dominant. If a market has 80 to 90 percent of its volume traded OTC, it is very difficult for an algo firm to get a foothold. In the Spanish market, for example, only around 20 percent of the volume is traded in the order-book. In the US, OTC dominance is even more pronounced, which is why financial algo firms have found it harder to establish themselves there.
What is the significance of TT’s connectivity to EEX markets?
TT connecting into our gas spot markets is a very important development for us and means the TT client base will have access to this market segment as it develops. TT makes these markets tradable by its customer base, a significant number of whom are exactly the kind of financial firms we have been discussing.
TT is also particularly relevant for the Nordic markets, where a lot of participants already use TT to trade. The integration of EEX prices into TT screens means that traders can see the full price formation across venues so they can ensure they are getting the best price.
To learn more about trading power and gas markets on TT, contact us today.