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Energy e-Trading Survey 2012

London, July 2012

Powering up Energy Trading

The energy market is rapidly maturing as an investment class and market structures are evolving in response - Lab49/Commodities Now Energy e-Trading Survey, 2012.


Since the middle of the last decade, rising demand for physical commodities from developing economies has provided opportunities for attractive returns. At the same time, growing participation of financial investors searching for alternatives to traditional asset classes has made commodities – and the energy sector in particular – a widely accepted investment class. As a result, commodity assets under management have grown exponentially, reaching $435 billion earlier this year according to Barclays Capital. With financial investors entering the market, the diversification and sophistication of instruments and strategies has increased dramatically. In addition, many large corporations are also taking advantage of their ‘inside view’ of the markets, venturing outside of traditional trading for hedging purposes and dabbling in trading for profit.

Since the beginning of the current financial crisis, trading of energy derivatives through organized markets has increased, with the central clearing requirement of new regulations likely to exacerbate this trend. The vast majority of energy and commodities products are expected to be cleared in future, reflecting both regulatory pressure and demand from market participants.

At the same time, commodities technology has lagged behind that of other asset classes, particularly when it comes to electronic trading. The complex and bespoke nature of energy markets, the historical lack of automation, and the emphasis on bilateral trading has meant that energy trading has long resisted electronification. Nevertheless, the growing sophistication of energy markets and regulatory trends are driving the transition to e-channels and increasing the pressure to upgrade technology. While energy technology is relatively advanced within commodities, it is still playing catch-up to the modern rates and FX portals (BARX, Autobahn and others), both in terms of richness of features and intuitiveness and ease of use.

Against this background, the Lab49 / Commodities Now Energy e-Trading Survey set out to answer key questions: is there a gap between the growing expectations of energy market participants and the capabilities of current energy platforms? What is important to users in energy e-trading platforms and would richer feature-sets compel users to shift more of their flows to e-channels? Do users of energy platforms want to see pre-trade, execution, and post-trade functionalities seen elsewhere? Do these expectations differ based on user profile and trading purposes?

Selected Highlights

Leadership Up For Grabs

There was no clear winner among existing energy platforms and the door is open wide for competition. ICE was selected by most respondents, while the second most common choice was ‘Others’ – the category which included GlobalVision, IG, and RediPLUS.

The top dealers: ICE, ICAP and GFI are clustered extremely closely reflecting the lack of a dominant player, although a closer look at trading patterns reveals a slightly better position for GFI’s EnergyMatch platform, especially in Europe. The study asked about the frequency of platform use, and on this measure, EnergyMatch gets the most responses.

Execution Features of e-Trading Platforms

Among the usual suspects for trading platforms respondents selected tight spreads and deep liquidity as the features most important to them and, at the same time, exhibiting the biggest deficiency with the users’ expectations. Interestingly, in the more mature electronic FX market, all the top player have strong fundamentals of price, latency and liquidity, and seek differentiation in other features.

Most existing energy e-trading platforms offer both electronic and voice-brokered execution and this reflects satisfactory marks given by users to the availability of price RFQs, executable streaming prices, and hybrid booking strategies.

The complex and bespoke nature of energy markets has meant that energy trading ... has long resisted electronification

Users were clearly dissatisfied with the non-availability of all energy products on a single platform in current energy e-trading offerings. This is not surprising considering that the industry is no longer dominated by the corporate hedgers and CTAs who tend to transact primarily in a single energy product. The majority of survey respondents [80%] trade multiple energy products and understandably want the convenience of trading on the same platform.

Two execution features were rated low importance – one is likely to become important, but the other probably not. First is advanced execution algo features that got low importance grades from users. This could be related to the fact that with the no deep liquidity for many energy products on energy platforms, users prefer tried and tested voice channels for executing block trades to breaking orders into smaller chunks. However, as the trading of many commodity OTC derivatives moves to swap execution facilities (SEFs) and organised trading facilities (OTFs) users may start relying more on execution algos.

Finally, the availability of other asset classes on the energy e-trading platform also received low importance rates, which could be due to the fact that 46% of respondents do not trade other asset classes. Among those who do, FX is by far the most popular choice, followed by equities and rates. These results confirm that portals should approach cross-asset capabilities cautiously and selectively.

Electronic Volume Expectations

An overwhelming majority of respondents expect the volume of energy transactions they execute electronically to go up in the next three years. Electronic execution is clearly the future and both regulations and growing familiarity with this trading channel play to the trend. As the industry switches to this channel (even on a non-exclusive basis) liquidity deepens and electronic trading enters a virtuous, self-reinforcing circle. These expectations factor in the likely mandate to trade many OTC commodity derivatives on SEFs, despite the relative complexity and variety of commodity instruments.

Importantly, the study also suggests that users’ current reluctance to move more of their trading online is the quality of existing platforms. With many institutional players entering energy as an alternative investment class the expectations of e-trading platforms are growing. Institutional users are accustomed to the sophisticated electronic trading experience available on modern Single Dealer Platforms (SDPs) for other asset classes and can be understandably disappointed with the limited experience offered by relatively new energy e-trading technology.

The study asked how much energy trading would the respondents do electronically if online energy platforms offered richer functionalities and features, and 85% of respondents would shift more of their trading to e-channel under these conditions.

The Future of Energy e-Trading Platforms

Despite significant growth in recent years, energy still has enormous unrealised potential as an asset class for both financial investors and corporates as well as producers diversifying their investment and hedging strategies. Further electronification of trading is inevitable given the maturing and standardization of the market under regulatory requirements. While the future of voice brokering is not assured in light of both Dodd-Frank and MiFID directives, overwhelming industry support for allowing voice interaction/execution in any definition of SEF or OTF makes it likely that the hybrid brokering model will survive and be the model of choice for energy e-trading platforms going forward.

The greater electronification of energy markets will speed up competition in online trading platforms. No one dominates the industry and incumbents are vulnerable to new players such as single-dealer platforms that have established themselves in other asset classes and evolve to offer energy trading.

The majority of survey respondents [80%] trade multiple energy products and understandably want the convenience of trading on the same platform

The greater acceptance of electronic trading in energy markets will naturally improve the two most common concerns among execution features of e-trading platforms: liquidity and spreads. However, the emergent leading platforms will want to go further in differentiating themselves from competitors. Among other things, they will want to offer all energy products as the composition of the energy market and its participants evolves and more and more people trade multiple products.

Finally, existing energy platforms are weak in pre-trade and post-trade functionalities. If they follow the path of platforms in other assets classes (which most believe will happen) they are likely to enhance their offerings in a number of areas. These include energy research, the availability of historical data, flexible reporting, and visibility into all the user’s trading activity – some of the improvements most often called for by users.


By Masha Filatova, Senior Strategy Consultant with Lab49 – a strategy, design and technology consulting firm that creates advanced solutions for the world’s leading investment banks, asset managers and exchanges.

To learn more about the future of electronic energy platforms and discuss the survey in more detail contact:

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