Autotraders – the future of intraday power trading
The increase in importance of short-term power trading in recent years is directly linked to the volatile production of renewable energies. This requires flexible marketing from market participants, but also allows for shorter term acquisitions. In light of these changes and the increased complexity, it is recommended to utilise the help of computer aided algorithms and to automate parts of trading.
The close link with dynamic renewable energies has direct impacts on the intraday market. Studies show that its volatility is around 200 times higher than that of financial markets. As a consequence, trade on the intraday market is becoming ever faster and more demanding. It has become almost impossible to keep to risk limits efficiently, without the help of additional tools.1 Decisions must be made more rapidly and market competition is growing constantly. An example of this is the development of intraday trading at Verbund AG. Until the beginning of 2012 the dispatchers managed to cover both power plant operation and intraday trading, but it subsequently became necessary to establish a dedicated team of intraday traders.2
Autotraders still underrepresented on the power market
It is therefore all the more surprising that the energy sector trails far behind comparable markets in this respect. For instance, the amount of automated natural gas and power trading was still below 10% in 2015 according to Intalus GmbH, a financial software provider. In comparison, in branches such as bond or stock trading this amount is 40 to 50%.3
According to industry experts, several market participants, such as Statkraft AS, EnBW AG or Axpo AG, already use partially automated tools, but do not entrust them with direct trading. They often use solutions which simply display the market data in a clearer form than the official EPEX SPOT trading screen, whilst some of them also make suggestions for trades to conduct. In contrast, there is now a new generation of autotraders which can trade by themselves on the exchange using conditions pre-defined by the user.
Alongside isolated in-house solutions, only two or three software developers offer fully automated autotraders which are operational. The main reason for this is the great complexity of such solutions and the resulting development effort. Other software developers who have so far missed out on the trend are beginning to carefully scour the market and starting to announce their own solutions. How long it will take until these solutions are market ready however, remains unknown.
Reservations regarding the advantages of the algorithms
Another factor holding back market participants in comparison with automated trading solutions is a phenomenon which researchers call “algorithm aversion”. This is where people tend to give human predictions preference over recommendations which can be traced back to algorithms. This is surprising as it is now possible without doubt to prove that the predictions from evidence-based algorithms are at least equal and often superior to those from their human counterparts in the vast majority of use cases.4
A recent study from the University of Pennsylvania has shown that the antipathy towards algorithms can have profound financial consequences for companies.5
Current developments on the intraday power market show that despite this widespread bias, an increasing number of agents are opening up to automated trading solutions. General interest in autotraders is high and many companies are already beginning to evaluate how much their business cases could profit from the use of automated trading solutions.
Emergence of a two-class system on the intraday market
Companies which already use fully automated trading solutions have until now almost without exception refrained from making this fact public. Many are still waiting for further development in the market. This is expected to change in the coming months given the increasing prevalence of autotraders. In view of the spread of autotraders on the financial markets, it can be assumed that software solutions for automated intraday trading on EPEX SPOT will become part of the standard repertoire of most market participants.
Experience from other markets has also shown that a two-class system could emerge. On the one hand there would be the market participants using automated trading solutions and therefore achieving the best prices on the market. On the other would be companies without such technical support. Their trading income would, not least because of the massive speed deficit, continue to decline in the future.
It is already becoming clear that automated trading solutions can provide a decisive competitive advantage. This is mainly due to the tiny latencies with which the autotraders trade large number of positions simultaneously, whilst also taking a multitude of limits and other parameters into account. Occasionally autotraders bid so quickly on amounts, that they have already been traded before they appear on the ComTrader screen. As the market volatility increases in the future due to the larger amount of renewable energies, traders will be exposed to much greater loads without technical support. It will also become increasingly difficult for human traders to filter out the most attractive offers from the mass of positions traded on the intraday market.
Autotraders are opening up new options for market participants
Autotraders are opening up new options for many market participants. Whilst many large traders operate 24 hour trading with the help of a dedicated team of intraday traders, this was not thinkable for smaller companies until now. The personnel and logistical costs for such continuous operation vastly exceed the means available to many market participants. With the help of an autotrader it is now possible for these companies to trade outside of business hours.
There is also much unused potential in day trading which can be exploited by autotraders and which in turn makes the trader’s work easier. This allows traders to observe the development of the market, recognise trends early and change or refine the strategies used by the autotrader. These strategies are, of course, one of the most important aspects for consistent success when using automated trading solutions. Countless parameters allow individual strategies to be created and subsequently optimised as much as possible with the help of a number of settings. Most companies manage various numbers and combinations of assets. In turn, this results in individual conditions, for instance power plant limitations (e.g. ramps or storage content). In combination with the gradual optimisation of the strategies, this means that most companies use highly customised strategies.
The volume weighted average price (VWAP) represents an important benchmark for the quality of transactions. The stated goal of traders is to get as close to this as possible with their own transactions or even to beat it sporadically. This goal is now considerably closer thanks to autotraders. Tests have shown that the VWAP can, for example, be beaten by up to six percent using VisoTech’s autoTRADER, depending on the market situation and the strategy used.
Fully integrated autotraders next
The majority of automated trading solutions available are special solutions which are connected to the rest of the system environment by a number of interfaces. Full integration is the next logical step in using automated trading solutions. Direct integration into the ETRM and schedule management functional areas allows the tasks before and after trading to be simplified or automated directly.
One possible scenario would be that the autotrader trades directly on the market based on the planned power plant usage administered in the system. Thus open positions can be closed at low prices and the power plant can be controlled according to the market situation. The trades made are in turn administered and evaluated in the same system. Subsequently the corresponding schedules are generated and sent based on the transactions made. It is also possible at any time to export current market price data and to use it for future forecasts or other purposes.
Good prospects for continuous short-term trading and autotraders
The forecast for the development of continuous intraday trading is very good. Thanks to the continuing spread of renewable energies, the role of short-term trading will continue to be strengthened. The growing volatility of the market means it will be increasingly necessary to trade amounts in the short term.
There is no doubt that flexibility will remain one of the most important topics in energy politics in the coming years. It is the mainstay of the legislative and regulatory efforts to achieve the energy revolution. Therefore, it can be expected that legislators will create additional incentives to further strengthen trade on the intraday market. At the same time other initiatives, such as promoting balancing group loyalty, will have positive effects. The notable intensification of trade will in turn speed up the spread of autotraders as there remains a large, mostly unused, potential for automated trading solutions. There are therefore many factors indicating that we are at the beginning of a revolution in which autotraders are changing, forming and maybe even dominating intraday trading on EPEX SPOT.
1 – Zha, Weixin, Looking for Volatility? Try Germany’s Shift to Renewable Energy (2014)
2 – flow, der VERBUND Blog, Viel Bewegung zwischen Markt und Wetter, vom 30.12.2012
3 – Zha, Weixin, Looking for Volatility?
4 – Grove et al., Clinical Versus Mechanical Prediction: A Meta-Analysis, in: Psychological Assessment 12 (April 2000), S.19-30.
5 – Dietvorst et al., Algorithm Aversion: People Erroneously Avoid Algorithms After Seeing Them Err, in: Journal of Experimental Psychology General 144 (November 2014).
Article from: VIK-Mitteilungen 5/2016, VIK; © 2016 by Verband der Industriellen Energie- und Kraftwirtschaft e.V.
You can also download the original article in German here.
Über DEN Verband der Industriellen Energie- und Kraftwirtschaft e.V.
Der VIK ist seit über 60 Jahren der Zusammenschluss industrieller und gewerblicher Energiekunden in Deutschland. Chancengleichheit im internationalen Wettbewerb durch eine wettbewerbsfähige und sichere Energieversorgung sind seine Leitmotive.
Der Verband verschafft den berechtigten Interessen der industriellen und gewerblichen Energiekunden in diesem vielschichtigen Geschehen in Brüssel, Berlin, den Bundesländern sowie bei Behörden und gegenüber der Versorgungswirtschaft Geltung.
Neben diesen VIK-Aktivitäten zur Gestaltung der energiepolitischen Rahmenbedingungen berät der VIK seine Mitglieder in allen Energiefragen. Auslegung und Anwendung geltender Regeln oder die konkrete Energiebeschaffung – der VIK berät seine Mitgliedsunternehmen bei allen damit zusammenhängenden energiewirtschaftlichen Entscheidungen.
Die VIK-Mitteilungen informieren über die breite Palette der für energieintensive Unternehmen relevanten energiepolitischen Themen. Neben den ständigen Rubriken: Preisvergleiche, Energie, Strom, Gas, Recht, Umwelt und Aus den Unternehmen wird in wechselnden Schwerpunktthemen z.B. über Themen wie Energiebeschaffung, Energieeffizienz, erneuerbare Energien, Objektnetze, Kraft-Wärme-Kopplung oder Emissionshandel berichtet. Zielgruppe der VIK-Mitteilungen sind Leser aus Industrie, Gewerbe, Energiewirtschaft, Politik, Behörden und Wissenschaft.