Algorithm-based trading technology, already established in financial markets, is now making its way into the world of energy trading. But uniting the requirements of trading automation with the special demands of the energy industry is no easy task. In a four-part series Wolfgang Eichberger, Co-Founder of VisoTech, shares the challenges of developing a fully automated solution for intraday power and gas trading. If you’re considering developing your own algo-trading solution, read on so you know what’s in store for you. In part one, Wolfgang gave a brief history of trading technology and how it has changed. Now, in part two, he shares one of the most challenging aspects of developing an automated energy trading solution.
Communication: the arteries of an auto-trader
Although the first task that probably comes to mind when someone thinks of an algo-trading solution is algorithm development, the biggest challenges in developing the autoTRADER have consistently related to its interfaces. As mentioned above, an automated energy trading system must communicate with a number of other systems, both internal to customer systems and external to exchanges. Each exchange (EPEX SPOT, Nord Pool, PEGAS, etc.) has its own API (application programming interface), using a variety of technologies, to read market data and execute trades.
The biggest challenges in developing the autoTRADER have consistently related not to algorithm development but to the interfaces.
Our exchange interfaces had to be 100% error-free and stable and had to pass a battery of conformance tests before go-live: the connection had to be stable and different kinds of orders placed, cancelled and changed. Sometimes multiple iterations were required to pass a single conformance test. It’s a lot of work, but once our software has passed, our customers can go live very quickly without further conformance tests.
Without a consistent, defined sequence, trading can go very wrong.
The greatest challenge we had with exchange interfaces was not in data structure or technology – there are many useable libraries available – but rather in the synchronisation of data exchange. When an order is placed on an exchange, the exchange can theoretically deliver the response in a different sequence. Without a consistent, defined sequence, trading can go very wrong. We had to correct such behaviours by building in heuristics to identify and handle transposed messages.
A never-ending story
Furthermore, each exchange interface generally has a major update every year requiring months of iterative development and testing, as well as several minor updates. Occasionally an exchange has had to make changes to an update before release, requiring further iteration. Especially when you consider reviewing documentation, communicating with exchange developers, troubleshooting and problem-solving, maintenance of exchange interfaces is a huge ongoing task. This has been the most common reason our customers have given up developing their own algo-trading solutions and decided to purchase a complete solution from us.
Maintenance of exchange interfaces is a huge ongoing task.
XBID, the European cross-border intraday trading initiative, has added another level of complexity. Originally, XBID and local products were to be available simultaneously, requiring automated trading tools to be able to decide which product to select. We had already begun work on an optimisation algorithm, when, in late March, the scheme was changed. Now, the optimisation is no longer necessary; trading will instead switch between the XBID shared order book and the local order book based on various gate opening and closing times. For us, as well as for every company with an exchange interface, this represented a completely different, but also significant challenge to be solved in a very short time. Further changes are expected as the XBID system matures and as more markets are added.
Next week in part three, Wolfgang describes the other major challenges of developing an automated energy trading solution.
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