Up to now, natural gas has been traded manually and only a few market participants are taking advantage of automating their short-term trading activities. With the growth of algorithmic intraday power trading, the commodity gas has now entered the focus of innovative trading houses and suppliers. Algorithms enable the automated monitoring of markets and can execute trading strategies reliably, securely and quickly.
The considerable growth in trading volumes in the intraday electricity markets and gas spot markets reflects the market’s need for short-term flexibility. While in the electricity market high complexity, volatility and speed is causing manual trading to gradually give way to algorithms, in short-term gas markets algorithms are mostly used only for specific opportunities. Innovative companies are able to free their traders from routine processes and thus establish the necessary focus and freedom to implement new trading strategies. In the field of intraday electricity trading, some companies have already successfully completed the transformation to digital short-term trading.
Accelerating the natural gas market
Short-term gas trading differs in many ways from intraday electricity trading (Table 1). Electricity products are simple and have clearly defined delivery times, whereas for certain gas products, the delivery period may depend on the time of trading and the volume traded is delivered in the remaining hours of the current trading day. The number of different products in gas trading is manageable, the lead times are longer and the speed still sustainable with manual processes – but whoever now thinks that gas trade is easier to accomplish is quite wrong.
Most products depend on time of trade: Within Day, Day Ahead, Weekend, Saturday, Sunday
Extremely short lead times:
Much longer lead times:
Basic market area structure:
Complex market area structure, e.g. NCG H-Gas, NCG VTP with capacity restrictions
API offered directly from the exchange
Additional contract with trading system provider Trayport required
High liquidity in most price zones:
Table 1: The many differences between power and gas trading
Due to the geographical distance between production and consumption, the natural gas market is complex and cross-border business is a natural part of trade. In the electricity market, on the other hand, trading capacities for many markets are now implicitly available via the intraday system “XBID”. Over the past few decades, various regulations have attempted to harmonise the European gas markets. However, a look at individual trading points and their physical settlement shows how inconsistent the gas market is compared to electricity. Special features such as within-day auctions in Austria, contracts in MWh / day in France, different gas qualities in Germany or dependencies between physical and virtual trading point are just some of the specialties that must be accounted for in algorithmic trading. In addition, the OTC market plays an important role in short-term gas trading and must therefore be supported by algorithms. Last but not least, the gas market has lower liquidity and much lower volatility than the electricity market.
Success in the new world of algo-trading depends on the knowledge of the trader. The new currencies of energy trading are data and know-how.
For these reasons natural gas trading is largely still a manual process, and up to now there has been little need for automation. The lower volatility might mead some to think that a shorter reaction time is not so important. But precisely because the prices normally remain so stable, the ability to react quickly to fluctuations or arbitrage possibilities is a major advantage. The gas market is also subject to changes in production, transport or demand that result in dramatic short-term price fluctuations. When a good opportunity comes along, it will be snapped up by whoever can react fastest. A gas trader could literally miss a good deal during a coffee break, and then wait hours or days for the next opportunity.
In today’s digital world, a fully automated trading algorithm will always be faster than manual trading. Furthermore, an algorithm can trade 24×7, exploiting market opportunities overnight without the need for a costly night shift. But trading automation does not mean that traders are no longer needed. Just the opposite: experienced traders are in demand today more than ever. Because who will design these systems? An algorithm is at most as intelligent as its creator. Success in the new world of algo-trading depends on the knowledge of the trader. The new currencies of energy trading are data and know-how.
Optimising assets and responding to the unexpected
Automated trading of natural gas considers the critical factors of storage and, transport capacity, as well as the current market situation. Furthermore, it accounts for external factors such as weather that influence demand. In this way, it enables optimal response to changes in all types of market conditions. The advantages are quite clear for three specific use cases:
Marketing storage flexibility: Free storage capacity can be used to generate additional profits (Fig. 1) and increase profitability of the asset. Depending on the portfolio situation, technical restrictions and current storage value, profits can be gained from the marketing of existing working gas or even short-term time spreads. With sufficient transmission capacity, flexibility can also be offered in multiple markets, increasing the complexity of the trading strategy.
Optimising transmission capacity: The optimal use of available transport capacities takes place with location spreads: Gas is purchased in the lower priced market and sold in a connected market at a higher price. Algorithms are predestined for this task, since arbitrage opportunities can be monitored around the clock and executed fully automatically. In this way, regional differences in supply and demand can be optimally exploited.
Position closing: Changes in supply or demand are two examples that require an immediate response. If the weather changes unexpectedly in one location, demand may exceed the forecast. Gas would have to be transported quickly to the affected area to meet actual demand. If a technical failure causes production in one location to slow down or to stop altogether, gas from other areas would have to be brought to the place of need. An algo-trader always closes the open position at the best price, even if it appears at short notice.
Traders stay in complete control of trading activities. They don’t need to be there every moment to manually trigger a trade.
With a fully automated trading solution, trading algorithms monitor changing market conditions and handle the actual trading day and night. They can respond instantly to favourable prices and other factors. These algorithms take into account the unique constraints and requirements of power and gas markets, based on many years of industry experience. Traders can focus on the bigger picture: keeping an overview of their portfolios. They can adjust various parameters and limits and evaluate, select and even alter strategies, staying in complete control of trading activities. They don’t need to be there every moment to manually trigger a trade. These capabilities currently provide a competitive edge, allowing more digitalised companies to make smart use of their resources and snap up deals before the competition. However, as the power industry is already experiencing, when adoption reaches critical mass automated algo-trading will eventually become a necessary tool in the gas industry as well.
PEGAS: gateway to Europe’s natural gas market
Any natural gas trading platform must include an interface to PEGAS, the major platform for European gas trading connecting 12 hubs (Fig. 2) across the continent. With the “greening” of the energy sector, trading of natural gas is becoming increasingly important. As the cleanest fossil fuel as well as the most flexible and most responsive to peaks and shortages, it provides a strong complement to intermittent renewable energy sources. A look at PEGAS trading volumes (Fig 3) makes this clear; in 2017 PEGAS handled 826 TWh in spot trades. This represents an increase of 25% over the previous year as well as a compound annual growth rate (CAGR) of 40% since 2013.
The first automated gas trading solution
According to PEGAS operator Powernext, currently only one standard solution is available on the market for fully automated gas trading. The Periotheus autoTRADER from Austrian software company VisoTech supports spot trading of natural gas on PEGAS as well as electricity on major European exchanges such as EPEX SPOT and Nord Pool. As part of the company’s Periotheus Suite, the solution can be fully integrated with scheduling and balancing for seamless, efficient digitalisation of the entire business process.
The autoTRADER, already well established in the power industry, has been selected by a leading company in the Austrian gas market as a key part of their innovation and digitalisation efforts. With the innovative solution, companies can manage and visualise trading, and advanced customers can even develop their own trading algorithms.
Most importantly, fully automated trading gives players in the natural gas market the ability to keep up with the accelerating pace of change in their field, remaining competitive even as the market becomes more challenging and goes increasingly digital.
Given the rapid increase in intraday trading volumes, natural gas companies are considering algo-trading to gain a competitive advantage. In doing so, they must ensure that their automated trading solution is able to cope with the particular complexities of the natural gas market and to keep pace with the accelerating pace of change. The reward for the well-executed digitalisation of trading is the ability to instantly respond to market events, day or night, without the added expense of a night shift. Businesses can leverage arbitrage opportunities and assets such as storage and transportation capabilities to squeeze every penny and ensure the highest margins possible.
Article published in: e|m|w Issue 4|2018, August 1, 2018; © 2018 energate gmbh.
You can download the original article (in German) in PDF format.
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