Mid-office apps rein in volatile variables

By Dana Bacciocco, Associate Editor

Energy trading may conjure up the image of a frenetic trading pit, but it is actually more about analytics than execution. The power market is more than a transactional pit, and energy trading has many unique variables. While vendors and trading organizations have addressed front and back office mechanics, the mid-office is demanding attention. And the electronic market will have profound effects on electricity, especially since it is not as commoditizable as the other energies have been in many respects, according to Chal Barnwell, vice president of North America operations for KWI.

“We talk about the power market as if there were one giant U.S. market. In fact there are dozens, approaching hundreds, of sub-markets. And all vary in price, one against the other and vary according to underlying fuels. Electronic trading is very likely to provide a great deal more liquidity than we’ve had in the past-it will provide a platform where people can deal in 10 or 15 different markets.”

When deregulation kicked off in 1992, details were left to states, and now there are a variety of different approaches, each at a different stage of the process. “This whole grope-athon we’re going through with deregulation, I find amusing and at the same time very aggravating. I think we’re playing dice with our electricity capabilities and I don’t know that it’s a wholesome dice game,” said Barnwell.

“It presents a very unclear investment environment to the community and we have to shift the burden of investment in the electric infrastructure from a highly regulated guaranteed return environment to a free market,” said Barnwell. “This is the underlying reason for the explosion in trading and risk management in electricity.”

KWI, a pioneer of trading and risk management systems for energy companies, recently secured more than $14 million of funding from Insight Venture Partners, a New York private equity company specializing in the information technology sector.

When asked about expansion and opportunity in North America, Barnwell explained that the North American market is very different from Europe’s-more complicated, with much greater price volatility, therefore, more opportunity to make or save. KWI will focus on their strength in risk analytics in the mid-office. The mid-office is the heart of decision support, calculations, and financial metrics that focus on measuring, monitoring and managing risk. It’s the “guts of power marketing and trading.” “It’s in the mid-office that we can afford someone the information that allows them to make a lot of money or save a lot of money,” said Barnwell.

Sense and response

“Sense and response is more and more important for business,” according to Santosh Alexander, CEO of iSpheres. Decision makers must screen and synthesize more information and attempt to execute timely decisions. Unfortunately, opportunities are often fleeting, and the really high value opportunities may occur once in a blue moon. iSpheres is also focusing on the mid-office as the analytical center for trading.

“What we’re doing is taking trading that has been typically a seat-of-the-pants operation into a very systematic approach and methodology for trading and capturing the expertise of trading organizations as they continue to trade,” said Alexander.

iSpheres developed its Energy Trading Opportunity Manager to enable energy traders to specify conditions for discovering and acting on trading opportunities in real time, by continually monitoring vast amounts of changing information and alerting traders to profitable opportunities.

The desktop application allows energy traders to express “opportunity scenarios” by combining information and indicators from spreadsheet calculations, to price and availability from electronic exchanges, to weather feeds, and internal applications and sources.

“This solution allows trading organizations to increase the profitability of books of business and reduce the number of unfavorable trade positions they may take. The new application is not a portfolio management or deal capture system, but it is in addition to and leverages those things, thus driving additional value,” he added.

By capturing the experience of a trading organization, the application mitigates the risk of traders’ hot and cold streaks, and considers the trading organization as a whole, the total profitability of the organization, and how that organization can improve trading operations systematically and analytically, thereby driving additional profitability. This is a subtle but substantial shift in the approach to trading, said Alexander.

KWI’s North America operations are headquartered in Houston. Contact KWI North America headquarters at 281-681-3301 or visit www.kwi.com. Alexander can be reached at 510-302-6700, or visit www.ispheres.com for more information.

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