Online trading flexes muscle; proclaims staying power

By Jill Feblowitz, AMR Research
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Since Dec. 1, 2001, the energy business is no longer the same. That’s when Enron declared bankruptcy, and energy companies and financial institutions alike found they were exposed for hundreds of millions of dollars. The rapid decline of Enron and its commodity trading exchange, EnronOnline (EOL), has raised doubts about online trading and the viability of the EOL business model. However, recent events have shown the staying power of online trading. Both Private Trading Exchange (PTX) and Consortium Trading Exchange (CTX) models will have a future because market participants want the flexibility of dealing on more than one exchange.

EOL was the epitome of electronic trading. A PTX that integrated its back office with its trading platform, EOL stood in the middle of trades. Still, the exchange was able to develop tremendous liquidity, with notional trading volumes peaking at $4B per day.

Even as EOL closed its doors, CTXs like IntercontinentalExchange and TradeSpark have picked up the slack. ICE alone saw an increase in daily average trading of 51 percent in North American power, 37 percent in North American Gas, and 32 percent in European Gas from December 2001 to January 2002. On Jan. 9, 2002, ICE saw $4.3B in notional value traded on the exchange-equal to Enron Online at its peak-at a time when gas prices had dropped and ICE wasn’t a counterparty to each transaction. TradeSpark saw similar increases, reporting more than $40.2B in notional value in the 4Q01.

The Enron demise has not affected trading through a PTX. DynegyDirect has also seen an increased volume of trading, with $13B in notional value traded in 4Q01. The difference, though, is that DynegyDirect not only trades energy commodity, but also uses its PTX to offer customers physical products backed by its own assets.

Despite Enron, the genie will not go back into the bottle. AMR Research expects the volume of online trading to reach $2.3T by 2005.

Fully integrating the back- and mid-offices with trading exchanges can save as much as 30 to 40 percent in processing costs; however, achieving these benefits requires full integration of internal systems and external partners. For trading, this means integration that ensures data and information flow from the exchange to settlement, risk management, and delivery and, in the case of retail suppliers, from the wholesale desk to the retailer.

EOL’s downfall was the result of bad business practices, not flawed technology.

EOL’s technology platform is impressive. Enron’s bankruptcy filings provided an in-depth look into what elements came together to build this PTX. The software listed in the agreement ranged from Adobe to VeriSign.

The Enron experience will certainly bring new regulation on accounting requirements for energy trading. Changes are expected in accounting for non-cash gains, where current earnings include profits expected from future contracts and derivative instruments. Risk management vendors such as Caminus, OpenLink Financial, and Financial Engineering Associates (FEA) are seeing an upsurge in interest in analytic applications to model physical and financial risk. Energy and utility companies that have not already done so will move away from spreadsheets and toward packaged software that can provide legible and reproducible mark-to-market valuation-the calculation of the value of a position at current market rates or price.

In the end, market participants will want to trade with more than one exchange.

Even before the demise of Enron, traders took advantage of EOL and CTXs for physical and financial energy commodities. That is because traders want the flexibility of being able to trade on more than one type of exchange. Dynegy is the perfect example, having built its own PTX, DynegyDirect, while still investing in and trading on TradeSpark. This is not to say that there will not be consolidation in the future within the categories. NYMEX has already scrapped plans to open eNYMEX, an exchange for energy financial commodities, and is courting ICE. Whether the Independent Trading Exchanges (ITXs) will last is another question. Still, both CTX and PTX models will survive as wholesale competition drives commodity trading.

Feblowitz may be reached at 617-574-5229, or

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