Rapid response: energy firms count benefits of algorithmic trading

Shifts in the world’s energy economy have created a substantial demand for short-term, intelligent position management for commodity trading firms. As a result, these firms have turned to automated and algorithmic trading.

Producers are slowly moving away from conventional sources of energy, preparing for a low-carbon future. Aside from the obvious physical structural changes, the pivot toward renewables is not straightforward. For finance and risk managers at large-scale commodity trading houses, the unpredictable nature of renewable output makes hedging and speculative trading solutions far more difficult to assess and quantify.

Navigating market volatility

Getting in and out of positions in a volatile market is quickly growing in importance for energy trading houses, and with that comes a host of risks. When the pressure is on, the risk of a mistake or hurried decision brings its obvious hazards. That is why many have turned to automated processes and are recognizing the benefits of algorithmic trading. Some market participants estimate that as much as 20 percent of the intraday gas and power market is automated, representing a significant growth in algorithmic trading.

It is not difficult to see why. The pressure is on for trading houses to seek out arbitrage on an intraday basis, and algorithmic trading offers the speed and accuracy human traders would struggle to maintain — with the emotional element of executing a trade entirely removed and risk assessments produced far more quickly.

The algorithmic advantage

One of the greatest benefits of algorithmic trading, however, is in its scope and intelligence. Algorithms search for and can spot changes and trends in a multitude of different markets concurrently, and the growing need to build energy economies on regional as well as international interdependencies plays well into that narrative. In recent years, market surveillance has become a growing regulatory concern, and algorithmic trading systems, in concert with energy trading and risk management (ETRM) solutions, allow market participants to better monitor and control positions. From a business perspective alone, the technology allows firms to observe trading activities and investment patterns with incredible levels of accuracy.

The systems available to market participants are highly advanced, allowing them to deal with those complexities and rely on the volume of data required to make a success of algorithmic trading. For example, partnering the right ETRM solution with intraday trading and power and gas scheduling solutions offers unparalleled forecasting, trade information management and balance settlement tools within the intraday trading market. Thereby, making algorithmic-based trading a reality for energy market participants with even the most complex requirements.