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New era of algorithmic trading

Dmitrii Ishutin, Quantitative Analyst at Brady Technologies ( explains why we can expect a new era of algorithmic energy trading in Great Britain.

“As volatility and complexity increase in European energy markets due to the rising prominence of renewable energy, traditional manual trading – although good at times – is currently not enough to capitalise on the new ‘wave’ of opportunities available and we are now seeing the rise of automated and algorithmic trading on the energy markets in continental Europe, the Nordic countries and Great Britain.”

“A typical day of a typical energy trader looked quite repetitive five years ago: arrive into the office, take over from the previous shift, submit day-ahead volume nominations, manually optimize assets for the rest of the day via internal and external trading, try not to leave too much volume into imbalance.  An experienced trader could complete such activities manually, based on their judgment – and still have time left for three or four cups of tea during a 12-hour shift.”

“However, the renewable generation has brought in an extra dimension – intermittency.  Unlike gas or coal generation that could be made available at a flick of a switch, renewable energy is heavily dependent on weather.  For context, day-ahead temperature and wind speed forecasts are on average wrong 8% and 9% respectively.  As renewable generation is unreliable and difficult to predict, its gradually increasing share in the energy mix led to higher price volatility and challenges when balancing.”

“As a result, the energy market became more complex, the number of tradeable intraday products grew, settlement periods became shorter (from 60 minutes down to 15 minutes in some European countries) and intraday wholesale prices became more volatile.  Negative imbalance prices – a strange, yet real phenomenon when a trader has to pay to sell (generate) electricity, and is being paid to buy (consume) electricity – have become the new norm.”

“This means that today, a trader typically has to optimize 48 or 96 periods instead of 24, seek arbitrage opportunities, beat Volume Weighted Average Price, predict Net Imbalance Volume and decide how much volume to leave for imbalance, optimize charge-discharge strategies for batteries and ancillary services – and, if they are lucky, find time to brew that one cup of tea per a 12-hour shift.”

“This has given rise to algorithmic trading as more and more trading companies start to adopt automated processes to analyse price patterns, predict price direction and act on it. Moving average crossover, mean reversion, convergence-divergence, relative strength index, etc. – these and many other strategies have found their application in financial markets, and likewise can be applied to the energy markets too.  However, since energy contracts are non-rollable with multiple expiration times per day, a trader needs to understand the industry context before modelling such data.”

“In volatile markets, first come first served is the dominant principle.  With 48 products to balance simultaneously, a human trader simply does not have the attention span required to spot such opportunities.  Likewise, traders need to be able to find and act on mispriced opportunities quickly.  Many traders must calculate clean and dark spark spreads manually several times a day to derive the implied spread and implied fair value in periods of low liquidity.  Being distracted in this, they may miss rare mispriced “easy money” opportunities, especially when trading multiple products at the same time.”

“Trading asset optionality.  Akin in the stock market, each power generation asset can be treated like an option with its strike, premium, calls and puts.  Options are complex instruments.  An algo can help a trader simplify option trading strategies and calculate the probability of success of different outcomes to mitigate risks.”

“More risk usually implies higher potential reward – or higher losses.  In such a rapidly changing context of the energy market, a trader will likely benefit from a solution that may help them navigate through volatility.  Reliable trading software that provides algorithmic trading capability – like Brady PowerDesk – could become a viable go-to option.”

Full blog can be found at
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