The Importance of Modern Technology to Minimise Risk in Energy Trading

We recently asked Adrian Bullock, CEO at Contigo, what he was seeing in terms of ETRM software in Europe. His take was that having a modern solution on a modern technology platform was paramount to being successful…..

Commodity Technology Advisory: European power and gas markets are changing rapidly. What are you seeing and what are the impacts on ETRM software?

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Adrian Bullock: The energy markets have changed rapidly over recent years, and this change looks set to continue. Organisations are going to have to be flexible and efficient in order to adapt to this change, which in-turn will allow them to benefit from new opportunities, such as large-scale power storage, that could create new trading activity. Only the fast movers will be able to take advantage of these opportunities.

However, many of the original ETRM systems, developed 15 or more years ago, are based on client-server technology and require a thick client application to be deployed on the desktop and direct database access rather than through a service layer. This architecture makes it much harder to install and upgrade new releases and makes the move to cloud based architecture very difficult.

The new style of ETRM systems that use the most modern technology are web based, which means a smaller footprint on the desktop and a much simpler process to upgrade to new releases. They provide a service layer to make integration and client access, such as through mobile apps, much easier.

It is the modern systems with smart database architectures that will be flexible, cost effective and fast enough to respond to changes in the energy market.

 

Commodity Technology Advisory: Speed is now important and having access to position in near real time is key especially as intra-day trading increases. What are some of the issues that users face around speed?

Adrian Bullock: Energy trading organisations that are using ETRM systems based on old technology, or spreadsheets, will often have to wait until the end of the day, or even the next day to get a true understanding of their exposure across the business. In my view, that’s a bit like driving a Heavy Goods Vehicle down the motorway and only looking out at the road ahead every few hours; there’s a high level of risk.

The more complex the operation is, the more risk there will be, and, while individual energy traders will know what their portfolio looks like, they will be unable to see the picture as a whole. This lack of knowledge can also make organisations become risk averse, leading to missed opportunities.

From a risk manager’s perspective, struggling with outdated systems can mean that the business is being exposed to risk far beyond what is necessary.

However, this doesn’t have to be the case. There are a small number of ETRM systems available that enable risk managers and traders to see their position and assess risk in near real-time. This information allows traders to take advantage of opportunities and helps ensure that risk is managed more effectively.

 

Commodity Technology Advisory: What about intraday trading? What is needed to support it?

Adrian Bullock: With many organisations only getting position information at the end of the day, how can they compete with others who are taking advantage of intraday trading?

In my view, only the most modern systems, that have intraday capabilities built into their core, provide a sustainable solution.

A trend we are seeing is for organisations to develop bolt-on features to their old architecture in order to satisfy the need for greater levels of granularity. However, there are many risks in doing this, and the more that are added, the higher the risk will become. One of these is the ability for these systems to deal with large volumes of data.

Systems built with a modern architecture and that make use of the latest technological developments, handle this requirement differently. With Contigo’s enTrader®, for example, the system disaggregates the trade immediately at the point of trade, so that, when there is the need to look at positions, the data is already there to view. This has enormous benefits for intraday traders who have to close positions down to the quarter hour, throughout the day.

 

Commodity Technology Advisory: What are you seeing as a result of the regulatory environment complicating things and raising costs?

Adrian Bullock: The accounting rules and regulations surrounding energy trading are becoming more complex, and back office teams with old technology systems can find it hard to meet all the requirements in the time required.

As rules change, many companies with old-style ETRM systems are likely to have to draft in expensive consultants or upgrades to deal with these changes. This is because many of the older ETRM systems use technology and architecture that simply make it difficult to update.

However, organisations can protect themselves from this risk. The new modern technology, used by ETRM systems, like enTrader®, means that they are highly flexible. As rules and regulations change, upgrades to deal them can take place in minutes, not months.

 

Commodity Technology Advisory: What advise might you offer new buyers of ETRM software?

Adrian Bullock: Businesses need to consider, not only the initial costs, but what their system is going to cost over future years. With the market and regulations changing, there will be a requirement to make changes, so organisations need to ensure that they have a system that can cope, quickly and inexpensively. With Contigo, for example, the majority of enTrader® upgrades can be done in a few hours and are provided for no additional charge, within a customer’s monthly fee.

Organisations should also be aware that there are opportunities to enter into licensing agreements, with monthly fees, rather than one-off, up-front capital expenditure purchases. This is another way that risk to the business can be managed more effectively.

Judging whether an ETRM system is based on modern technology

When it comes to selecting an ETRM supplier, or evaluating a current system, there are questions that can be asked that will help judge whether the system is based on modern technology:

  • Can the application be deployed in the cloud without the use of technologies such as Citrix?
  • Does the application provide comprehensive Application Programming Interface (API) using modern web service standards?
  • Does the application easily allow data to be imported from and exported to Excel?
  • Does the application support standard SQL reporting tools?
  • Does the application support an automated upgrade process?
  • Does the application support access from mobile devices?
  • Does the application support pre-configured market data and rules?
  • Does the application support multiple time series granularities down to 15 minute intervals?
  • Does the application maintain positions and calculate risk in real time?
  • Can the system be easily customised to meet a customer’s specific requirements without modifying the core application code?

A new generation technology ETRM system can make a substantial difference to risk management and business success. However, in a market where the latest technology is not used by all suppliers, determining how modern the technology is can be an important step for energy trading businesses.


Adrian Bullock ContigoAdrian Bullock, Contigo Managing Director

Adrian is Managing Director of Contigo and also responsible for technical strategy and product development.

He has over 20 years of commercial software development experience, using a wide range of technologies, for a variety of blue chip companies including AT&T, AXA Funds Management and E.ON UK. At E.ON UK Adrian was responsible for designing and developing systems including trading, notification, credit risk management, gas forecasting and fuel trading systems.

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