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January 1, 2010

Addressing the Intraday Trading Position Conundrum

By Edward Cuoco and Victor Milligan

It’s no surprise that business pressures can increase the value of optimized trading for energy companies. Specifically, lower commodity prices and more competition in energy markets have put pressure on profits and margins, which, in turn, increase the importance of fast and accurate risk reporting.
 
Internally, faster reporting and optimization cycles are required to in order to maintain a competitive position. Simultaneously, position reporting must maintain a high level of granularity, as regulators and auditors seek balance at 60-, 30-, and sometimes even 15-minute intervals.
 
While organizations continue to move toward intraday position reporting, the breadth of detailed data and the frequent time increments in which they are provided are not adequately leveraged through the normal risk reporting process. Consequently, data end up as part of manual portfolio optimization that occurs daily, weekly, or even less frequently.

It is possible, however, to enhance risk reporting with tools found in other industries, allowing for faster integration of detailed supply and demand data. Those companies that look outside of traditional trading tools will be able to rapidly assess, evaluate, and react to this critical data and put themselves in a stronger position to make more timely and informed decisions about future trades and contracts.
 
The value of integrating supply and demand data at intraday increments to intraday risk reporting lies in reduced risk in the portfolio, lower fines, and/or penalties for being out of balance and, ultimately, in the improved optimization of trading strategy (and by extension, a more competitive advantage in the market). Operationally, integrated data improves a firm’s ability to adapt trading strategies to account for unexpected supply changes more quickly. Furthermore, timelier accounting for supply and demand data will reduce the risk of short- and long-term contracts and provide improved insight into counterparty and contract profitability.

Few organizations are actually using either supply or demand generation data on an intraday basis, despite the obvious benefits. Processes for position reporting are organized around intraday schedules, but supply and demand data are often unaccounted for in these processes.  In each case, trading desks are forced to perform a “true up” by means of manual reconciliation of the data to position reporting days or weeks after the fact, sacrificing margin or even moving from profit to loss due to “unexpected” changes.

Therefore, the choice facing trading organizations today is between an analytic capability that allows one to look backward and report what happened, and a capability that allows an organization to understand what is happening as it happens and adapt and react to it in real time.