No technology, no sympathy

Participants in the energy trading markets face an increasingly difficult surveillance challenge. Regulators complain that they receive far fewer reports of suspicious activity from market participants than they would expect, and so believe that there is a problem with detection. The energy markets have become more complex, especially with the evolution of algorithmic trading, and so more difficult to surveil. And technology is not keeping up.

No off-the-shelf solutions exist that have been designed from the ground up for the energy and power markets specifically. One European exchange spoken to by 1LoD recently explained that it was so difficult to customise systems designed for financial markets to energy that they had built their system from scratch and were still refining it:

“We looked into buying off the shelf products, but we concluded that they're not a good fit for our markets. For example, they focus on continuous trading while we see the largest risk are really in the auction-type markets; we have things like transmission constraints which have no analogy in the financial markets, and rules specific to particular types of market participant are also difficult to implement in off-the-shelf systems. So, we felt there is too much tailoring needed if you buy off-the-shelf and it is too hard to adapt them continuously – which is what is needed.”

This leaves participants struggling to comply as rules tighten up, and regulators are unlikely to provide much leeway. One key European body told 1LoD, “Yes, it is difficult [to customise off-the-shelf systems] because they are not designed for these markets. Do I have sympathy with that? No, not a lot, especially if we feel that a bank or a broker or energy firm should have seen manipulation that we have seen ourselves, or that one of the other firms has seen and, and have sent a STOR to us. Our message generally is, ‘get your act together and, and make sure that we have orderly markets.’”

As the current turmoil in energy markets continues and the possibility of government intervention in prices rises, surveillance is only to get more difficult. Without the technology to do it well, participants face an uphill struggle to stay in the regulators’ good books.

Have a look at our Energy Trading Surveillance Deep Dive to find our what can be done.