World’s Top Exchanges Are Benefiting From Europe’s Energy Crunch
(Bloomberg) -- Gas and power traders are flocking to exchanges as energy companies seek to protect themselves from the risk of others collapsing.
With volatility climbing to record levels, the share of European gas traded on the Intercontinental Exchange Inc., the European Energy Exchange and CME Group Inc. ballooned to about 80% at the end of last year, according to data compiled by price-reporting service ICIS. That’s up from almost 50% just a year earlier and about 40% at the end of 2019.
Exchanges have been gaining ground in recent years, replacing the bilateral trades in the over-the-counter market that have long dominated European gas and power deals. As prices more than doubled last year, energy companies including RWE AG and Uniper SE restricted the number of parties with which they can trade directly in the physical market, boosting the appeal of bourses.
“We did benefit from what’s happening in the market,” said Gordon Bennett, managing director for utility markets at ICE, the main venue for European gas deals. “The share of exchange trading has been on an upward path for years. It’s had this pop; now the question is whether it comes back a bit or whether it stays there.”
Gas and power deals have traditionally been handled by brokerage firms including Marex Group, ICAP Plc and Tullett Prebon. For years, bids and offers for OTC deals were posted on Trayport, a trading platform that became so popular it lured interest from exchanges. ICE agreed to acquire the firm in 2015 and later sold it to TMX Group, operator of the Toronto Stock Exchange.
But OTC deals are now in decline. Unlike a large part of bilateral trades executed in the physical market, companies using exchanges aren’t directly exposed to their counterparts. Bourses act as the intermediary, guaranteeing all trades even if a particular company fails or defaults on deals.
Also see: Gas and Power Rally Spurs European Energy Firms to Curb Trading
In the power sector, OTC deals have been even more prevalent than in gas, but EEX says it’s now seeing a record share of bourse-cleared trades in almost all European markets. In October, German OTC power volumes tumbled 22% and jumped more than 30% on EEX, according to data from the exchange and the London Energy Brokers’ Association.
“Exchange had been slowly encroaching on brokers over the past few years but the price spike has really intensified that trend,” said Thomas Rodgers, a European gas analyst at ICIS. “A few big utilities are still trading with each other on the OTC market, while all the hedge funds and other players seem to primarily operate on the exchange.”
European gas ended 2021 with volatility at an all-time high, and the wild price swings continue this year. The region is yet to experience extreme cold like it did when the Beast from the East freeze hit the continent in 2018. If such weather appears again, volatility is likely to be even more severe.
“This level of uncertainty doesn’t seem like that’s going to end any time soon,” ICE’s Bennett said. “If there are reasons for people wanting to do more on the exchange, it doesn’t feel like those are going to go away.”
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