Enter the pit and start shouting. That’s what trading on a traditional trading floor looks like to outsiders. And that’s essentially what happens. It’s the so-called “open outcry” method of trading, which had no alternative up to the early 1970s. Today, however, not only is most trading done electronically, it is in fact possible to reduce human involvement to a minimum. Exit the trading pits and let algorithmic trading take over.
If you have read one of our earlier blog posts about how to monetize your flexibility, you will be well aware that entering the continuous intraday market, in particular, is a huge commitment: you need to implement algo-trading and everything - data, interfaces, infrastructure - that goes with it, not to mention the hurdles concerning 24/7 trading and market access. But we’re here to make it easier and more efficient for you by ensuring that the most lucrative options are available to you on intraday markets, as well as by supporting day-ahead markets. We recommend that you trade on both, and will explain why below.
Trading short term
Companies that decide to try their luck in short-term trading tend to start out on day-ahead markets, where power is traded for all delivery periods during the following day. The lead times, however, are relatively long, and fluctuations in supply and/or demand can occur, which stops companies from making the most of their flexibility. Still, trading at day-ahead auctions can help you earn a profit as long as your trading activities are efficient - our technology, which relies on the real-time integration of data and self-learning trading strategies, can ensure that they are.
Many companies decide to steer clear of intraday trading as it involves some risk, caused mostly by volatility. Despite it being potentially lucrative, you can only really expect to capture profits systematically if you use algorithmic trading, which enables you to immediately react to ever-changing market developments. Without algo-trading, it is nearly impossible to stay competitive, but the technology is complex and costly to implement, which puts many companies off. Even so, more and more traders are using it: 55% of total volume traded on the European power exchange EPEX SPOT in 2021 was automated, while Europe’s other leading power market Nord Pool reported nearly 60% for 2020 - the figures for 2021 have yet to be released, but they will presumably be higher.
Trading around the clock
Once you have plucked up the courage to trade on day-ahead markets, there is no reason to stop there. As Katharina Niciejewska, Key Account Manager at EPEX SPOT, pointed out in our recent webinar, “Short-term markets play a key role when it comes to the energy crisis. Ultimately, what they do is organize the dispatch resources that are needed to meet the load at minimum cost.” The long-term prognosis for energy prices is unclear; hopefully, they will stabilize soon, but a repeat of the current price spikes is certainly possible in the future. This makes expanding your short-term trading an even wiser choice.
Granted, moving into a continuous intraday market can be challenging since intraday trading is more complex. Due to lead times measured in minutes, however, it’s also much more efficient and - with market forces driving prices for each individual delivery period - more dynamic. In addition, it has high liquidity as well as high volatility, which, with the help of smart algorithms, provides great opportunities for higher profit, too. Additionally, certain barriers to entry are low, and if you trade through a service provider like enspired, there are virtually no barriers.
We can help you move into the intraday market and take care of all the aspects surrounding market access, software, and data. By optimizing your assets, you can expect higher margins and an increase in profitability. And since algorithms can trade around the clock, you don’t need to staff a trading desk, plus our experts will keep your algos tuned and up to date.Learn more about trading the enspired way.
Mastering both markets
As we explained above, there are differences between the day-ahead and intraday markets. At the same time, they also complement each other, and we recommend that you combine them to take advantage of the opportunities each one offers and the liquidity that comes with trading on it.
In stormy weather conditions, for instance, a wind power trader would not sell all of its production forecast on the day-ahead market, for fear of cut-offs caused by the high winds. Trading the total volume on day-ahead markets could easily mean having to buy back large amounts of the power already traded, probably at higher prices. Instead, it is likely to sell a smaller quantity on day-ahead markets and the additional volumes on intraday markets where production forecasts are more precise.
Another example of trading on both markets is that of a flexible conventional power plant that tries to sell its power in the day-ahead auction for the marginal price of its production costs. If the auction price is below the marginal costs, it’s not worth turning the power plant on. But if during the day the renewable production for wind and solar energy stays below what was originally forecast, and intraday prices rise above the auction prices and the marginal costs, the operators will probably decide to turn on the plant and sell the power on the intraday market.
These two examples show that trading on both day-ahead and continuous intraday markets can help you maximize the potential of your assets - and we are here to help you every step of the way. Schedule a non-binding call today to learn more.