Power markets boost algorithmic trading amid changing sector dynamics

More small companies adopt algo-trading for flexibility

Players in algorithmic trading space become more diverse

83% of orders submitted on EPEX SPOT came from API apps

Algorithmic trading in European electricity markets is becoming increasingly common to meet the industry’s needs amidst rapid development of battery storage and larger renewable energy assets, market participants have told S&P Global Commodity Insights.

A year ago, when European power prices were hitting four-digit figures on the back of soaring natural gas prices, French nuclear cuts and poor hydro resource, automated trading platforms — more commonly referred as algos — became a target of blame for the unprecedented swings.

While power and gas prices have stepped down since, strong volatility persists, keeping algorithmic trading on the agenda.

“[Algos] are part of the issue for sure, and an increasing part. They bring an extra volume and speed that the traditional players have trouble absorbing, they exacerbate the moves,” a gas trader operating in Northwest Europe said, after the Dutch TTF front-month contract jumped 18% day on day recently.

Algorithmic traders mostly trade off technical signals and follow the trend, so a higher market close — especially a record high one — will act as a buy signal to them. This could bring the price to a level that is hard to justify by market fundamentals, critics argue.

New players

“We see more and more small companies trying to jump on that algo-trading train especially for flexibility… The market realised that decentralised, small assets require technology for optimisation,” said Juergen Mayerhofer, CEO and co-founder of enspired, a Vienna-based company that is fully based on algorithmic trading.

There are lots of new diverse players in the algorithmic trading space, including banks, international commodity traders, small energy start-ups and new proprietary trading shops.

There are also many renewable energy development companies — algos are often used to balance wind and solar generation — that have a growing portfolio and want to close gaps in the value chain.

“Reduced volatility in general means that earnings are reduced now, and companies are looking to diversify and improve their strategies. More sophistication and more data science is the focus,” said Helmut Spindler, CEO of PowerBot, a Vienna-based algorithmic trading platform.

In 2022, about 83% of orders submitted on EPEX SPOT’s continuous markets platform came from application programming interface (API) apps, data from the power exchange showed. Put another way, 59% of volumes traded on EPEX continuous markets came from API apps over the period.

This said, just because an order comes via the API doesn’t mean the order was created automatically, while there are other exchanges that have much less automated trading activity, Spindler said.

Taking those factors into an account, around 50% of all intra-day continuous traded power volume all over Europe could be executed via algorithms, according to Spindler.

Battery factor

One of the enablers of algo trading is the increased installation of battery storage systems, driven by the need to better integrate renewables.

“Revenue streams — especially wholesale — get more and more important for optimise complex assets, such as battery storage: front-of-meter, behind-the-meter, co-located etc.,” Mayerhofer said.

“Battery storage is the topic all over the world. How to tap into different revenue streams, get the most money out of investments, getting 10-15 years business cases done. No matter what topic a discussion starts with, it will end with energy storage,” he added.

24/7 trading

Algo trading has been focused on spot markets, while the forward market remains the domain of human traders.

According to Spindler, the technology exists to trade the curve using algos but only a small share of participants do this at present.

The reason power spot markets rely on algos — despite some criticism from human traders — is that it is a physical 24/7 market, with dozens of parallel contracts that need to be traded simultaneously just to optimize an asset, Spindler said.

Forward markets, meanwhile, tend to operate in office hours with simpler technical processes and a focus on hedging rather than physical strategies.

Whether algo trading will move deeper into the forward space is not clear, but in any case, it is only expected to expand in Europe and has now become a fundamental part of the market, especially as large new wind and solar…