Trading

Find papers and presentations on all trading topics, or specifically on the topics of financial transmission rights, investment incentives, market "manipulation," and market liquidity. 

 

Trading

Trading

McBride Johnson, Philip. “Turf Wars - an Essay.” In, 2010.Abstract
McBride Johnson, Philip. Turf Wars" - an Essay. Distributed to the Harvard Electricity Policy Group, Fifty-Ninth Plenary Session. Cambridge, MA. May 20, 2010. 4 pages."
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Financial Transmission Rights

Transmission Risk Hedging Products: Solutions for the Market and Consequences for the TSOs.” In, 2006.Abstract

Executive Summary

In the framework of the EC Regulation 1228/2003, the goal of this background paper is to provide a description of the different market based solutions available for transmission risk hedging in congestion management. This paper presents three different transmission risk hedging products that can be offered to the market in the field of cross-border trade and congestion management. Due to various facts several price zones exist within the overall European electricity market where the demand of each zone is met in real time by the production of the respective zone and a zone specific market price is found (e.g. on the respective Power Exchange). This raises the question of how a market player wishing to buy electricity in a certain price zone and to sell it in another one can hedge the risk of a price difference emerging between those zones. This paper describes the three main kinds of transmission risk hedging products identified by ETSO: • Physical Transmission Rights (PTRs); • Financial Transmission Rights (FTRs); • Financial Contracts for Differences (CfDs); The paper also provides a first evaluation of the different solutions adopting a markets’ perspective. From a practical perspective, the implementation of forward PTRs only requires a minimum of market infrastructure and contractual arrangements. This is probably the reason for this product to be widely and successfully implemented on most European interconnections. However, Market Splitting or Coupling or co-ordinated implicit auctions would be the main prerequisite towards the implementation of marketbased FTRs and CfDs in Europe. Vice versa, in case Implicit Auctions (Market Splitting or Coupling) are introduced FTRs form a reasonable complement to those schemes for transmission hedging.

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Investment Incentives

Joskow, Paul. “Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks.” In, 2006.Abstract

Modern theoretical principles to govern the design of incentive regulation mechanisms are reviewed and discussed. General issues associated with applying these principles in practice are identified. Examples of the actual application of incentive regulation mechanisms to the regulation of prices and service quality for “unbundled” transmission and distribution networks are presented and discussed. Evidence regarding the performance of incentive regulation in practice for electric distribution and transmission networks is reviewed. Issues for future research are identified.

Brown, Ashley. “Developing Sustainable Regulatory Institutions in Developing Countries: Some Long Term Considerations for Investors.” In, 1998.Abstract
A discernible, and potentially destabilizing, irony has emerged in the pattern of infrastructure
privatizations and establishment of regulatory regimes in developing countries. Investor and
lender fears of political and regulatory risk may well be leading to risk mitigation strategies that
may, in the medium to long term, exacerbate the very risks to which investors were adverse in
the first place. While there are clearly risks besides political and regulatory matters with which
investors need to concern themselves, it is in seeking to protect themselves against those two
categories of potential problems that investors may do more harm than good to themselves and
the framework within which they operate in the long run.
The context of the irony is two fold, conceptual and historical. The conceptual aspect is the
appropriate equilibrium between investor, consumer, and public interests. The historical aspect
is the spectrum of past events within which the current wave of infrastructure privatizations are
occurring.
[...]
The first, and the most obvious, step to take is to provide a high level of service, a higher level
than had heretofore existed in the predecessor, publicly owned enterprise. One of the arguments
that proponents of privatization almost always make is that private ownership is more efficient
and more responsive to consumers than parastatal companies. It is simply foolhardy to behave in
ways that disprove those arguments. That is particularly the case where privatization has been
accompanied by reductions in staff and/or increases in rates. The private investor is well advised
to view itself as having a fiduciary obligation to increase efficiency. Merely cutting costs may be
good for the bottom line in the short run, but it is a perilous course politically and regulatorily if
it is not part of an overall program to increase efficiency in delivering a higher quality of service
to consumers. It is very difficult, if not impossible, to establish a pricing regime for newly
privatized entities that makes the subtle distinction between incentivising efficiency and
incentivising mere cost cutting. It is incumbent, therefore, on the investor to see the “big picture”
and produce a better product at lower cost rather than simply reducing its own costs regardless of
the consequences. In short, the investor needs to see the overall public interest in high quality service as being its own enlightened self interest.
 

Market "Manipulation"

Hogan, William W.Cross-product Manipulation in Electricity Markets, Microstructure Models and Asymmetric Information.” In, 2019. Publisher's VersionAbstract

Electricity market manipulation enforcement actions have moved from conventional analysis of generator market power in real-time physical markets to material allegations of sustained crossproduct price manipulation in forward financial markets. A major challenge is to develop and apply forward market analytical frameworks and models. This task is more difficult than for the real-time market. An adaptation of cross-product manipulation models from cash-settled financial markets provides an existence demonstration under uncertainty and asymmetric information. The implications of this analysis include strong empirical predictions about necessary randomized strategies that are not likely to be observed or sustainable in electricity markets. Absent these randomized strategies and other market imperfections, the means for achieving sustained forward market price manipulation remains unexplained.

Keywords: market manipulation; electricity markets; limits to arbitrage; asymmetric information

McBride Johnson, Philip. “Turf Wars - an Essay.” In, 2010.Abstract
McBride Johnson, Philip. Turf Wars" - an Essay. Distributed to the Harvard Electricity Policy Group, Fifty-Ninth Plenary Session. Cambridge, MA. May 20, 2010. 4 pages."

Market Liquidity