US Coal House of the Year: Evolution Markets

In line with commodities markets in general, coal prices have been volatile over the past year, prompting more players to use hedging tools to curb their exposure to fluctuations in price. Evolution Markets capitalised on this activity by launching EvoScreen last year, in a bid to consolidate market information and aid price discovery for coal trading clients across North America.

Evolution Markets capitalised on this activity by launching EvoScreen in October 2009. An electronic screen for over-the-counter coal trading, the aim behind EvoScreen was to consolidate market information and aid price discovery for coal trading clients in the North American markets. Evolution’s client base – which includes producers, utilities, energy traders, banks and hedge funds – can transact more than 100 coal products on the platform, in addition to some products in the environmental space.

“This gives the market the ability to choose any reasonably liquid, domestic US coal product and spread it against any other, or show outright markets or options markets on any products in the domestic US,” says Steve Nesis, managing director and head of Evolution Markets’ coal desk. “We wanted to provide a screen on which everything could be traded or at least viewed and I think that the number of products available puts EvoScreen far above any competing screens out there. Clients have the ability to see where all of the domestic US products are trading, not just the three or four more active contracts.”

The platform facilitates bilateral and cleared transactions and offers additional features to help users manage credit risk by allowing definition of risk parameters for any trades completed via the screen. Traders can also customise the screen, for example by including spot crude or natural gas prices. In addition, access is also available via a home computer or through an iPhone application called Tap & Trade, offered by its technology partner TradeCapture OTC.

The major aim in developing EvoScreen was to provide more options for trading the market and so Evolution’s clients can use it by itself or can choose to combine the screen with the company’s voice brokerage services. “I think the coal market does still prefer the hybrid or voice brokerage/electronic model. There still is a lot of information that people need and want via voice,” Nesis says. “While some people are comfortable executing on the screen, other people want us to do it for them. It all depends on the type of trader you are – every trader is different.”

Coal prices rose by 7% in 2009, according to the US Energy Information Administration, and they are set to fall by 3% in 2010. Nesis points out that such volatility has increased the need for financial hedging by many physical participants. “We’ve found that more organisations want to hedge either production or some of the direct deals they have put together. In general, people are much more eager to use hedging tools such as options and financial swaps, as well as cleared products,” says Nesis.

This increased activity has also combined with greater activity in European markets by Evolution over the past year to make for a busy year for the coal trading desk. “We’ve found that when the European market closes at around noon, some of the activity in the Newcastle and the API 2 and API 4 contracts, for example, has come across the pond, which is a big change from a year ago,” he says, reasoning that improved communications between the different regional offices of global coal trading businesses is behind this trend.

“The trading positions they have are forwarded to the domestic offices in the US so they can continue the strategies while the European market sleeps, so to speak,” Nesis explains.
Strengthening the connections between various regional markets should boost trading activity and liquidity levels, something that Evolution has also tried to encourage with the development of EvoScreen. According to Nesis, all the major players in the market currently use the screen to some degree and he believes that as the platform continues to evolve thanks to the addition of new features, users will incorporate it further into their day-to-day coal trading activity.