When two brokers set their sights on developing power trading in illiquid European markets such as Greece, reactions from brokers, utilities and other traders in the space ranged from interest to scepticism. The resulting brokerage, Arraco Global Markets, has now been operating for more than a year and market participants say it has already improved liquidity.
Tom Roberts, a former broker at Icap, launched Arraco with his cousin William Rigby in 2016 with the aim of building liquidity in obscure European power markets. “It’s all standard futures terms and expiries, but we operate in illiquid markets,” Roberts says, referring to the brokerage’s growing presence in regions including Greece, the Czech Republic and Slovenia. To date, the firm has completed more than 3,500 trades and works with approximately 90 organisations across the European power markets. That includes major European utilities, commodity trading houses, some smaller banks and several North American fund managers that are active in European power markets.
“For the larger banks in this space, we need to have been in operation for more than a year for compliance purposes, but since the one-year mark [in March 2017], multiple banks have initiated contracts with Arraco,” Roberts says. “However, we are really going to be concentrating on growing our fund client base going forward.” Arraco has recently added a compliance officer to satisfy the regulatory requirements of these larger organisations, in addition to another broker who will concentrate on building more flow business from Hungary and the Czech Republic.
Most recently, Arraco has turned its attention to alleviating basis risk issues in the Italian power markets, particularly in relation to cross-border transactions. “The spot price in Italy is essentially an index of all of the various regions within the country,” says Roberts. “This makes it very difficult to hedge on the cross-border if you are trading with Switzerland or France, for example.” He explains that ineffective cross-border trading capabilities affected many traders in the region when nuclear power plant outages in 2016 drove power prices in France upwards, pushing up prices in other regions, such as Italy, as well.
“Because market participants were trading the whole of Italy, as opposed to that single region [bordering France], a lot of people got burnt – although others saw huge benefits at the same time,” he continues. In order to mitigate exposure to such basis risks in the future, Arraco launched a specific financial contract for the border region of Italy, which is known as Zona Nord. The contract was launched in February 2017 and allows market participants to hedge their exposure to that particular region, rather than the whole of Italy, providing power traders with greater granularity. “We have seen some activity already and we have had a lot of interest from utilities, several of whom are awaiting internal approvals to trade the contract. So we are confident this activity will continue to grow,” Roberts says.
Arraco has also developed a market in Greece. “Greek power now trades daily, with monthly, quarterly and year-ahead trading happening in the past year. This is a milestone for Greece, and for European power in general,” Roberts says. He adds that others in the market scoffed when the cousins floated the idea of setting up a brokerage to target illiquid markets such as Greece. “But with the hard work and determination of our team, here we are a year later, having expanded our activity even further.”
EU integration and beyond
Energy Risk interviewed a number of Arraco’s current clients, all of whom said that while it is not the only brokerage covering these illiquid markets, it is definitely contributing to the development of much-needed liquidity. Those clients say Arraco’s flexibility and ability to use its relationships and extensive market knowledge have helped those markets develop.
Arraco’s growing client base certainly appreciates the timing of its launch into the market, which coincides with current moves to further integrate European Union energy markets. All regions will require a tradeable wholesale market as a result of these changes, and Arraco is among the organisations that are working to boost liquidity in those regions that are currently lacking. “As the EU ‘boilerplate’ mandate for power markets approaches, the smaller, less cared-about markets need to be developed so that wholesale trading can take place,” Roberts says. “We’re willing to break the current concentration on central, more liquid markets to help develop these new markets.”
As Arraco enters its second year in business, Roberts says the growing team continues to be enthusiastic about providing “great customer service by giving our clients new markets to trade”. The brokerage is already looking towards Asia, where Roberts believes it could transfer its current business model in order to develop new gas and agricultural markets.