The European over-the-counter energy markets have been a tough place for interdealer brokers over the past 18 months, with regulations imposing onerous requirements. Yet Griffin Markets has flourished in the space.
In 2017, the firm – a relatively small interdealer broker in terms of headcount – became a leading player in Europe’s OTC gas and power markets, registering the highest market share of contracts traded at the Dutch Title Transfer Facility (TTF), Europe’s most liquid gas hub, according to data from the London Energy Brokers’ Association (Leba). Griffin brokered more than 25% of all OTC TTF contracts in 2017, a meteoric rise from broking less than 1% of the market in 2014, Leba data shows.
Griffin also registered as the number one physical continental gas and power broker based on the count of trades matched through the Efetnet electronic confirmation matching system, the firm says.
Established in 2011, Griffin Markets has a big emphasis on using technology to innovate, reduce trading costs, improve efficiency and reduce risk, it says. This served it well for the introduction of the second Markets in Financial Instruments Directive (Mifid II), which became live in January 2018.
Mifid II introduced stringent pre- and post-trade requirements on venue operators and put pressure on them to increase automation. Additionally, since the introduction of Mifid II, there has been a move away from exchange trading to broker bilateral trade in European Union energy markets, as corporations attempt to remain below Mifid II thresholds that would deem them a financial entity subject to onerous rules, including possibly punitive capital requirements.
“The shift from exchange to broker bilateral trading marks a shift away from trading commodity derivatives in the sense of financial instruments,” says Nick Jackson, general counsel at Griffin Markets. “Players in the energy markets – generally utility companies – are wary of being caught by [regulatory] thresholds which … might drag them into financial regulation.”
Since January 2018, Griffin has operated an organised trading facility (OTF) – a type of trading venue introduced by Mifid II. An OTF must operate with an element of discretion, which has been widely interpreted to mean the need for some human involvement before or during trade execution. This suits Griffin’s model, which is intended to marry technological prowess with human skill and integrity, the firm says. For Griffin, the trustworthiness of key people is vital.
Technology also plays a huge part. Griffin’s OTF includes proprietary technology that allows firms to overcome credit issues that might prove a barrier to trade, says Simon Davidson, chief executive at Griffin Markets. The system integrates with Trayport, the front-office technology used widely in the European OTC energy markets.
“[We offer access to] bilateral markets driven by a credit matrix,” Davidson says. “Smart interconnectivity between our systems and Trayport, along with our own market knowledge, means we are able to allow orders that would appear untradeable to appear tradeable, so a trader can aggress that order directly and then we [use our credit optimisation model to] find a counterparty on that trade.”
In a bilateral market where two counterparties are unable to trade due to credit restrictions, if counterparty A puts an order on screen, that order will be untradeable to counterparty B. Griffin uses a mechanism whereby a third party is prepared to stand in between counterparty A and counterparty B and facilitate that trade.
“Our proprietary systems allow us to make more orders tradeable,” says Davidson. “So the probability of getting filled at market is greater on our screen [than other broker screens].”
The firm’s credit optimisation service, which launched in January 2016, delivered a €750 million ($884 million) reduction in counterparty credit exposure in the direction customers requested, on the notional value of transactions in March, according to the firm. Over the past 12 months the firm claims to have delivered a total of €6.5 billion of reductions in counterparty credit exposure, in the direction customers wanted.
Building a business around that technology took a combination of market understanding, technological capabilities and first-mover advantage in seeing an opportunity and acting on it, the firm says.
Our proprietary systems allow us to make more orders tradeable. So the probability of getting filled at market is greater on our screen [than other broker screens]
Simon Davidson, Griffin Markets
When Griffin migrated to the Trayport platform in July 2014, it developed systems to interact using the Trayport read/write application programming interface, which it believes set it well ahead of any rivals.
“We invest where others try to cut costs,” says Davidson. “But actually through that investment, we have delivered significant cost savings and are able to give our brokers best-in-market tools. That drives the excellence and execution, it drives the efficiency, and it drives cost savings through lower head count and allowing people to focus on service rather than process.”
Griffin’s high level of automation means the firm has lower error rates than other brokerages, according to the three key performance indicators produced by Efetnet. In 2017 and into 2018, Griffin was most frequently ranked number one for the percentage of trades matched without error, time to submit trades and time to match trades, the firm says.
While technological innovation is a key part of Griffin’s ethos, the firm stresses it also offers a full voice-broking service that adheres to the highest standards of client confidentiality, data storage, record-keeping and client data protection.
Griffin believes it has introduced a much-needed level of competition to the market. “Customers find it refreshing that we have shaken things up,” says Davidson. “We anticipate our customers’ needs and, through strong relationships and state-of-the-art technology, we deliver solutions that improve their trading experience.”