Energy firms increase use of trade surveillance technology

Robotic process automation could be next step for trade surveillance

Growing numbers of energy firms are installing trade surveillance technology to monitor for market abuse, according to an annual energy trading and risk management software survey carried out by Energy Risk magazine.

The percentage of respondents saying their firm uses trade surveillance technology has more than doubled over the last three years of the survey to stand at 26% – up from 15% last year and 12% in 2015.

“The uptake of trade surveillance technology is definitely increasing,” says David Campbell-Montgomery, chief information officer at RWE Supply & Trading, based in Swindon, UK, who adds that his firm has been implementing such a system within the last year.

Regulation, such as the European Union’s Market Abuse Regulation (Mar) has led more firms to consider internal surveillance systems, consultants say. Mar came into force in July last year with the aim of stamping out insider trading and market manipulation across asset classes. It has a much wider application to commodities than the previous Market Abuse Directive and brought a swathe of commodity derivatives and spot markets within scope for the first time. It also requires firms to have some sort of trade monitoring in place, although it doesn’t insist on an automated system.

Gas and power market participants have also been under increased pressure to improve trade monitoring following the 2011 EU Regulation on Wholesale Energy Market Integrity and Transparency (Remit), which imposed tighter rules on conduct in the physical gas and power markets. And in the US, the Dodd-Frank Act gave the Commodity Futures Trading Commission (CFTC) stronger tools to combat market abuse. The Federal Energy Regulatory Commission (Ferc), which polices wholesale power and gas markets, also upped its anti-manipulation drive, creating a Division of Analytics and Surveillance in 2012. Over the past five years it has meted out some hefty fines, including a $435 million fine to Barclays over allegations the bank’s traders manipulated power markets in the western US from 2006 to 2008.

At the same time, regulators’ surveillance powers are growing. Mandatory trade-reporting regimes such as those under Dodd-Frank and Remit give regulators a more complete picture of the market. Despite scepticism over the quality of some of the data they receive, Remit regulators say they are already monitoring the markets for misconduct.

“I think companies are worried about getting caught by a regulator before they’ve identified a problem themselves and would rather run software internally to highlight any issues they can the­n deal with rather than the regulator being the first to know about it,” says Campbell-Montgomery. “If you can prove that you’ve got a process and controls in place, I think it will be looked on a lot more favourably than if you don’t have anything in place.”

Regulation isn’t the only driver of interest in surveillance technology. With utilities operating on thinner and thinner margins, firms need to take bigger risks and therefore need greater checks and controls in place, consultants say. Additionally, the complexity of today’s energy markets makes it harder to track things manually. “It’s very unusual now that you get a standalone desk operating in a single commodity, market or hub,” says Campbell-Montgomery. “A lot of desks are cross-commodity and may also act as a route to market for others so it’s a very complex web.”

However, implementing and maintaining surveillance technology is an expensive process and one that, today, is confined to only the largest energy firms, such as oil majors and multinational utilities, say consultants. 

Purchasing and implementing the surveillance tool is one thing, but then there are the ongoing costs of monitoring all your trades in near real-time, and having the infrastructure of people and processes in place

Lloyd Chapin, MRE Consulting

“Purchasing and implementing the surveillance tool is one thing, but then there are the ongoing costs of monitoring all your trades in near real-time, and having the infrastructure of people and processes in place,” says New York-based Lloyd Chapin, a director at Houston-based MRE Consulting. “That is a very high cost to a regional or mid-sized energy firm.”

For this reason there is likely to be a plateauing in the uptake of systems from here, consultants believe. “I think that some of these small to mid-sized firms do not see a need to put in specific technology for surveillance when they have human interventions and controls in place,” says Baris Ertan, Houston-based managing director and global trading and risk lead at consultancy Accenture. 

The business case for such a system may also be weakened for the time being by the loosening regulatory regime widely expected under the Trump administration.

“The political winds have changed and so a business case might be harder to make,” says Bill Bucy, a Houston-based director at MRE Consulting. “If I were a CIO right now I’d probably be taking a wait-and-see approach until there is more clarity on what’s going to be required.”

The biggest incentive for investment in surveillance technology would be another high-profile market abuse case, say consultants. “I think we’ll see a gradual creep up in the numbers and a spike if there is another story of fines being given out to energy firms,” says Sunilkumar Ramakrishnan, a London-based associate partner in IBM’s energy risk management division.

While the market for energy-specific surveillance technology is narrow, there are general automation technologies, such as robotic process automation (RPA), that could have an application to surveillance, say software specialists. “I think RPA technology will be applied to surveillance more and more over the next couple of years as it becomes more proven,” says Accenture’s Ertan. “There needs to be some proven use cases in this space before it takes a broader deployment,” he adds.

Once it does, he believes it will probably be used on the trading side as well. “Some trading firms are already looking into how they can take advantage of RPA technology to potentially execute trades and take advantage of arbitrage opportunities. It’s definitely on our clients’ minds.”