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The THE market area

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Due to a technical problem, some subscribers were sent an incorrect version of this newsletter today. Herewith you will receive the correct issue for October 2021. We apologise for the error!

The situation in the trading market for gas is getting crazier from day to day. Prices continue to soar, and the intra-day volatility is reaching dimensions never seen before. On September 15, the price for the front-month October went up during the day by 13.00 euros/MWh – only to drop again during the afternoon by 14.00 euros/MWh. Fundamentally, the tight supply is responsible for the price level and the volatility of Russian flows plus uncertainty about the start of Nord Stream 2 operations are responsible for the volatility (this is at least the short version).

I discussed the impact of algo trading on the market development with several traders. One trader told me he is absolutely certain that “new” algo trading systems used by US hedge funds are mainly responsible for the turmoil in the market. He argues that the systems were designed for much more liquid markets, like the stock market and is “too fast” for the gas market. They are mainly used for the near curve in forward trading at the energy exchange ICE. ICE dominated the forward trading for the TTF. All the other traders I spoke to confirm the increasing role of algos and also the increasing importance of hedge funds as market participants. But no second source confirmed the opinion that algo trading systems are decisive for the current market situation. They said that algos are amplifying price movements, but that the decisive factor is scarcity as well as increasing concerns about the supply situation in the coming winter.

The topic of the month is the merger of the two German market areas. Older readers may remember that after the groundbreaking amendment of the German Energy Act (EnWG) in 2005, the German gas market started in 2006 with 19 market areas (does anyone remember the two-contract-model?). After all other market areas were integrated in GASPOOL and NCG in 2011, most market participants were able to live with that situation. Thus, the merger of the two remaining market areas did not elicit much enthusiasm when the process started. In the topic of the month, we take another look at this story and want to explain what will happen in future.

TOPIC OF THE MONTH The THE market area

From October 1, gas Germany will finally be united. This means, dear readers, that when you have this edition in your hands or on your electronic desk you will already know whether the start was smooth. Torsten Frank and Sebastian Kemper, two of the managing directors of the no longer brand-new market area manager Trading Hub Europe are quite optimistic that everything will work fine from the beginning. As a side note: THE, as a company, is no longer brand new, as it already started operations on June 1 and is currently operating the two market areas.

All preparations, including all necessary IT adjustments, are finished. It will be exciting to see whether system-control trading and access to the VHP portal will work smoothly on October 1: “For the first time, system-control energy management for the whole of Germany will be organised. This is certainly something exciting”, Mr Kemper remarked. With the THE kick-off, the former GASPOOL (and now THE) dispatching team headed by Heiko Bock is responsible for the whole system-control energy trading. The system-control energy products were different in both market areas and the new product portfolio is partly still unknown for Mr Bock’s team.

Although both managing directors are confident that everything will work, they both acknowledged the complexity of the merger process: “It was a challenging time”, Mr Frank emphasised. “Fourteen instead of eight dispatchers are an organisational challenge”, Mr Kemper mentioned as one example. The new programming necessary for the IT systems for system-control energy trading was one of the other examples the two managing directors mentioned.