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    Q&A with Opportune Partners Don Jefferis and Marty Makulski

    Q. We tend to think of the heyday of energy trading as the late ‘90s and early 2000's – before the Enron crash. Is it true that more energy trading is taking place today than ever before?

    A. Yes, and for a variety of reasons. Market participants and traders are attracted to price volatility, and with the highly publicized run-up in Crude Oil prices in 2008, we have witnessed energy commodities emerge as an attractive asset class to a whole new breed of investors. As a result, the concentration of trading that we witnessed with Enron is now dispersed with a far more companies engaged in energy trading. Technology has also played a role in allowing for greater trading volumes. The NYMEX merger with the CME has migrated the futures market to be traded electronically, eliminating what had been a barrier to price discovery and providing for greater ease in trading execution.

    Q. Approximately what percentage of energy trading today is physical trading versus financial (paper) trading? Is there a difference in the type of systems required for each type of trading activity?

    A. The volume of physical trading still outnumbers that of financial (derivative) trading, although the gap between the two is narrowing. From a systems perspective, transaction management of a derivative is far simpler than the requirements brought on by physical trading activities. With multiple modes of transportation and storage, the physical characteristics of a commodity creates significant complexity for a system. Given the breadth of requirements driven by physical trading, it is often a challenge to find a single software vendor that delivers both transaction management (deal lifecycle) and risk management capabilities across multiple commodities and geographies.

    Q. Do some energy traders still use spreadsheets or have most switched over to commercial software?

    A. It is no secret that spreadsheets are hands-down the most pervasive technology on an energy trading floor today. In decades gone by, we envisioned a day where spreadsheets would no longer exist but with the benefit of two decades in the business and seeing how this industry continues to innovate financial and physical products – coupled with the complexity of evolving systems – it is difficult now to foreshadow spreadsheets vaporizing from energy trading floors in our lifetime. So, the challenge becomes how to create a work environment of well-behaved spreadsheets synchronized with the firm's ETRM system rather than "replacing" spreadsheets. With the few exceptions for custom developed systems, all energy traders use some form of commercial ETRM software.

    Q. Have risk management systems become significantly more sophisticated in recent years?

     Don Jefferis and Marty Makulski jointly run Opportune's process and technology practice.

    A. Yes, although the changing nature of the energy trading markets means these systems are often lagging the market (and traders'/portfolio managers' innovations) by a few years. By and large, systems investments by the large vendors in the space have centered around (a) increasing the number of energy commodities and geographies that the systems handle in the energy complex and (b) updating the technological underpinnings of the systems. Systems today handle integration of electronic trading, cross-border/multi-currency, and have greatly enhanced their risk reporting capabilities. From a risk management perspective, today it is standard for systems to calculate value at risk, option greeks, display risk measures in charts or heat maps, and offer P/L change explanation reports as "out of the box" functionality.  This certainly was not the case just a decade ago.

    Q. Finally, how would you describe the functionality of today's ETRM systems versus those of several years ago?

    A. The systems today support greater straight thru processing, which allows for transactional efficiency and transparency of deals through a deal lifecycle. Systems today also feature much more robust measurement of risk, and embedded reporting capabilities that allow the end user to manipulate date to slice and dice information on their own (something that used to require a programmer to do). Increasingly we are seeing vendors embrace visualization capabilities, to bring different types of data and different technologies together. As an example, several vendors can overlay their physical inventory and pipeline information onto a Google earth map to allow one to quickly ascertain position and price in a tangible way.


    Don Jefferis, Partner
    713-237-4810; djefferis@opportune.com
    Marty Makulski, Partner
    713-237-4812; mmakulski@opportune.com

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