They say that with age comes wisdom.  Maybe wisdom is simply having the luck to live long enough to have seen something before?  That's certainly how the energy trading business feels to me right now; we've been here before.  It feels as though we are back in 1996-7.  There are million dollar signing bonuses being bandied around, there are people investing in trading solutions, there are companies piling onto the energy trading band wagon, and there is a renewed interest in electronic trading solutions.

I was recently asked whether I'd heard of Trading Technologies, which I hadn't, and so I went down to visit with them and was treated to a demo of their solution which is very slick.  It got me thinking that maybe I was missing something here, since I'd also been shown a demo of Trade Capture's equally slick solution a month earlier by Vinnie Annunziata.  Is there a renewed trend towards companies offering interfaces to trading exchanges?  The answer is a resounding yes, and so this then begs further questions such as, have things moved forward from the last time around?  Are the exchanges behind this?  What is in it for trading organizations and what are the implications for the Transaction Management companies serving the energy space?

Moving Forward

Remember Altrade, EOL and NGX in 2000 - 2001?  Remember having to re-key all your deals once they were done on the exchange?  At least EOL had an Excel download button that you could use to download completed trades.  Incidentally, they also had a "Download as XML" option as well.  The company that I worked for got accused of a Denial of Service hacking attack on EOL when we actually decided to stress test this functionality before rolling out a solution to clients.

I spoke with Marc Karstaedt, one of the innovators and pioneers of energy trading exchanges (he founded QuickTrade which was acquired by Altra and merged with  Altrade) to ask his opinion on whether progress has been made since the days of EOL, Altrade and NGX.  Marc's first comments were that the energy exchanges have matured tremendously and have a completely different attitude towards their application programmable interface's (APIs) this time around.  The APIs offered by exchanges today are robust and give the same functionality that is available through the exchange screens.  These APIs enable a whole industry of companies that offer enhanced functionality above and beyond that of the exchange.  At the end of the day, an exchange is not in the software business after all, they are in the business of running an electronic exchange.

Another interesting aspect of the mature APIs is that Independent Software Vendor's (ISVs) that have traditionally served the finance industry are now able to move into the energy space.  What this means is that the energy industry can benefit from highly sophisticated, mature products that have been proven through expertise in the finance sector.

Are the Exchanges behind the ISVs?

This may seem like a strange question, but it needs to be asked since the last time around Altrade, and EOL were not very excited at all about an independent company poking around in their business.  Thankfully, this is completely different today, and the exchanges advertise certified ISV partners on their web pages.

So why would the exchanges be so wholeheartedly behind ISVs?  It appears that there are a couple of reasons.

1 - Decreased load on infrastructure - When speaking with one exchange I was told that when an ISV provides connectivity to their customer base (let's say 20 users), it only represents a single log on to the exchange.  This is in contrast to the same 20 users logging on through the exchange screens, or through a direct API which would represent 20 log ons.   If you consider that the volume of futures transactions on ICE have increased by 918% over the past year, infrastructure load becomes an extremely serious consideration.

2 - Increased business - Electronic interfaces and ISV solutions can provide additional insight into market opportunities that may not be seen using the exchange screens.  In addition, electronic interfaces naturally lend themselves towards cross exchange arbitrage opportunities.

What's in it for trading companies?

Why would a trading company pay a premium price to be able to use an ISV solution?  After all with the exchanges offering an API, why buy a solution when you can build your own customized solution?

1 - Speed to market - Building a customized solution in house will take longer than buying a tried and tested commercial version.  If your organization is in a hurry to get advanced exchange trading tools, then maybe you should consider a commercial solution, even if it is only a stop-gap until your custom solution is built.

2 - Cost of building and maintaining - Custom solutions usually take five times longer than expected to build, and cost 5 times as much.  This is not a scientific or well researched number, but is based upon rough experience in the field.  Maybe I'm wrong by a factor of two, but even so, everyone knows that a custom shirt or home will cost significantly more than one off the shelf.  Custom software has the unfortunate side effect of costing more to maintain on an ongoing basis in addition to the upfront building expense.

3 - Proven solutions - As stated above, the mature APIs now available from exchanges offering energy products mean that companies that have been in the exchange ISV field for several years can now enter into the energy space.  Energy traders can take advantage of years of development, rather than being guinea pigs for new solutions.

What are the implications for ETRM vendors?

One question that has been persistently in the back of my mind throughout preparation for this Issue Alert has been which of the ISVs would want to start providing transaction management capability in addition to the trading platform capability.  After all, the ISVs have the deals, and then must hand them off to the internal systems.  A logical extension might be that they start to push for additional revenue from inside the trading organizations.

When I spoke with Vinnie at Trade Capture he asked me the opposite question.  What will happen when the transaction management vendors offer an ISV solution?  Not coincidentally, Trade Capture is rolling out their ISV solution in August of this year, and when Nymex offers physical contracts on August 7^th, Vinnie expects that this will see the beginning of an ever increasing volume of the broker business being conducted electronically.  This could have huge implications for companies that play catch up in this arena.

Other ETRM vendors hinted at ideas and products in the works to cover this aspect of the market.  I expect we'll see new offerings in the near future.

Conclusion

Deja Vue always has a weird feeling to it, and this time is no different.  However, having spoken with multiple experts in this field in preparing for this document, I believe that ISV provided exchange solutions are here to stay, since they offer compelling advantages to all sides of the equation.

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