Abstract

Over the past 3 decades, trading volume on the world energy markets has grown almost 100 fold. From the emergence of the Spot market in the 70's and early 80's to the explosive growth of derivatives in the 90's, the energy trading business has grown from an environment of highly regulated and long-term contracts to one of the most dynamic commodities markets in the world.

In the late 1990s and the beginning years of the new millennium, the pace of change accelerated. A wide range of new products appeared on the scene driven by deregulating markets, the rise of merchant energy companies, and - significantly - relentless innovation from Enron.

It was against this backdrop that energy trading companies crashed into the e-Commerce boom and its concomitant proliferation of Web technologies. Commodities trading and the Internet seemed like a perfect marriage. The Web promised global reach, low cost information flows, and the possibility of "many-to-many" exchanges where big and small players alike could conduct commerce in an open, transparent environment.

When the e-Commerce bubble on Wall Street burst, the whirlwind of publicity and activity surrounding e-Commerce and trading began to subside. Then, in the Fall of 2001, the collapse of Enron left the industry wondering if there was any real money in energy trading and whether it was worth the risk to chase it. By the early Spring of 2002, most of the major players in the energy markets had shifted focus from innovation to shoring up the balance sheet.

But the new electronic trading media did not disappear with EnronOnline. Instead, most of the volumes quickly shifted to other proprietary and open exchanges. EnronOnline's one-stop shopping and easy-touse system had brought hundreds of new players into online trading. The trend now appears unstoppable.

In this paper we argue that:

  • There is a real value proposition for e-Commerce and energy trading in back-office efficiency, front-office effectiveness, and expanded markets and volumes.

  • Traditional brokerage, marketing and risk management services will come under increasing margin pressure and the ability to leverage proprietary positions and seize arbitrage opportunities will become more fleeting.

  • In order to profit from these changes, traditional trading companies need to move their backoffice and front-office to a more flexible and efficient technology, and seek selected areas where they can develop innovative products to serve the new customers and markets reached by online platforms.

Introduction

Commodity traders thrive on change. From the emergence of the Spot market in the 1970's and early 1980's to the explo

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