In September 2021, Risk.net surveyed 227 energy traders and users of CTRM software at energy firms, trading houses and consultancies. The results show the most prominent challenge shared amongst all respondents was knowledge. Understanding what today’s technology provides and how it can help them be more competitive was unanimous amongst 70% of the respondents.
Understanding the benefits that latest technologies offer seems to be on everybody’s mind, with little action taken to cure the curiosity.
NO ONE WANTS A ONE TRICK PONY
42% of the respondents confirmed their organizations used cloud-based CTRM software. At first glance, that number looks reasonable, but there is a catch: cloud-hosted and cloud-native live in separate worlds and offer different value-propositions.
Cloud-hosted means that the company who has licensed a CTRM software is free of any hardware constraints (acquiring, installing and monitoring).
Cloud-native means that the solution has been built with the aim to provide a fully-fledged service and offers three main benefits:
- In addition to providing and managing the hardware for regular use, cloud-native solutions offer scalability by design. By scalability, we mean everything that would typically require a bigger technical set-up due to new users, new locations, more activity etc, or a change in computing needs. A cloud-hosted solution would require sizing additional hardware to be able to manage activity peaks when cloud-native solutions offer automated, immediate, and invisible scaling at a significantly cheaper cost and risk
- Most cloud-native solutions are evergreen. They automatically upgrade from a version to the next, with minimal disruption. Cloud-hosted solutions need a fully-fledged upgrade process which may turn out to be as long and expensive as a new installation
- Cloud-native solutions are developed using more modern technology and typically offer API layers that allow easier extensions of functionality.
DATA IS THE NEW PRECIOUS COMMODITY
Looking at the most pressing issues that impact trading, 65% of the respondents selected data quality (data hygiene, credibility and standardization) and 55% voted for the ability to use in-house developed or third-party analytics.
Data comes in three flavors:
- Data which is owned by the company (e.g., counterparties, book structure, contract definition, GL accounts, invoice templates)
- Static data from market participants collectively (e.g., index definitions, future and option contracts definition, conversion tables, currency tables, calendars)
- Market data provided by vendors and exchanges.
If CTRM software vendors do not typically resell market data, it is (or at least should be) their responsibility to provide connectors with market data vendors and exchanges. It should also be their role to offer a solution that is pre-loaded with indices and contract definitions. Why spend time and money – on every project – to implement data that is shared amongst the industry, which is the same for everyone yet brings zero competitive advantage?
Developing analytics comes second with 55%. The development of pricing models can be done by any confirmed or aspiring quant, but the value comes from the ability to use or construct market data types that do not come as a standard in the CTRM solution. The complexity comes from the need to not only connect the pricing model with the CTRM software but also to arrange for the latter to understand it should be used by any part of the system (risk management but also invoicing and accounting), so that it offers its true value: a single version of the truth.
Connecting pricing models can be done in two ways:
- By modifying the source code of the solution, if allowed, bearing the risk of not being able to upgrade or
- By relying on the natural openness of some of the CTRM solutions. This provides large sets of APIs but also sometimes give the ability to create specific market data types that the system will understand as its own.
WHY THROW GOOD MONEY AFTER BAD?
Of the respondents, half commented on the lack of flexibility of the solution they have and 27% reported poor or slow performance.
As mentioned previously, on-premise legacy or cloud-hosted solutions do not scale easily. When additional computing power is required, more hardware follows. Which needs to be installed and monitored. All this effort is a project in itself and needs management and funding, only one day to become obsolete.
With cloud-native technology, scaling up or down is managed by most of the hosting providers, who automatically adapt the hardware based on the computing needs at any given time.
IT’S A NEW DAWN
The energy and commodity trading and risk community have realized that solutions developed 20 or 25 years ago are no longer fit for purpose. It is also clear that with recent market activity and volatility, trading has become more financial than physical.
With CTRM software users naming market data management and custom analytics as their biggest areas of concern and focus for 2021, it’s good to know that there are remedial solutions available.
It’s what we do.