The extension of trading hours for all EU and UK gas and power futures and options on the Intercontinental Exchange (Ice) could create difficulties for trading clean spark spreads, Argus heard from market participants.
Market participants are concerned about the time inconsistency across the legs of clean spark spreads, with gas markets — strongly traded on Ice — possibly moving to trading hours of 00:50-23:00 GMT, while trading hours for EU and UK ETS allowances — also strongly traded on Ice — and most power liquidity will remain between 07:00-15:00 GMT. This could complicate hedging activity in hours during which the power and ETS components cannot be traded, but when the impacts of weather forecasts and geopolitical events remain tradeable and visible in gas markets, Argus heard.
And one of the key concerns raised by several market participants is the extent of liquidity in gas markets outside of current core trading hours, and the subsequent impact on volatility. The majority of participants highlighted expectations for low volumes and high volatility in the overnight hours, and for liquidity to remain in the core hours currently traded. Some highlighted that nearly uninterrupted trading hours could also soften the jumps currently seen at the market opening.
Extended hours may also enable continuous spread trading between TTF and Henry Hub and offer traders more flexibility to react to US and Asian market moves. The move could also offer wider opportunities for LNG inter-basin arbitrage and to improve and increase hedging and risk management.
But others indicated expectations that overseas players — particularly hedge funds and players in the US — would move in to take advantage of the extended hours. Some highlighted thin liquidity during off-peak periods could heighten volatility and create opportunities for market manipulation, particularly following overnight announcements. Several also highlighted that this could benefit larger companies, especially those with offices in the US, over smaller firms, but that even bigger players may not be able to trade out in overnight hours. And opinion was divided on whether this move would lead to an increase in shift trading or in algorithmic trading.
Overall, traders showed little enthusiasm for the proposal, with many expecting limited market impact and some questioning whether liquidity is sufficient to justify the change.
For power, some market participants highlighted concerns about the impact on prompt contracts owing to updated forecasts allowing players to trade on newly-available information, with general consensus that the far curve would not be significantly impacted. Several were unconcerned about the impact on power considering volumes on Ice are a small portion of the market, and they do not expect structural changes to the market in the short term, while others said they expect the European Energy Exchange (EEX) — where power liquidity is heavily concentrated — to eventually follow suit.
