October 2016: TTF further solidifies position as largest market; Euro Power volumes up; Coal exchange executions at record levels; broker bilateral market share on the rise
October saw overall market volumes drop 1% vs. September to 7,572 million monthly contracts traded. Volume growth was mixed across the commodity classes, with the Power (up 16% MoM) and Emissions (up 10% MoM) markets seeing large volume gains but the Gas (down 8% MoM) and Coal (down 2% MoM) markets posting declines in volume for the month. All price benchmarks were up MoM, with the power markets seeing the greatest increases. The old adage volatility begets liquidity seems to have played a part in the Power and Emissions markets this month but the opposite seems to be true for the Gas and Coal markets. Why did we see a drop in Gas and Coal volumes when we are seeing double digit growth in Power and Emissions volumes, yet with volatility across all markets?
Of this 7,572 million monthly contracts traded this month, 60% was executed broker bilateral. This is the largest broker bilateral market share we have seen since August 2014. Broker bilateral share has been trending up gradually over the last five months, from 56% in June 2016. YTD we are seeing stability in broker bilateral share, at 56% YTD 2016, equal to the same period in 2015. Are we seeing the start of a shift back to broker bilateral after the years of an increasing cleared market? Could this shift be firms moving where they trade in response to incoming MiFID II market share test thresholds?
While Gas volumes may be down overall, TTF has continued to come out on top, at almost one and a half times NBP volumes this month. We've been tracking the size of TTF vs. NBP for some time. The chart below shows the volume evolution of the two gas hubs since January 2011, and also shows the TTF proportion of NBP volumes each month. For the first few years TTF maintains a shallow trajectory upwards, until late 2014 where it starts to gain a bit more momentum in increasing volumes vs. NBP. We then see in the last year a steep increase in the relative size of TTF. This is now the fifth month in a row that TTF has been the largest commodity covered by this report, so it looks like it is here to stay. What have been the main drivers of this push towards TTF liquidity? The importance of TTF as a spread trading hub vs. continental Europe? The push towards TTF becoming the European gas price benchmark?
Another trend we have seen emerging in the past few months is that of decreasing broker cleared market share in the Coal markets. This has been due to both increasing broker bilateral and exchange executions. This has been fascinating to observe, given the opposite trend towards broker clearing in this market in the last few years. Broker bilateral traded volume was a significant portion of the market (~40%) prior to the swaps to futures event in late 2012, and a shift back towards greater bilateral trading today is not quite as unforeseen as the increase in exchange executions. Exchange executions have historically been very low in this market, yet in October we see their share at 11% of the total API2 & API4 market. Individually, both API2 and API4 saw record volume exchange executions and market share this month – API2 exchange executions market share was 20% and API4 exchange executions market share was 5%. Global coal prices have seen a big rebound this year, with front month API2 closing at $84.35 on 31 October, up $36.30 since the end of 2015. Is there any relationship between this change in price and the shift of execution choice?
Euro Power prices and volumes have seen big changes over the last couple of months. October extended the Euro Power region's price gains, with UK Power front month prices up 43% vs. September, and French Power front month prices up 121% MoM. The colder weather has started to hit along with ongoing supply constraints, causing this continued spike in prices. The chart below shows UK Power, German Power and French Power prices over the last 24 months, indexed to 1,000. You can see the dramatic increase in prices over the last two months, with French Power prices so high the chart breaks to be able to display it. Volumes are up on the back of this volatility, with French Power overtaking Nordic Power this month to the second largest power market in this report, on volumes up 52% vs. September. All remaining power markets were up MoM except Italian Power, which was down 9% MoM.