Block Futures Go Electronic11.07.2014
The benefits of trading energy contracts in size electronically are being sought by energy producers, refiners and other companies in the supply chain. They are using block futures contracts to trade electronically off-exchange, using platforms such as GFI Group’s EnergyMatch.
“The trade platform itself is just a trade facilitation tool,” said Lou Pellathy, head of Empire Electronic Brokerage, a subsidiary of GFI Securities that was established in June 2014. “We’re very much a hybrid broker voice/platform system, but the actual trades do not happen electronically.”
GFI Group will offer block future services of crude oil, natural gas, and refined products block futures on its EnergyMatch platform. It is anticipated that energy options will be added in early 2015.
A block trade is a privately negotiated futures, options or combination transaction that is permitted to be executed apart from the public auction market. Participation in block trades is limited to institutional traders.
Block trades provide the convenience of privately negotiating a trade with a selected eligible counterparty, the ability to execute a large transaction at a fair and reasonable single price, and are cleared through a futures exchange such as CME or ICE.
“When you trade on-exchange, and you’re a larger size customer, you don’t necessarily want to have your order ‘piece-mealed’,” said Pellathy. “When they come to the market with those types of volumes, they’re concerned about matching with someone that can take an equal volume, or at least a good portion of that volume, and not move the market, or give away what they’re doing.”
Although the matching takes place on EnergyMatch, the actual execution of the block order takes place on an exchange, and must also be cleared. “In order to comply with applicable regulatory requirements during this year, initial entry of a bid or offer for block futures is treated as an indication of interest only,” according to the EnergyMatch website.
“A trader can place a bid, and then another trader can place an offer, and if the two match, then it’s taken off the screen, confirmed by the broker via voice, and then it’s novated back to the exchange,” Pellathy said.
Pellathy, a veteran energy trader, has experience working with liquidity providers and takers, as well as a quantitative approach to brokering. “The purpose of my coming on board was to build liquidity on GFI’s EnergyMatch platform,” he said. “I still am a voice broker, but I bring system expertise. Our goal is to take the volumes we do by voice and transfer them onto a platform.”
Regarding Empire Electronic Brokerage, Pellathy said, “We focus on the electronic side of the business, we are a group formed for the purpose of bringing electronic liquidity to our EnergyMatch platform.”
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