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Measuring and Assessing the Evolution of Liquidity in Forward Natural Gas Markets: The Case of the UK National Balancing Point

Lilian M. de Menezes, Marianna Russo, and Giovanni Urga

Year: 2019
Volume: Volume 40
Number: Number 1
DOI: 10.5547/01956574.40.1.lmen
View Abstract

Following the development of natural gas trading hubs in Europe, forward products have become a response to the higher exposure to price risk faced by energy companies. Yet, a significant share of trade occurs over-the-counter (OTC), where inter-dealer brokers act as intermediaries and deals may be customized. Hence, there are concerns about transparency and market quality, of which liquidity is a main indicator. This study investigates liquidity in the largest one-month-ahead European forward market for natural gas in the period from May 2010 to December 2014, using asynchronous high-frequency data and time-varying measures of spread and price impact from the financial market microstructure literature. The usefulness of these measures in the seasonal and evolving National Balancing Point (NBP) is assessed. Different aspects of liquidity and transaction costs are unveiled.

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