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Could Market Making be Profitable in The European Carbon Market?

Emilios Galariotis, Iordanis Kalaitzoglou, Kyriaki Kosmidou, Spiros Papaefthimiou, and Spyros I. Spyrou

Year: 2019
Volume: Volume 40
Number: The New Era of Energy Transition
DOI: 10.5547/01956574.40.SI1.egal
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Abstract:
We investigate when market making can be profitable in the European Carbon Futures market, by developing an order type selection rule, based solely on transaction level data. We employ a granular approach that uses an observable variable, i.e. trading intensity, to extract the liquidity and information price components and we investigate their impact on spreads, volatility and ultimately on the profitability of different order types. We find that market orders are always less profitable than limit orders. In addition, market makers are expected to derive most of their profits in a low trading intensity environment, mainly due to higher liquidity commissions and a lower probability of dealing with better informed agents. In contrast, an unconditional limit order submission strategy from an off-floor trader should not be preferred, apart from a medium trading intensity environment, where information and liquidity premia adequately compensate them for execution and information risk.



Price Formation in Auctions for Financial Transmission Rights

Jeff Opgrand, Paul V. Preckel, Douglas J. Gotham, and Andrew L. Liu

Year: 2022
Volume: Volume 43
Number: Number 3
DOI: 10.5547/01956574.43.3.jopg
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Abstract:
Financial Transmission Rights (FTRs) are financial derivatives in wholesale electricity markets that are sold in auctions. The revenue collected from FTR auctions is passed through to electricity customers to reimburse them for transmission congestion payments they make in the spot energy market. On average, electricity customers' congestion payments greatly exceed auction reimbursements in electricity markets across the United States. We study the issue of auction revenue deficiency through the lens of Auction Revenue Rights (ARRs), which is the predominant mechanism used in U.S. electricity markets to distribute auction revenue to electricity customers. We demonstrate how the ARR process influences fundamental supply conditions in the FTR auction market and show how divergent auction equilibria emerge under different ARR decision-making regimes. Using market data from PJM, we find empirical evidence that variation in ARR management strategies helps explain differences between an FTR's auction price and its realized ex post value.





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