Energy Trading Q & A

Gotcha. Thanks so much for the response, kinda what i was hoping for!

Prospect in Non-profit

Thank you for doing this. I’d appreciate if you could give your opinion on EU vs US power markets. If you had to pick one of the two, which one would it be and why?

Hi there! Tbh, I don't know a ton about EU markets, as I have not traded them myself. My understanding is that not a lot of folks in the US are trading these markets, although I'm sure there are some. I think ultimately, you can make any market work for you and your trading style, although you may find some to be more suitable than others. So, the key is adaptability. You should learn to adapt to the nuances of your particular market, and I recommend dabbling in multiple if possible, to see which suits you best. If you're a derivatives trader, then your strategy may favor higher liquidity markets, while congestion trading in power markets will likely have more opportunity in renewable heavy markets. This is because renewables by nature tend to create more transmission congestion, leading to higher vol and more opportunity. So, if you focus on virtuals or FTRs, then it's likely you'll become more active in a market with high renewable penetration. As for myself, I am biased lol, but I would stick to US markets due to my time zone and being primarily a derivatives trader (if i traded an exchange that operated on EU time, that would likely be something like holding roughly 2am - 10am hours my time). Although this might actually fit my insomnia well. Hmm... But I honestly wouldn't mind trying out EU markets at least for a bit to see if I could find an edge. I think another reason to stick to US markets being in the US is that if you specialize in EU trading, it will be a lot tougher to find a job at any given time with US firms. I don't think I've ever seen a job posting for an EU trader in the US. Anyways, hope this helps!

pbgrxavel

Hi Aaron, it's really cool that you're offering this info. I'm currently considering a master's program in energy management for a career in power trading.

Could you walk us through a typical day at your work? Like, technically, what are you doing hour by hour?

And how has this changed throughout your career? Do traders tend to stay as individual contributors, or become managers?

How do you manage the fluctuations in an industry so highly subject to changes in policy?

What skills do you learn over time vs. what are you expected to know at entry level? Will you straight-up get fired for underperforming one year?

I hear there's a lot of travel or client entertaining involved - how crucial is this to the overall job?

What do you think of trading at a power company vs. at an HF or shop? Is there a difference in knowledge, responsibility, culture, compensation, etc?

Speaking of comp - how variable is it, year by year? What would a totally average power trader earn?

Sure thing, bud. I usually wake up ungodly early (insomnia, not work requirements), so anytime between 3 and 5am local time, but don't necessarily start working right away. If I could still "sleep in", I'd prob wake up around 6am (I work fully remote), because virtual markets have a 9:30am local deadline for next day submission. So, this gives me a few hours to review all of the fundamental info I want to look at to make trading decisions for the DA market bidding I plan to do. But, tbh, I have automated a large portion of my virtual trading so I really don't even need this much time anymore. If I was strictly trading on the exchange, I'd prob get up around 7-8am and get to it. Not usually much advantage in logging on earlier than that for this purpose. I usually take a bit of a mental break after virtual deadline submission and do something else for up to an hour or so, unless I'm active on ICE at the time. Then the rest of my day is flexible between watching what's going on on ICE, reviewing DA market results (get posted between 12:30-2pm local time, depending on the market). I trade term ICE mostly, and don't do as much in the very short term anymore, so I'm mainly just watching nat gas movements to see how power will move in tandem. In the term, weather is a relative unknown, so really things are just moving based on gas and any major announcements (newly planned unit retirements, etc), which rarely occur. If ICE is boring that day, not a lot of movement, I may sign off early, maybe around 2pm-3pm, once I've had time to review the DA market results. If I'm actively trading ICE and things are happening, I can occasionally work until ICE closes at 5pm local time. But most often, I do my ICE trading in the morning or early afternoon and am done early. My job truly is a bit flexible and I do not work a full 40 hours/week. But this is also partly my trading style. I know a lot of ICE traders who work roughly 7-4 or 8-5. 

As far as if you want to be a manager, it's really just personal choice. Generally, you're still expected to trade and earn profits, but you'll also be managing a team. But most traders stay as individual contributors. If you have a naturally mentoring personality (which I do), then you may like management (which I do). 

Policy can shift things, but often time it creates more opportunity (FERC order 2222 better incentivizing battery tech). It's important to stay up on new policy changes (for ex. MISO is about to increase their price cap from $3,500 to $10,000). This is obviously a significant change and should be treated as such. MISO could become the new ERCOT in a sense, especially with ever-increasing solar supply leading to more volatility during solar drops in the evenings. Policy changes typically take a good bit of time to get pushed through though, so it's not like there are major changes all the time. 

It depends on your role as to what you are expected to know initially vs. learn over time. It's unlikely to start in a trading role (unless its RT trading), so no one expects you to be a market expert right away. This takes time to build up and you really should seek out a good mentor when you're new. You are finding your next gig as much as you're finding your next boss when you job search, so just keep that in mind. And yes, depending on your shop, you can def get fired for not performing one year, or less, so very important to accurately assess the risk of each opportunity. Some shops are much safer than others, but ultimately, if you're a pnl generator, your job is to make money, so you should be careful and utilize appropriate risk management always. 

I don't travel for work really, nor entertain clients, but depends on your role. This is more of an origination function than trading. 

Power companies are prob safer than HFs/prop shops. You need to assess the company's view on traders (are they short-term trading their traders, i.e. firing them if they didn't make money in a couple months, or really give them a shot). Absolutely there are differences in all those factors. The lower risk typically comes with lower comp in the form of bonus. Power companies will often use discretionary bonuses (a blank check for screwing good performers out of good bonuses), whereas HFs/prop shops have a specified % of book you'll earn above your seat cost. 

Comp is highly variable. I've made 7-figure bonuses, and I've made no bonus. Really depends on the year and performance and shop. An average trader might earn low-mid six figures. Not everyone does well in this. And if you're truly "average", you probably won't have a long career. You have to find your edge and stick to your strategies. The best advice I can give is to disconnect your identity from your trading. If your identity is fully stuck in what you do, you will ride the market roller coaster and possibly have an existential crisis anytime a position goes against you - no bueno. You have to be cold, calculated, and savvy, going in every day, sticking to your strategies, and not letting losses eat you up. 

Hope this all helps!

anon123CAD

Not broken into the industry yet, but am a student in the generalist S&T space. Am interested in using the paid mentorship services you mentioned to break into the energy trading space. Is that smth you could provide with personal tailored advice? Thanks again for the Q&A

Yes, absolutely. Happy to discuss and go through anything you'd like. Here's my link: https://www.wallstreetoasis.com/mentors/871791

foodservicefoil

Curious how you’d compare trading energy at a bank vs. at a merchant like Glencore or Trafigura in terms of day-to-day work, comp, and career mobility. Do you see people moving between the two worlds?

Hi there! I think there are a lot of similarities and differences are largely cultural and employment risk related (but even this will obviously vary between different banks and various merchants), but also comp structures and advancement opportunities will vary between company type. I used to work for COP, and, overall, great place to work. A lot of lifers there. However, you are restricted on comp (discretionary bonus). This is mostly the case for many large energy companies or utilities. Some merchants may provide a % of salary style bonus, but it varies greatly. Day-to-day can look similar to a bank, depending on what you do specifically. But there's prob a lot more upside at a bank, as you should be getting a set % of book (although it might be on the lower end compared to HFs/prop shops, i.e. 10% ish). Career mobility is really more a question of the individual than it is the company. If you find a company that struggles to promote people, red flag. But you can certainly see new positions created for individuals who have some tenure in a pro employee development environment or who demonstrate a skillset and drive that justifies a new position. Merchants should generally be safer than banks in terms of employment lifetime. We had traders at a prior company of mine of this type that lost money for consecutive years and were not let go. However, at a merchant, to get promoted, you may be sitting behind several other lifers who are in line for the same promotion. Prob a little more turnover at banks, so if you are doing well, that could create some opportunity for advancement. 

So, TL;DR - day-to-day: likely similar for similar roles (with some cultural differences). Comp: likely discretionary at merchants, relatively lower % of book at banks, so if you're doing well, you should make more at a bank. Career mobility: depends more on individual, but banks prob have more turnover, whereas merchants will be harder to advance due to more senior folks hanging on bc it's a "safer" trading environment.

And yes, you can absolutely move between the two. I've seen this many times. Depends on your goals and personal risk tolerance.

Intern in HF - RelVal

Appreciate you doing this! This is a very pointed question, but what are your thoughts on starting a career at a place like Alphataraxia and DC Energy. As they're small shops, I worry about the level of training given

That’s really tough to say, as I can’t directly speak to the culture or training given at either of these companies. However, if you’re starting off in this space, experience is experience. There will be a lot you can learn from people at either of these firms, I’m sure. The big names don’t always mean the best training. There isn’t really much formal training in power trading. It’s more about immersion, finding a good mentor if possible, and creating/finding your niche/edge. Modeling after others who are successful is not wrong. After all, there is nothing new under the sun. Chances are, if you can think it up, someone has probably already done it or tried it. I’m not that familiar with Alphataraxia, but DC Energy is decent in the FTR space. And, generally speaking, quantitative power trading tends to attract pretty intelligent folks. I would worry less about how much you’ll learn vs other shops and worry more about overall cultural fit, relative safety of employment, and growth opportunities. Hope that helps.

Trader in PropTrad

Hey, I have around 4 years in the space. Mostly virtuals/ICE now but dabbled in FTRs.

I moved to a smaller fund and took home a 7 figure bonus this past year.

Do you have any advice on how to stay successful in this industry?

Yo! Congrats on the solid bonus! I've been doing this for 10 years and I can say the top two traits that I think benefit me most are 1) adaptability and 2) mental toughness. If you can't adapt to market changes, you'll fall behind and become irrelevant. Virtual markets have gotten tougher over the last few years. I attribute it to more algo strats entering the space, collapsing opportunities that used to be profitable. And if something new pops up, the market is all over it immediately. But the market is still largely reactionary (it's very difficult to be highly accurate with predicting market outcomes in advance under new scenarios, i.e. gen/trans outages, etc). But if you have an edge, you should stick to it, unless something fundamentally shifts against it, and remain calm under pressure, trusting your instincts. Risk management is an obvious skillset that is critical in this business. I never agreed with the traders who'd be up a million or two early in a year and then risk it all to really try for a home run. Think about capital/return preservation as much as you do adding risk. If it took you 3 months to make x amount, do you want to risk 3 months of hard work for a day or two that could go really wrong, trying to hit it big? 

Also, have a mental war chest. There are things that you will glean only with experience, that newer traders may not understand. Keep these in mind. There are strategies for every scenario, and not saying you need to know them all, it's probably better to focus a bit more than to be all over the place. That being said, have a strong mental database of what has occurred in unusual scenarios, so when similar scenarios arise, you can capitalize, or at least manage your risk better. It just takes another polar vortex to blow up your career if you're over-extended. I trade a lot differently than I used to. My risk management now is much more prudent than it was initially. This is a learned skill. Learn this skill well. Tailor your anticipated max losses to your risk tolerance based on position sizing. This helps keep you in the driver's seat, not your emotions, and you will be more relaxed and in the zone knowing you aren't risking your short or long-term career on any single trades. I also trade less frequently than I used to. I usually aim for singles, not home runs. And if you swing at every pitch, you're bound to strike out before long. You can't always be right.

Finamazing20

Thank you for offering this to the community. Is going from back office to scheduling in a bank a good path to eventually trading or sales?

I've never worked for a bank, but essentially yes, at many shops, going from back office into scheduling will help you on your path to trading. If you want to get on the trading desk, take any role you can get within that function, whether it's scheduling, analyst, real time trading, etc. From there, you can work your way in. Real time trading is still prob the quickest way into direct trading, depending on your background. So, keep in mind, you may have to pay your dues on shiftwork for a bit. 

Prospect in AM - Other

for someone who would like to trade curve power, would you recommend starting as a shift trader or as an analyst on power curve desk (if that opp presents itself)

I think shift trading is a better bet, for two reasons: 1) there will be more of these opportunities available, and 2) being in a risk-taking role will give you the cred you need to move into other trading seats down the line. Whereas, if you start as an analyst, some companies/managers may be hesitant to want to give you a chance to take on risk yourself. Sometimes tough to move from analyst roles into trading, unless its RT trading, so you may as well start there, or unless you can really show you have profitable strategies via backtesting, etc. Then you also have to convince them that you want to and are comfortable taking on risk. You have to prove your mental game. That's the biggest part of trading. It's in the mind. 

Jupta:

Hi thank you for doing this.

Why do people trade separate commodities? What skills differentiate say power traders from crude traders from metals traders? Thank you!

Oh man, the skill sets are very different from commodity to commodity. Financial power trading is very data heavy, so being able to manipulate, clean, and extract strategies from data are important skills in power trading. Some areas of power even more than others, and some are more niche to electrical engineering (FTRs). The crude/NGL “traders” at the major I worked for were really a lot like sales guys, building relationships, business development, personable. And we were not speculating in crude, mainly just selling our equity production. But this area is mostly relationship driven, whereas fin power you can trade on a screen. There’s also fin crude trading of course, which has a more global macro bias, whereas power is quite a bit different. There are also relationship driven roles in power (origination), so it depends on your personality and what you enjoy doing. Working more with people directly, or more heavy analysis/data crunching… this will determine the path you should take.

Jangumon09

Was wondering what college major would be the best for breaking into energy trading? I had it narrowed down to either finance, economics, applied mathematics, or a combination of two of the three. Could you explain the pros and cons of each and what you would major in if you could restart?

To be honest, any of those would be fine to get your foot in the door. But if you really want to specialize in power, electrical engineering with a power systems focus would be the best route. This is bc these are the backgrounds companies are looking for for congestion traders. But to be a phys or exchange derivatives trader, any of those would work just fine. I’ve seen a guy with a music degree make it into the front office, it just depends on where you are and how much you want it. Hope that helps. 

Prospect in IB - Cov

Understood that you are on the power side, but do you have any insights on the 'Gas Scheduler' role. I am in an adjacent industry and want to make the jump into a markets role. I know I can't jump right into a risk taking seat and I see the Gas Scheduler role as something that can get me to where I want to be in a few years. Do you have any thoughts / feedback on this?

Gas scheduling is a good route into trading, but if you're in an adjacent industry, gas scheduling isn't really an entry level role. Those are coveted roles too, often taking time to get into. But if you can make the jump, it would be worth it, even if you wanted to move into power eventually. You could go from gas scheduling to gas trading, or into some sort of front-office oriented power role, i.e. analyst, RT trading, etc. Then you can move your way up. So, in short, yes gas scheduling could do that for you. As far as how long until you can trade gas, depends on the shop, and it could be awhile. I'd say from entry level to gas trading was usually like a 6-10 year progression, largely bc none of the gas traders ever left. It was a pretty good seat to be in. And if someone ever did leave, there were ten people in line in front of you for the role. 

motorboat123

Hi Aaron, thanks again for doing this.

I was hoping to get your perspective on starting out at a small speculative or prop-style shop, particularly in a real-time trading role with a clear path into virtuals if performance is strong.

One concern I have been thinking about is longer-term optionality. If someone begins their career in that kind of environment, are there any real limitations or frictions when trying to transition later into more asset-backed or physical roles? For example, do asset-backed shops tend to view that background differently, either positively or negatively, or are there specific skill gaps that typically need to be addressed?

You also mentioned in another reply that there can be a hurdle when moving from physical trading into more financial or paper-focused roles. From the other direction, what do you usually see as the main skill gaps when someone comes from a more financial or virtual trading background and tries to move into physical or asset-backed trading?

I am still fairly new to the space, so apologies if this is a basic question. I am trying to understand where the biggest differences really are in practice, such as risk management, operational knowledge, decision-making cadence, and what tends to matter most to asset-backed shops when evaluating that transition.

Thanks again for sharing your perspective.

Hi there, sure, good questions. I think that’s a fine start regardless of what you want to do in the end, because you will still learn 1) power markets (specific market knowledge can overcome certain other gaps), 2) trading (how to define/measure risk, and virtuals are all about position sizing), 3) risk management.

Ive gone from spec trading to asset-backed, back to spec, and my background is similar to what you’re describing (I started in RT trading, learned some virtuals, then moved into strictly virt trading, then layered in some cash ICE, then term, before moving into asset-backed trading briefly). I can say that it took a little more time for me to find a role that would hire me for asset-backed than if I had been seeking a spec role, but I was able to land one. 

One of the biggest differences in style of trading is of course speculation vs. hedging in this case. Hedging isn’t about making money, it’s about locking in prices to have predictable cash flows. I learned you will rarely, if ever be praised or performance bonused a high amount for a “really good hedge” you put on. And if you hedged when you thought prices were high and they went a good bit above that, it makes you look bad. To me, this lack of incentive to “hedge really well” is a big con to asset-backed trading. But it is always good to keep your future options open. And with gas unit hedging (which I was mainly doing), it’s about using spark spreads for the hedge. If the heat rate of your spark spread exceeds the heat rate of your unit (cost), you effectively locked in profits for the unit. Otherwise, you’re losing money to run those hedged MWs.

Hope that helps.

Director in CorpStrat

Hi Aaron, really appreciate you taking the time to do this. I've recently developed a real interest in the space - particuarly power trading. I'm London based. Studied mathematics at a top EU uni (loved it and placed top of my class) and then went into M&A for 4.5yrs....I'm 28yo now and I've basically come to a realisation in the last year that the thing that will keep me performing at a high level in a career in the longterm is working on hard technical problems with a tie to the dyanmic nature of markets/economy (if that makes sense) and ofc strong compensation for performance in that space. M&A doesn't do that for me. I think energy/power trading ticks alot of these boxes. I'm considering a pivot (even if I'll take a large pay cut initially). What would your advice be to someone in my position? What would be the best route in? I'm highly ambituous and work focused so I would be looking to drive my career progression quite quickly. How hard/quick is it to get into a risk taking trader seat? Whats the likelihood of me making it to that sort of role? Is this a terrible idea....? The base case is I do the typically IB>PE route and get paid very favourably/have quite a guaranteed level of comp/title progression.

Yo yo. This makes sense. IB is interesting and enjoyable work for some, but taking risk in markets is definitely faster paced, more interesting if you’re bored easily or need constant challenges, but I think is tougher to gauge if it’s a good fit for you without having done it. 

My initial and most important questions for you are 1) what is your general risk tolerance? 2) what is your personality like/how do you anticipate handling losses? 3) how much of your identity is in your career?
 

If you’re not a natural risk taker, hard to learn to become one. Calm, collected folks can do really well in trading, bc they don’t freak out at the first sign of losses. If you are 90%+ viewing yourself as what your title or paycheck is, trading may not be for you. You’ll ride the emotional roller coaster with every market swing, and trust me, that’s no way to live. These are more existential concerns than technical, as it sounds like you’re smart enough to prob be able to develop some successful strategies or learn from others. That’s not my concern for you. Fit is.

So, that being said, how does that all resonate with you? I think some of the best traders are those who just enjoy the game. It’s fun to them. It doesn’t matter if they make $100 MM in trading or not, they’re doing what they love. If that sounds like it could be you, then maybe it’s worth going after. Doing something you love, you’ll never work a day in your life. Appreciate we all gotta eat and earning a nice paycheck is also an important consideration. But if you’re remotely successful in trading, this won’t be a problem, as you can be paid very well. 

Recruiting is doable. The key will be finding your edge in trading. This is what it’s all about. It’s not about what strategy/strategies necessarily, but what gives you an edge over the rest of the market. Maybe you don’t freak out so easily when things don’t go your way, which would serve you well. But if you really care about doing well, you’ll find your edge.

All that said, I know that there is an increasing demand for power traders, also in EU, as trading activity continues an auspicious climb both on your side of the pond and mine. And there will continue to be more demand for power traders who aren’t just speculating but that know how to source cheap power and trade around assets due to power being the number one cost for 1) BTC miners, 2) data centers. These are areas that are opening up for the future of trading. Hope that helps.