Q&A: US Power Trader (Prop/Spec)

For some context, never worked directly in S&T but this is the only "trading" focused forum on here. I started in essentially sell-side research for power, and transitioned to a spec shop afterwards. For power specifically, there's a few tried-and-true career paths (IMO). The RT trader/scheduler at a utility/IPP to DA/RT to cash/term trader route is probably the highest probability path. I know of a number of larger/more quantitative shops (more FTR focused) that hire out of grad/undergrad as well as from competing shops. Sell-side research is the last path that I think works quite well still. 

For power, if you were to go work at a utility or a sell-side research firm and wanted to exit into something other than trading, there's still plenty of exits. Between jumping to the load side at a large corp (Walmart employs a number of power traders) and jumping to development (new load, generation), there's a number of opportunities outside of being market-facing. 

I can't speak to different commodities, or the relationship between S&T and exiting to a commodities shop, but I would assume it works somewhat similarly. 

I think the best way to phrase it is that ERCOT will not be the most interesting market over the next five years. Politicians/regulators are still reeling five years after Uri, and they're not going to forget it anytime soon. Then, look at passed regulation like SB6 and TIP that are both out-of-market impacts to the grid. Batch Study Zero is currently going on (or is getting planned, haven't really followed in a few months), but I thought I read something the other day that a large number of data centers were rejected in this process. They're looking to move to 12CP from 4CP. Everything ERCOT is doing is directly aimed at reducing the probability of another Uri. 

TLDR: Insane gas/solar/battery build-out, regulators targeting lower volatility through out-of-market actions, data centers probably going to undershoot leading to excess generation capacity. ERCOT's probably dead till early 2030s. 

Honestly, a bit beyond my experience, but I think I can speak to it generally. 

Let's assume a few things:
 

• You're a few years into PU&I IB, and you're good at your job. You understand the industry, where things are going, what's driving revenue, etc. 
• You're interested in trading Power and not the underlying equities. 

With this background, I don't think a shift from IB -> Power trading is a crazy jump, not common but also not crazy. Your best bet is to go to a more traditional fund/trading house that trades mainly term and not FTRs, Virts, or Cash. I know of a handful of traders who specialize in understanding market rules and changes in regulation, so this isn't an unheard of approach. Your experience would give you a lot of insight into how participants are going to react to market conditions and regulation changes, and how that might change price formation in the future. 

Now I wouldn't say this is an easy transition, and you're likely going to need to really convince someone to take a shot on you, but I think with the right firm and some work on your own to follow the market and regulation it's not even a long shot (just a matter of time IMO).

I actually started with more of a traditional finance route, which is not too unusual from my experience. Power is such a niche field that most people find themselves stumbling into it, at least from the trading/finance side of things. My original plan was to go into asset management/equity research, and I had an internship and return offer for an asset manager that I nearly took. I ended up doing an internship at the research firm I worked at full-time after graduation and it opened my eyes to how deep the power markets really go. This was all pre-AI, but I thought with the energy transition there was probably more growth opportunity in power than trying to duke it out in AM/ER with everyone else. Half a decade later and I can very clearly say the gamble paid off, I love the industry and what I do, I was able to get into a risk-taking seat quite early into my career and carry that into having my own book/desk a few years into my career (not unheard of on the prop/spec side). 

I think I've always been a bit nerdy when it comes to how things work, and being able to peek behind the curtains to see how the largest engineering project in the world works (the Eastern Interconnect spans ~30-40 states and thousands of miles across multiple markets and keeps the lights on for hundreds of millions of people) was fascinating. Now with the AI boom, it seems more topical than ever and it's fun to see it pop into the mainstream (despite how wrong most people get it).

I haven’t had a ton of interaction/visibility on the banking positions TBH. I do believe Goldman manages an asset though, not completely sure here but I thought I remembered this.

I actually think the banking positions may see a resurgence in relevance with this AI wave and the current admin’s deregulatory stance. I think large loads are more likely to go to a bank (or use their bank) to broker power purchase agreements/commodity risk management practices, so if you’re interested in trading derivatives or term contracts this could be a good seat. Even if you aren’t, I know of at least one person who went from GS power to a prop shop and now he’s a recruiter. 

TLDR: I don’t really think you can go wrong with a junior position at an established company. Worst case, you spend two years learning what you don’t like and gaining industry experience before pivoting. 

Really enjoyed these questions, thanks for asking!

I've always found the purely ICE trader really fascinating personally. Coming from a background which is heavily anchored in powerflow and dispatch modeling, I've talked with term traders who use relatively simple S&D models and have had incredibly profitable 20+ year long careers. I haven't seen a ton of traders jump from gas to power, but my career has also been relatively short and narrow in scope, so not to say that it doesn't happen. I think in order to understand power, you need to at least have a broad understanding of gas and where it's going, but the opposite isn't true for gas (to some extent). Gas also gives a natural hedge to power, and it might be easier to execute significant size with power and gas contracts than attempting to find someone to take your size on a heat-rate contract. I think the transition from gas to power is probably easier than you expect, but my main question would more be around why you want to make that transition. If you're genuinely interested in power or you think there's more opportunity then the switch makes a lot of sense, but if you're looking for a different style of trading or something else I'm not sure if that's really right.

I haven't managed any assets but worked with a number of people who have. I think there's an "anti-goldilocks zone" of sorts when it comes to switching from asset to prop. If you don't have a lot of experience, or you have a full career, the switch is very easy, but if you've got a few years managing an asset I've found those traders really struggle. Managing an asset is essentially just managing the optionality around a single node. The decision problem is relatively simple, and it's more about beating a benchmark/managing risk than it is generating total returns. When you're trading speculatively, you have every node to choose from, and it's less about choosing between two options and more about narrowing down the universe of nodes into something that's going to be high volatility and pricing to be on the right side of things. Traders who have been managing an asset for 10+ years have a deep understanding of the market, and maybe they don't trade every day but on the big days they're able to show up and produce. Traders with 2-3y managing an asset don't have the experience to show up on the big days yet, and they're still stuck in the "I can make an extra $2/MWh by choosing DA over RT here" mindset and I haven't found that to be a winner (at least trading discretionary, obviously a positive alpha systematic strategy would be able to do that across a massive number of nodes and then it scales well). 

Regarding PJM "fixing itself", I think this is such a tough question (but a good one). I think the naive-economist in me would say that this fixes itself within a few years (5-7y) when more gen build-out occurs, and this is essentially what the market was designed to do. I think the issue that's caused some of the problems, and will continue to cause problems, is that there's a number of competing interests in PJM. Virgnia wants data-center business, PA wants tighter emissions, COMED is sitting out on an island in the mid-west dealing more with MISO than PJM. Until the states can agree on a common path forward that includes building new gen (even if people don't want a gas plant in their backyard) and allowing for at least some data centers to be built, I don't see the market being "fixed". At the same time, I don't think a PJM breakup is likely or would actually fix anything.

I think there are certain personality traits that likely make a better trader, but I don't think there's a particular personality that's required. I've worked with people who are quiet, loud, PhDs and coal miners. That last one is a bit of an extreme, and I don't think they're actively trading anymore, but it goes to show that it's an incredibly learnable skill-set. 

There's two things that I do think make a good trader, especially spanning a career. The first is a natural curiosity. Without the drive to figure out why things work, try new things, take risks, I don't see how you could be a great trader. The inherent drive to be better, figure out why things are happening, looking at things a different way, these have all been common with the people I've worked with. 

The other is less about the makings of a good trader, and more about longevity of a career. I've known a number of people that either can't take risks or can't take losses, and there's nothing wrong with that. Managing risk isn't for everyone, and within trading not every style is for everyone. Part of why I've enjoyed trading DA/RT in the power markets is that your portfolio only persists for 24h at a time, and you can only really trade a single day out. For me this means that once the auction clears, I'm stuck with those positions and really shouldn't worry about them anymore. In RT when I see a position going against me, I typically don't stress too much because I know a.) there's nothing I can do and b.) the position is gone in a few hours max. This makes the risk much easier to stomach, at least compared with other products. When I've traded FTRs or term futures and been in a similar position, I've found myself tossing and turning at night worrying about where the market might move or what happens if something continues to occur in the market and whatever product I'm holding continues to draw down. Personally, that type of risk isn't worth the extra size and volatility those markets provide. This also makes me more willing to take risks, try something new, deploy a strategy and scale it quickly. The people I've seen who fail as traders either get stuck in analysis-paralysis, or the second they draw down their mental implodes and they just spiral into worse and worse trading. Even if they have a good strategy, they're smart, or they start off making money, it's just a matter of time until they leave trading, voluntarily or not. 

Definitely a possibility. I didn't trade RT, and most of the people I worked with didn't either. I think as things have moved more quantitative in the last 5-10y and there are more and more prop shops opening up we've seen the pipeline shift a good bit. 

Day-ahead hours are pretty good, especially once you've got some seniority. When I started I would work 6AM-6PM (ET), with a 7AM-11AM stint on the weekends. I chose to get the extra reps in on the weekend, but I've worked on desks where they rotate who's on or off for the weekends, and at least at my previous firm people were quite relaxed about covering if you wanted a weekend off. Auctions close between 10:30-11:00 AM ET (except for CAISO/NYISO if I'm correct, CAISO is 1PM ET, NYISO is like 4AM or something crazy so most people trade 2DA). After auction close it's basically just analysis and planning for the rest of the day, quite relaxed work if you ask me.

Once you've got your system down and understand what to look at, what you want to trade, and what's going on in the market I've seen people work 7AM - 12PM and then hop off to go do whatever they want (at least for DA/RT, FTR traders need to put in more hours). Now I do think that this lifestyle is going to get phased out as more participants enter, but at least for the foreseeable future this is definitely still a plausible schedule for a senior DA/RT trader.

Not impossible but harder since many desks just hire from within their pool of real time traders. Harder to compete with people who already trade and know the markets and internal systems.

Obligatory not financial advice.

I wouldn't short it, but at these prices I don't know if I'd buy. I think there are probably better names out there if you want exposure to the utility sector. Not really my field of expertise, but taking a quick look you can get almost any other public IPP at better ratios, so unless you have a Talen specific thesis I don't really see a long play there. If you just want exposure to PJM, there's an ETF that tracks power futures (MWHS), or you could pick up Constellation or Vistra who both have significant PJM exposure at better ratios.