Energy market price discovery platform Tallarium secures $1.6m investment from XTX Ventures and Reciprocal Ventures
Tallarium, providers of unique trade analytics for price discovery in off-exchange energy markets, today announces that it has secured additional investment from XTX Ventures, the venture capital arm of leading algorithmic trading company XTX Markets, and Reciprocal Ventures, a venture capital firm.
The companies have provided a combined total of $1.6 million of new investment in Tallarium to fund Tallarium’s ongoing expansion as the ‘single source of truth’ for pricing in the opaque energy trading markets. This brings the total raised by Tallarium to date to $7 million.
Tallarium is helping to digitise energy trading markets
Based on the energy clearing house and exchange data from ICE and CME, as well as Tallarium’s own calculations, over 90% of energy contracts, representing over $7 trillion per annum, are traded off-exchange (actively transacted via messenger chat and over the phone). The industry has been one of the slowest to digitise, with energy traders still using Microsoft Excel as the primary tool used to record and analyse data. Some of the world's largest energy firms are forced to rely on these highly manual methods for risk management and valuation processes.
Using proven, robust and reliable methodologies, Tallarium’s platform automatically gathers and structures pricing information from broker chat messenger and voice conversations to create the industry’s first, definitive price discovery platform for the entire market. Its advanced data analytics provides a step-change in off-exchange energy trading, making manual data-entry and analysis obsolete, increasing efficiencies and helping traders to maximise the potential of every trade.
Commenting on the investment, Stanislav Ermilov, Founder and CEO of Tallarium, said: “Tallarium will help bring all the benefits of digitisation to energy traders, such as centralised pricing and access to increased liquidity, without asking traders to change the way they trade. Our technology empowers energy traders to trade more profitably by capturing more opportunities and helping them to manage and respond to market risk more effectively.”
He added: “We’re delighted to have secured the backing of key strategic partners such as XTX and Reciprocal Ventures, who bring with them deep domain expertise in data and capital markets. They will contribute their experience and invaluable advice to our team as we continue to grow and this additional funding will allow us to accelerate our development and scaling even further. We look forward to a long and successful relationship with our new investors.”
Mike Irwin, COO at XTX Markets, said: “As innovators in trading ourselves, we are always looking for partnership and investment opportunities in exciting companies making a real contribution to financial markets. We were impressed by Tallarium’s technology, its people and its focus on solving a real problem in energy market trading, by providing definitive product pricing information where none has existed before.”
About Tallarium (www.tallarium.com)
Tallarium gives traders an edge by providing a ‘single source of truth’ for price discovery in off-exchange markets, offering energy traders the solutions and insights required to access more liquidity and maximise the potential of every trade.
Using proven, market-leading and reliable methodologies, Tallarium’s True Value Discovery (TVD) engine gathers fragmented pricing data from trader chat messenger and voice conversations to build the off-exchange energy market’s only definitive price discovery platform that works in real time.
Collating millions of data points across hundreds of products and spanning the views and sentiments of thousands of data sources, Tallarium enables traders to instantly grasp pricing dynamics within both their broker network and the wider market.
Tallarium’s SaaS offering makes data and analytics available to energy traders via Tallarium web, desktop and mobile device apps, as well as APIs. Built-in collaboration solutions allow the best energy product pricing data available anywhere in the market to be shared, maximising trading performance across entire teams.
Tallarium services a significant number of the top 30 most active players in their respective off-exchange energy product markets. Some of the largest energy companies in the world rely on Tallarium for energy market pricing data and analytics to enhance their trading outcomes.
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Over the past few years we have spoken to a broad range of traders in the OTC energy trading space to inform our product development at Tallarium. Across the more than 200 traders we engaged with, we saw one consistent challenge emerging time and time again: getting a view of the forward curve for a wide number of benchmarks.
As markets become more volatile and trading becomes more sporadic in response to macroeconomic news, there are major benefits to having fast and constant access to markets’ forward pricing. Such information arms a trader with the means to take advantage of trading opportunities and eliminate risk - whether that’s by better understanding market fundamentals, evaluating alternative, cheaper supply sources, or enhancing their hedging strategy.
Unlike markets that trade on an exchange however, there is no standardised and centralised platform in OTC markets where traders can easily discover all the necessary forward curves to inform trading decisions. To construct a good view of all the required forward curves currently, traders tend to do the following:
Aside from the above method being labour intensive, it has limitations with providing a truly accurate and objective picture of the market. It is also extremely difficult to properly manage the volume of broker pricing - even when dealing with just a handful of brokers, it often still means a lot of valuable pricing information.
Furthermore, liquidity can be sporadic and constrained during certain market periods (see Figure 1). In these instances, traders have to ‘guesstimate’ curves based on available pieces of pricing data in adjacent markets or exchange quotes.
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Some products only have 10% total volumes traded on-exchange (e.g. Ebob gasoline and Nap NWE crack). It’s clear that exchange data won’t do much to solve the problem of forward price visibility in such markets.
If you’re trading markets that are totally off-exchange, you are therefore left to rely on multiple broker quotes to manually recreate a view of the forward market. This means traders need to be actively trading a market to get a decent view of where “value” is within it, and they have to trust that those broker quotes represent large enough of a sample to be truly representative.
Translating these quotes into a market view is still a labour-intensive process which becomes especially strained in volatile markets, no matter which way you cut the current methods.
This challenge has been one of the key drivers that has informed our product development. We see it as a key problem for traders and trading firms in OTC energy markets, and believe it will continue to constrain traders until it is finally solved.
By providing a view of forward curves in the OTC energy space we enable companies to capture more trading opportunities and arm them with strategic insights, whilst preserving their efforts for higher-value activities.
McKinsey believes digitisation can provide a competitive edge in metals, but we think the impact will be even bigger for OTC energy.
In a recent article McKinsey outlined how the digitisation of operating models provides a huge opportunity for early adopters in metals trading to differentiate themselves and establish a competitive edge, and how laggards may fall victim to progress.
We agree with both their diagnosis of the problem and the solutions, but think the opportunity is even bigger for OTC energy markets.
Traders in both energy and metals rely on relationships and broker networks, but use manual and non-standard processes to make decisions and manage trade flow, communicating via analogue channels like messenger chat and voice box.
The time spent managing these data flows ultimately decreases time spent on more strategic endeavours, and becomes harder to manage the more pressure is placed on traders to respond quickly to changing market dynamics.
McKinsey then goes on to outline the quickest wins and key areas where operating models need to be updated.
Upgrading these four areas not only provides a competitive edge through enhancing speed and quality of decision-making as well as profitability, it also decreases operating costs by between 19% - 28% (McKinsey).
As traders in energy markets face increasing pressures and volatility, the opportunity is a no-brainer, the only barrier is changing mindsets. Both the Tallarium and McKinsey take is that those who fail to adapt will be outcompeted by those who do.
At the moment traders in energy markets are making multi-billion profits on the back of volatility and price inflation. But rather than waiting for hard times to strike, is now the best time to safeguard future profits and competitiveness?
Good times for energy traders?
For traders in the energy markets right now, the global political and economic climates mean there is plenty of volatility. This creates a fruitful trading environment with multiple opportunities to take advantage of as markets get displaced from their previous equilibrium levels. At the same time, there is the challenge of low and inconsistent liquidity as its provision in such a climate is much harder.
But ultimately this results in extremely hectic but profitable times for the best-positioned market operators. Whilst commodities prices start to decline from their peaks during the post-pandemic demand and war in Ukraine, energy prices remain buoyant.
Recent gains in the energy markets have driven successes for traders in the sector so far, but this performance may be masking an underlying problem which will become important when markets eventually settle down to a more familiar pattern.
Fundamentally, the energy markets are broken
Off-exchange energy contracts represent up to 96% of the total energy trading contract universe which includes contracts like LNG, biofuels, jet fuel, propane, petrochemical, environmentals, US pipeline crude and many more. But at the same time, there is no single public price for those contracts. Over $5tn worth of deals per annum is done using chats and phone calls and traders track prices manually using spreadsheets. Inevitably, when trying to compete in the market, energy traders have to act on ‘gut feel’ to make trading decisions as they rely on pricing from their private broker networks and legacy systems like Excel. This makes price discovery for energy products a cumbersome and convoluted affair and therefore a major challenge that adds risk and uncertainty to any trader’s day.
What’s more, this leads to major systematic challenges with trading decisions, clearing and timely risk management. At a time when many other asset classes have made significant strides in electronification, automation and transparency, something as fundamental as product pricing data is not standardised in energy markets. Those 96% of energy market contracts share no common data or common marketplace. Instead, pricing is inferred from a vast amount of voice and message chats between brokers and traders. Pricing information is manually input into Excel spreadsheets and analysed there. A typical energy trader will get as many as 5,000 quotes a day from as many as 50 different brokers, generating a large volume of unwieldy data that is impossible to handle, prone to errors and missed execution opportunities. As a result, energy markets heavily rely on dealing through brokers using legacy channels, with only a small fraction of the total volume transacted via electronic markets.
This anachronistic approach to energy trading, whilst currently dominating the trading landscape, is also its main barrier to long term confidence and security.
Today’s energy traders operate ‘blind’
Gathering, storing and using data in this way leads to information being siloed and stagnant in even the most established, most advanced energy trading teams. With no exchange pricing information to benchmark against and a finite network of contacts providing limited consensus, each trader operates ‘blind’ and has no real way of knowing with complete confidence if they are making the best deal possible, at the right time.
They cannot be sure they are not leaving value ‘on the table’ during transactions as there is no definitive, reliable confirmation available and this lack of pricing certainty inhibits deal flow, understandably giving traders cause for pause as they second-guess the potential outcomes. In this way, opportunities can be missed.
Moreover, the energy trading market can be a tough business anyway. Competition continues to intensify between energy trading organisations, whilst sustained volatility compels markets to adjust to macroeconomic factors much more quickly. This means that despite the importance of what energy traders do and the rising pressure they are under to make more good trade decisions than bad ones, traders have less and less time to interpret the market and make those trade decisions.
What they need at the very least is a real-time single source of truth that aggregates and structures those vast amounts of market data points into reliable pricing information.
The lack of innovation holds energy trading back
Because energy trading markets lag behind other asset classes when it comes to electronification, they have not yet felt the benefits of improved efficiencies, increased speed, higher access to liquidity and more certainty in trading decisions. Soaring energy prices have insulated the market from these realities of late and perhaps whilst profits are good, nobody is asking the question: “How do we remain in front of the curve when the energy markets normalise?” If nobody realises that the market is ‘broken’ nobody will ‘fix’ it.
There are wider implications too, as the impacts of these markets are not just on the profitability of traders, but on inflation for the general public and even the energy security of nations.
Time to embrace modernisation, better price discovery and execution
The good news is, as other markets such as equities have shown, there is life beyond Excel. If the energy trading and wider commodities trading markets can use this period of rising profits to invest in modernising their trading operations, the benefits to businesses over the medium to longer term could be profound. Imagine energy trading with the kind of clarity and confidence a digital trading infrastructure could bring. Imagine being able to act more quickly, access more liquidity, instantly know portfolio performance and fully understand its potential risks across the wider business and its implications, rather than just having isolated areas of positive performance within an energy trading floor. In other words, imagine trading energy the way people trade equity or FX but at the same time maintaining the benefits of the current broker-driven market structure.
These kinds of improvements could make energy trading more profitable overall, reduce risks and at the same time help maintain an orderly market in global energy supplies, helping to keep future inflation under control and pave the way for greater energy security for entire nations.
In today’s technology and innovation-rich financial markets, the solutions are being developed right now, and as equities proved, no transition to digitisation is impossible, no matter how embedded in tradition they are.
Now is the time to say goodbye to Excel constraints and the ‘old school’, legacy ways of energy trading and embrace automation within the trading lifecycle. This will lead to more informed trading decisions, accurate price discovery and better execution outcomes - and let’s not forget the wider benefits of increased market efficiencies and ultimately, wider uptake of the new markets which are critical for the energy transition.
Stanislav Ermilov is the founder and CEO of Tallarium, the provider of the energy market’s first and only definitive pricing data and analytics.