Electricity Trading

[Sig]

The California Electricity Crisis: Lessons for the Future
Dr. James L. Sweeney, Stanford University

"Thus the problem in California was not electricity deregulation; it was price regulation at the
retail level and rigid regulation prohibiting long-term contracts at the wholesale level. It was an
issue of gross mismanagement by the California governor and the CPUC."

"The issue is not that deregulation does not work but that it should not be done the California way."

"Second, isolation of the supply side of the market from the demand side breeds disaster. Appropriate risk management and analysis are essential. Ultimately, any major restructuring of a system, whether it is a company, the military, or the electricity system, is bound to have problems in the beginning. The system must be monitored, and management must be flexible and quick enough to respond appropriately. Governors and legislatures need to act courageously and wisely and not driven entirely by political expediency."

Funny you picked this quote, I actually had the pleasure of talking with Professor Sweeney about this in person back in 2007/8 when I was at school and he was helping us develop my first business.
I've of course read Professor Sweeney's book and I don't believe that anywhere in the book, certainly not the section quoted, are the manipulations that Enron propagated listed as a result of "socialist" policies. Wholesale and retail rate limits had no impact on Enron selling power outside CA when it was needed inside CA or shutting down plants for bogus maintenance to create artificial shortages. Remember, this was one of the first states to go from a monopoly to a deregulated electricity supply market. Nothing is more anti-capitalist than a monopoly, I think we can all agree on that, so the step CA took as one of the first to try to end a monopoly is the last thing from what anyone could call "socialist". As the first mover they undoubtedly fucked up when it came to anticipating market manipulation. Again, that's not being "socialist", that's being a leader in eliminating monopolies, again the most pro-market, anti-socialist thing you can do.
I don't disagree at all that structurally the way CAPUC handled wholesale and retail pricing was deeply flawed. That has next to nothing to do with Enron's illegal market manipulation. As an aside, I always found it ironic that when you did a case study on Enron it was about their accounting fraud. Just a few people like you and I even realize the extent of the malfeasance they subjected us all to on the market manipulation side. A truly evil company.

 

[quechua]

I don't want to interrupt California Energy Crisis topic but any idea how my friend could do this ? Maybe I should start a new thread in Forex section but just want to try my chance here first.

A friend of mine blew my mind. He doesn't tell us much but he has an app or computer software that automatically trades foreign currency between multiple currencies. He only told us that depending on the trend, he just buys and sells hundreds of times and those small profits stack up.

 

[Sig]

I don't want to interrupt California Energy Crisis topic but any idea how my friend could do this ? Maybe I should start a new thread in Forex section but just want to try my chance here first.

He's most probably either confused luck with skill or he's bullshitting you. It's a pretty common human condition, ask anyone after a trip to Vegas how they did and often they'll tell you how much they were up or what they wonder but seldom their net results. Same when it comes to bragging about forex results.

I'm an engineering as you are. It's crucially important to grasp that engineering and trading are fundamentally and completely different. Trading is full of very bright people, the only safe assumption is that at least a few are as smart or smarter than you or I. And at least a few are far better capitalized than you or I. And trading systems are a winner take all proposition, so if there is an edge in building a particular kind of trading program the first person to figure that out will almost instantly arb the opportunity away. So if you have a bright idea that any competent technical mind could come up with, you're flattering yourself to think it's unique and therefore exploitable. Therefore your friend's "just built a little program" thing is most certainly bullshit.

The exception to that are niches where the assumptions I listed may not hold. Are you in Peru (assumed from your handle) and have some unique insight into a corner of the Peruvian stock market that pretty much no-one in a hedge fund somewhere would have, or is too small to be worth exploiting? That's what you want to look for.

 

[bone]

He's most probably either confused luck with skill or he's bullshitting you. It's a pretty common human condition, ask anyone after a trip to Vegas how they did and often they'll tell you how much they were up or what they wonder but seldom their net results. Same when it comes to bragging about forex results.

I'm an engineering as you are. It's crucially important to grasp that engineering and trading are fundamentally and completely different. Trading is full of very bright people, the only safe assumption is that at least a few are as smart or smarter than you or I. And at least a few are far better capitalized than you or I. And trading systems are a winner take all proposition, so if there is an edge in building a particular kind of trading program the first person to figure that out will almost instantly arb the opportunity away. So if you have a bright idea that any competent technical mind could come up with, you're flattering yourself to think it's unique and therefore exploitable. Therefore your friend's "just built a little program" thing is most certainly bullshit.

The exception to that are niches where the assumptions I listed may not hold. Are you in Peru (assumed from your handle) and have some unique insight into a corner of the Peruvian stock market that pretty much no-one in a hedge fund somewhere would have, or is too small to be worth exploiting? That's what you want to look for.

I’ve got a buddy who made several million dollars on a CME Yen arbitrage in the 1990’s. Lasted all of about four months - Morgan Stanley figured it out as well and they pinched him for half of his gains over a period of just a couple weeks.

Markets are so efficient these days - especially in the day of electronic exchanges open 23 hours per day and accessible worldwide. Efficiency hurts arbitrage possibilities. And then you’ve got Dalio and his clones of very smart people with huge scale and an abundance of resources and tools.

 

[bone]

Funny you picked this quote, I actually had the pleasure of talking with Professor Sweeney about this in person back in 2007/8 when I was at school and he was helping us develop my first business.
I've of course read Professor Sweeney's book and I don't believe that anywhere in the book, certainly not the section quoted, are the manipulations that Enron propagated listed as a result of "socialist" policies. Wholesale and retail rate limits had no impact on Enron selling power outside CA when it was needed inside CA or shutting down plants for bogus maintenance to create artificial shortages. Remember, this was one of the first states to go from a monopoly to a deregulated electricity supply market. Nothing is more anti-capitalist than a monopoly, I think we can all agree on that, so the step CA took as one of the first to try to end a monopoly is the last thing from what anyone could call "socialist". As the first mover they undoubtedly fucked up when it came to anticipating market manipulation. Again, that's not being "socialist", that's being a leader in eliminating monopolies, again the most pro-market, anti-socialist thing you can do.
I don't disagree at all that structurally the way CAPUC handled wholesale and retail pricing was deeply flawed. That has next to nothing to do with Enron's illegal market manipulation. As an aside, I always found it ironic that when you did a case study on Enron it was about their accounting fraud. Just a few people like you and I even realize the extent of the malfeasance they subjected us all to on the market manipulation side. A truly evil company.

When I traded commercial power at a utility I made a special effort to F*** over Enron every chance I got. We relished the opportunity when it presented itself. Even in the ‘90’s they were assholes of the highest caliber. They preyed upon small utilities and co-ops. Enron bought up firm power contracts and transmission rights then ransomed them. There were times when I would cover Co-ops with Emergency Power directly - after refusing the same to Enron just to force them to pay liquidated damages to the Co-Ops. There were times when I lost big nuclear units and my first phone call was to Enron - and then bid up the price to cover the balance elsewhere. A Senior VP came back from a conference in Monterey California and told me that the way Enron talked about me that he wasn’t sure if they 1. Wanted to put out a hit on me, or 2. Admired me.

 

[Sig]

A Senior VP came back from a conference in Monterey California and told me that the way Enron talked about me that he wasn’t sure if they 1. Wanted to put out a hit on me, or 2. Admired me.

I'm surprised given the silly money they had to throw around they didn't try to hire you to either get you out of the way or try to indoctrinate you to the dark side. Hell, they might have even given you a half dozen LLCs as a signing bonus!

 

[quechua]

For @bone,

I was going to send a PM but thought that it should be public so that other people can benefit, too. Think of this like an interview.

You come from engineering background like me (like potential engineers who will read this thread in future).

- What motivated you to shift towards investing world rather than calculating fault current of a 3 phase system at a distribution company ?

- Which area of investing do you suggest for future investors from engineering background ?

- Share with us your general advices how to get into investing and obtaining the knowledge and experience ?

Thanks.

 

[bone]

For @bone,

I was going to send a PM but thought that it should be public so that other people can benefit, too. Think of this like an interview.

You come from engineering background like me (like potential engineers who will read this thread in future).

- What motivated you to shift towards investing world rather than calculating fault current of a 3 phase system at a distribution company ?

- Which area of investing do you suggest for future investors from engineering background ?

- Share with us your general advices how to get into investing and obtaining the knowledge and experience ?

Thanks.

NP. It was a strange turn of opportunity and luck as one sometimes encounters in life.

I took a job at Commonwealth Edison straight out of school as a Nuclear Engineer. My specialties were radiation shielding design and robotics (I have multiple Patents in the fields). I worked in the downtown Chicago corporate office. I lived in the City and had a buddy who was a trader at the Chicago Board of Trade. He thought that I'd make a good trader. I leased his evening Pit seat and started trading in the evenings - at that time the Japanese and Asians were very heavily involved in US Treasuries. My Membership badge was "NUK" because I was a Nuclear Engineer. I would get off of work in the late afternoon and walk several blocks over the the CBoT building - I never quit my Engineering job. I was also one of the first locals to use electronic platforms like Globex and Project A in the evenings and sometimes early morning hours. My buddy mentored me, and Ray Cahnman, the President of TransMarket and one hell of a trader himself, taught me how to spread trade. As fortune would have it, the CEO of my Power Utility, James J. O'Connor, took a Director Seat at the Chicago Board of Trade at the behest of his friend and CEO of the CBoT Thomas Donovan. Ray Cahnman sat on the Board. So did Bobby Corvino, a very prominent local trader who traded the evening Pit sessions and also sat on the Board. At the first Board meeting, Ray and Bobby proceeded to tell a thoroughly confused Power Utility CEO that they knew one of his engineers and that he was a trader. A few weeks later I received a page at Zion Nuclear Station. It was Mr. O'Connor's Secretary telling me that I was no longer a Nuclear Engineer and that I was to report to a certain office at a certain time in order to assist a new executive hired from Lehman Brothers in order to help start up an energy trading desk. So that's how it happened for me.

A few years later, my utility, Commonwealth Edison merged with Philadelphia Electric Company to become Exelon. As part of that merger, the Chicago trading desk was to dissolve and the PECO trading desk in Pennsylvania was to do all the trading. At that time I had been married for a few years and had a couple kids. My wife had a good position with IBM in Chicago. Like 90 percent of the other traders - I took a buyout package instead of moving to Philadelphia. And from that point on I started trading exchange products full time. I was making way more money on the screen than in the pits. I was one of the early traders in Chicago to take and pass the DTB test and I did really really well trading Eurex.

I have experience with proprietary trading firms and at a HF. I have seen raw Engineers who knew how to code get hired as coders and analysts - eventually some of them make it onto a trading desk. In fact, many of these firms really like Engineers and Physics and Math types
(if they can code). To me, that is the best way to enter the world of trading. If you can code for machine learning and AI and are quite proficient at time series analysis then that's your ticket. An MBA is no longer the ticket it used to be. Maybe an MBA from a top five school is still relevant in the M&A field (traditional Investment Banking) but not so much in trading anymore IMHO.

One suggestion would be for you to procure some data from the CME (choose Crude Oil and Ten Year Treasury Notes) and model it. Don't download free data. If you're going to put in the time and effort spend the nominal fee to get clean accurate data directly from CME. Get on the CME website Educational Resources website and review the education materials - they are free and are typically very high quality. Don't buy any texts or books on trading - spend that money on CME data.

https://www.cmegroup.com/education/browse-all.html

https://www.cmegroup.com/market-data.html

The problem will be that as an analyst you are going to be pigeon holed. Traders will take your good ideas and turn them into money for themselves and the firm. Keep a very detailed and updated portfolio of your work and accomplishments at home regardless of what your employment contract says. At some point in time, you will have reached a level of proficiency where you should line up a position at a competing firm and give your current firm the choice to either promote you to trader or to accept your two weeks notice. They might be pricks about paying your $20K bonus but that won't bother you considering that the trader you have been feeding ideas to and taking abuse from just got a $3M bonus. They will be pricks about your employment contract boiler plate non-compete and IP constraints - but in terms of enforceable law for "at will" employees in the US States that matter in the trading industry those constraints are not legally enforceable. Only exceptions being if you "stole" IP that you didn't work on or that the Company has Patent rights on, or if you "stole" a client list which is irrelevant in your case.

Good luck with everything and I wish you good fortune !

 

[quechua]

In my term project, I used a machine learning tool to forecast energy consumption of our campus for the next day. I was successful. I am not very advance at time series analysis, just the basics of signal processing due to our field but it will help that I have the mathematical background to improve. It will be a long run for me anyways.

Let me ask you another 3 questions, or anyone who might have any idea.

- How is the job market in the US for analysts and do they welcome foreigners ? I've been to the States a couple of times in a total of 1 year and moving is my top priority for the life. I don't care if I make $36k/year.

- As a continuation of the first question, besides work experience, what can I do to improve my chances ? I've heard there are some solid certificates (the one I head was CFA I guess).

- What part of trading an analyst is interested in ? Foreign exchange, stocks ? Or is it someone who just analyses the data and constructs a model to predict the trend irrespective of the area ?

 

[Sig]

In my term project, I used a machine learning tool to forecast energy consumption of our campus for the next day. I was successful. I am not very advance at time series analysis, just the basics of signal processing due to our field but it will help that I have the mathematical background to improve. It will be a long run for me anyways.

Let me ask you another 3 questions, or anyone who might have any idea.

- How is the job market in the US for analysts and do they welcome foreigners ? I've been to the States a couple of times in a total of 1 year and moving is my top priority for the life. I don't care if I make $36k/year.

- As a continuation of the first question, besides work experience, what can I do to improve my chances ? I've heard there are some solid certificates (the one I head was CFA I guess).

- What part of trading an analyst is interested in ? Foreign exchange, stocks ? Or is it someone who just analyses the data and constructs a model to predict the trend irrespective of the area ?

I'll give you a consolidated and brutally honest answer. If you don't have a U.S. work visa and are (again assuming) from Peru or somewhere similar then you have next to no chance of getting hired in the U.S. for what you want under your circumstances. The company would have to sponsor you for one of a very limited number of visas and there are more than enough qualified folks here that want that same job. Ironically the best chance you'd have of getting a work visa like that would be for an electrical engineering job under your electrical engineering experience, there is a legitimate shortage of those (I'm also an EE undergrad).
Really the only way you're going to even have a realistic chance of accomplishing what you want is to get into a grad school program in the U.S., which allows you to work for a short time in the U.S. after graduation. I'd recommend the best MBA program you can get into for the maximum flexibility, but there are also some good management science and engineering programs that are much easier to be admitted to. You could also just go for a masters in CS or EE and try to get hired as a quant, although again a super competitive field especially if you're also competing for a visa sponsorship. A CFA or any other certificate isn't going to get you visa sponsorship.

I hate to burst your bubble, but what you're trying to do is about as achievable as becoming a Real Madrid player given that you're the best soccer player in your elementary school. I'm an electrical engineer like you, a U.S. citizen, and also have an MBA from a school that should give me an automatic ticket to any job I want, and even I would need to work pretty hard to break into banking because I didn't "pay my dues" working 80 hour weeks right out of undergrad as an analyst. You have one of the most in-demand degrees in the world, you're much better off using that, either as an engineer or as an entrepreneur using what you know and how you think as an engineer, and trading as a hobby, than making yourself miserable trying for something that you'll really achieve only if you're incredibly lucky. I know that's not what you want to hear and "chase your dreams" and all that bullshit, but every now and then it's incumbent on us to be completely honest and in your case you're realistically only slightly more likely to achieve this than become a professional soccer player. I'll leave you with my favorite XKCD cartoon on the subject to cheer you up, apologies to everyone else on the forum who's already seen me post it:

https://xkcd.com/1570/