My Thoughts On “IEX Market Coupling”

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My Thoughts On “IEX – Market Coupling”


There are lots of theories going around market coupling mentioned in the new CERC draft will take away IEX competitive advantage and other exchanges will be able to take some volume away from IEX by offering lower fee or free trade etc ( which they have not been able to do so far).

There is one brokerage report out there stating very confidently this is very negative for the IEX and they valued it -20 to -30% to their earlier target price based on analysis that never made any sense since its inception.

The idea behind all this is people believe Market Coupling means now you can trade from any exchange and settlement will get done by MCO (market coupling operator) based on its algorithm.

Here is the draft which states about the functions of market coupling –

As you can clearly see, after reading this, the first impression it’s going to make on you is that the ultimate monopoly is now with MCO, which kind of has become an exchange and existing exchanges have become now brokers and brokerage business is bad business there is no moat and low cost provider wins ultimately but competitive pressures will keep you away from making truck loads of money.

One flaw I see in people (atleast who reached out to me) reasoning, saying “” IEX moat is gone, now other exchanges can easily burn Rs 100 Cr (by charging no fee ) gain market share, earlier it was not possible due to network effect IEX was enjoying ”” is they see IEX is normal stock exchange & then derive these conclusions but power exchanges are way more complex than stock exchanges – ( it’s not that obvious to me moat is gone)

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The more pressing question is why do I need MCO and Exchanges ?, why not have just MCO alone where all the bids can be submitted and settled, Like how it’s been happening in IEX currently.

Naturally another question arises: what’s wrong with the current system? and what have you achieved over and above current system by introducing MCO ? and turning exchanges into brokerage firms whose job going to be just putting the trades into MCO (Exchange) and wait for result then display to the traders.

Also, who is going to setup MCO ?

You can say – well this will bring down the cost of trading due to competitive pressure in the markets, but doesn’t the overall cost has gone up instead as now we have brokerage cost (IEX, PIX etc) + exchange cost (MCO) and earlier we had just Exchange cost ( IEX).

A general PX provides the following services to its market participants:

(a) online market interface for power trading;

(b) market clearing and deal settlement;

(c) accounting and billing of spot market products;

(d) information needed to its market participants; and

(e) addressing financial risk.

You can argue saying only point (b) will be moved to MCO and rest has to be managed by Exchange.

This statement is partly corrected and I believe only in special cases (like to enable cross border trades) something like MCO will be required. Probably that’s what the intention here more from the angle of doing homework by CERC to enable One Sun, One World, One Grid: India’s grand plan and CERC has been talking about enabling Cross border trades for a long time.

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To make sense of it let’s look into European markets and understand how they arrived at the concept of Market Coupling –

Why Market Coupling Introduced In Europe ?

In cooperation with the European Commission, APX launched a Trilateral Market Coupling initiative in 2004 to bring the French, Belgian and Dutch power exchanges closer together. Coupling power exchanges implies managing their respective supply and purchase curves jointly, by matching the highest purchase bids and lowest sale bids, regardless of where they have been made (eg. matching a purchase bid in Belgium with a sales bid in France), but taking into account the available interconnection capacities on the borders. In other words, the counterparty of a transaction on a power exchange may originate from a foreign exchange without the participants being bound to explicitly acquire the corresponding transmission capacity.

The initiative has improved border power flows among markets, EuroPex (The Association of European Power Exchanges) stating that “border flows are now always in the right direction, with netting of imports and exports. With 100% utilization of the remaining capacity in order to reduce the price difference as much as possible, even often to zero. And as a result, prices have come together, converged, yielding a common integrated market with often one single price”. When no congestion occurs between coupled markets, the markets merge into a single zone with one price and shared liquidity. This leads to convergence of market prices whenever there is no real constraint.

How volumes in major EU power exchanges changed over time due to market coupling ?

Before market coupling volume in different EU exchanges – ( Today in all these exchanges volume in the range of TWh from GWh in 2001)

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Market coupling in Europe introduced between 2000 -2008 , All most all major exchanges mentioned below grew during that era –

Here is the DATA of what happened post 2008.

Towarowa Gielda Energii ( SPOT vol aren’t showing any signs that went away to some other exchange )


Neither EEX & EPEX graph shows – ( Exchanges turned into brokerage house due to market coupling )


Similarly for other exchanges APX, APX -UK, NORD pool, OMEL etc are still the dominant exchanges in their region.

Market coupling has facilitated the settlement between these exchanges for cross border transmission.

Currently just based on the CERC draft i would hesitate to make an opinion MOAT has gone away, I believe its way more prudent to wait for regulation to become mature. I also find it hard to believe CERC has introduced market coupling to move away little 4% volume of total power trading to many other exchanges from IEX, I believe the higher purpose behind this move is to enable the cross border trade of electricity in future.











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Dhruva Pandey

Dhruva Pandey

Dhruva looks for companies with a durable competitive advantage that are run by honest people, and available at a price that makes sense to him. His interests include technology, investing, markets, psychology, and chess.
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