Information in time: aFFR/mFFR activations and insider trading

Who knows what, when? Is the current information asymmetry in the German energy market sustainable?

This post takes us from indices to insider trading. In the last two posts we were thinking about indices to represent the value available to Battery Energy Storage Systems (BESS) in the energy markets. We argued that a “true index” should be adapted to how information flows in the market. Using “foresight in hindsight” may lead to useful heuristic measures, but our standards for an “index” should be higher. This view leads to a prediction that we will see market participants publishing adapted index strategies and associated “live” indicators before too long. Once they do, we will consider that the market has evolved a step forward in its maturity.

The broader theme raised by the exploration of indices is the theme of information flow in time. What do we know when, and how do we act based on what we know?

Things are transformed one into another according to necessity, and render justice to one another according to the order of time.

A translation of the only fragment of writing we have from Anaximander, as quoted by Carlo Rovelli in “The Order of Time”

We might criticise an index methodology that is not adapted to the natural flow of information in time or we might applaud it as a shortcut leading to a useful heuristic. In any case, there is no harm as long as we can see through it and don’t take the measure too seriously.

In contrast, questions of insider trading are serious indeed. The integrity of the system is at stake. The concern in the context of index design was about pretending to have known more in the past than was possible. Insider trading is about the much more serious issue of actually knowing more in the present than others can possibly know, and being able to act upon this additional information flow to your advantage.

The design of every regulated market includes rules about the flow of information. Information that has the potential to influence the market, but is not available to all market participants, is, by definition, “inside information.” A market should be a venue for fair dealing. It seems unfair if you have inside information that has the potential to be useful in dealing and don’t share it with everyone else.

ACER Guidance on REMIT application, https://acer.europa.eu/sites/default/files/documents/en/remit/Documents/ACER_Guidance_on_REMIT_application_6th_Edition_Final.pdf

Now you might think that insider trading is relatively rare. In fact, it turns out that the existence of “inside information” may be a systematic problem in the German energy markets.

Earlier this year in June, an article by Montel raised questions about insider trading in the German energy markets. Activation signals for the secondary and tertiary frequency restoration reserves (aFFR, and mFRR) are not published publicly in “real-time.” For a period of time, therefore, activation signals are only available to parties who participate in the aFFR and mFRR services. It is possible that they might use this information to inform their dealing in the continuous Intra-Day market before others get a chance to catch up.

A systematic problem?