So-called 'round-trip trades' and what FERC should do about it.
Mark T. Williams is a visiting scholar at Boston University, and a principal of Boston-based Minuteman Energy Consulting LLC.
Historically, the energy industry, for sound or unsound reasons, has placed a lot of weight on the level of company trade volume relative to its peers. If there were any doubt, you need only look at the recent equity performance of Dynegy and Reliant Resources after recent disclosures of round-trip trades that inflated trade volume. Round-trip trading is the practice of executing mirror-image transactions, in which two companies enter into a trade at the same price, quantity amount, and delivery point.
Although such transactions boost volume and revenue, there is no material impact on either company's reported net income. Following the initial May "round-trip" trading disclosures by Dynegy and Reliant, each company's stock price dropped by more than 40 percent, representing billions in lost market capitalization.
In fact, Reliant last month also acknowledged that round-trip trades boosted stated volume and revenue.
Given this, why has trade volume historically been one of the key measurements used when evaluating an energy-trading firm's financial health? The main reason is that as this sector has rapidly developed there has been a tendency to gravitate to a single industry rankings benchmark that could be consistently applied to individual companies as well as to peer group performance.
In fact, published industry rankings based on volume traded have been used to determine market dominance, validate growth strategy, evaluate a potential merger candidate, or to determine whether to extend credit to counterparts.