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Davos: Digital transformation in energy trading

Alessandro Sanos, CAIA, SCR
Alessandro Sanos, CAIA, SCR
Global Director Sales Strategy & Execution, Commodities, Refinitiv

The digital transformation in energy trading is gathering pace. As the Globalization 4.0 theme at Davos 2019 brings automation and the Internet of Everything into sharper focus, Alessandro Sanos describes the four key milestones for the digital journey in commodities as part of the 'Global Markets Forum at Davos: The future is now' blog series.

  1. Companies able to embrace the digital transformation in energy trading will succeed in the increasingly globalized and interconnected future.
  2. Data is the core of the Internet of Everything and it needs to flow across the whole organization to extract its maximum potential. But customers find it challenging to manage different unconnected data sources.
  3. There are four milestones on the journey to a digital transformation in energy trading, including the use of execution algorithms and machine learning.

The Fourth Industrial Revolution is introducing change at a pace and scale unparalleled in history. As Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, has stated: “Globalization 4.0 has only just begun, but we are already vastly under-prepared for it.”

Compared with financial institutions, commodities and energy trading companies are much less prepared in terms of progressing their digital transformation journey.

The interconnection of the commodities ecosystem has become increasingly complex, but the manner in which business is conducted has not kept up, with many processes still paper-based.

Most executives now recognize that they need to evolve their businesses to stay relevant. There is a growing realization that due to lower margins and the democratization of data, companies must transform and reconsider how they create value.

Digital transformation

As with any buzzword, digital transformation means different things to different people. IMD defines it as “organizational change through the use of digital technologies and business models to improve performance”.

From this perspective, the business-as-usual technology upgrade cycle is no longer enough.

It is essential to rethink and change the current business model by leveraging technology. In other words, it is important to think ‘digitalization’ not ‘digital’.

Figure 1 – “How far along is your company in its digital transformation journey?” Live poll during the #EnergyInteractive event in London, November 2018. Davos 2019: A digital transformation in energy trading

At our recent #EnergyInteractive event in London, we discussed the digital transformation in energy trading.

The industry is moving at different speeds

“In energy, we live in a two-speed world. Power and gas players are galloping and quickly transitioning from traditional discretionary trading into systematic trading, whereas the oil industry started paying attention to digital only in the last couple of years.” — Antti Belt, Partner, Digital Commodity Trading, Boston Consulting Group

Change is currently taking place at different speeds in the commodities industry. Big companies who held the world’s commodities assets used to control the majority of the information.

Now, companies without physical assets can leverage geospatial analytics, infra-red imagery and the Internet of Things to access very granular data that was not previously available or affordable.

With other exponential technologies, these innovations are collectively referred to as the Internet of Everything (IoE).

IoE has a profound effect across the industry as it introduces transparency and reduces the information asymmetry that has long characterized this opaque market.

We can already see the effects, as small and agile commodity trading firms who are leveraging the emerging IoE are reshaping the landscape.

As Leo Johnson, Partner and Disruption Lead, PwC, highlights: “The different components of the revolution that is taking place in energy, the multiple pieces of the puzzle, are all slowly coming together.”

Data is the core of IoE, and it needs to flow across the whole organization to extract its maximum potential. However, data is just the beginning.

Established players that traditionally approached data on a desk-by-desk basis, therefore need to adapt new ways of working and go through a paradigm shift that fundamentally changes the way they work.

How challenging is it for you to aggregate and normalize your different internal and external data sources into a single information flow? Davos 2019: A digital transformation in energy trading

The automation of processes

“We will see widespread automation of manual processes, through deployment and uptake of industry-wide platforms built on technologies such as blockchain. This will not only speed up paper-based processes and remove human errors, but also enable companies to access up-to-date information digitally.” — Leigh Henson, Global Head of Commodities, Refinitiv

Our customers tell us that they find it challenging to manage the different unconnected data sources they use.

So how can commodity traders achieve the digital transformation endgame? There are four milestones on that journey:

  1. When companies provide their traders with access to information on their screens, for instance via Eikon or REDI.
  2. Automation of the front, middle, and back office functions using execution algorithms, with the focus of cutting costs.
  3. A focus on improving margins, with human traders assisted by algorithms and machine learning that leverage reliable data.
  4. When companies move from desk-based systems to fully-automated functional systems. The main focus here will be on the underlying data and the evolution of the talent pool, from traders to data scientists and programmers.

In the beginning, the journey may feel daunting as companies face the inevitable early issues around data integration, infrastructure, technology and talent.

Nevertheless, Antti Belt tells us that the current consensus is that market players able to harness IoE will converge between the third and fourth level within the next five to ten years.

The journey mapped as integrated data and technology solutions present opportunities in a world of digital trading. Davos 2019: A digital transformation in energy trading

Helping with the digitalization journey

Today, companies need to be able to make critical decisions fast and these decisions need to be data-driven and not based on opinions.

We have had many years of success in organizing and connecting different internal and external data sources, so that our clients can focus on analyzing the insights that emerge from the interconnection of this data in order to deliver maximum business benefit.

As the world’s first fintech company, we believe that we should move past the narrative of humans versus machines, acknowledge that we can be smarter humans enabled by smarter machines and that the ultimate goal of technology is to help people do their jobs better and more effectively than before.

Companies able to ride the digital transformation wave will succeed in the increasingly globalized and interconnected future and will dramatically reduce the chances of being disrupted by their lack of action.

Watch: Digital Transformation in Energy Trading at the #EnergyInteractive event

Globalization and the GMF

This piece is part of our ‘Global Markets Forum (GMF) at Davos 2019: The future is now’ blog series.

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