By Nerijus Adomaitis and Nina Chestney
OSLO/LONDON (Reuters) - The European Union started on Thursday to amass information about all so-called over-the-counter trades in the region's energy markets in a bid to crack down on suspected price manipulation.
EU watchdog the Agency for the Cooperation of Energy Regulators (ACER) began collecting data about trades on official energy exchanges within Europe in October but says it can only get a full picture once informal transactions are tracked too.
Over-the-counter (OTC) trades account for at least two thirds of Europe's multi-billion dollar wholesale power and gas trading markets. The EU has been concerned energy prices could be rigged with inside information, or with tactics used in stock markets such as "layering" where traders bombard systems with orders they do not intend to execute to try to shift prices.
As a result, the EU launched the Regulation on Wholesale Energy Integrity and Transparency (REMIT) in December 2011, and the watchdog hopes the collection of OTC data will improve the integrity and transparency of the markets.
There are several hundred companies involved in wholesale electricity and gas trading in Europe with up to 10,000 transactions a day, all of which makes it difficult to nail down whether there has been market manipulation.
ACER said the REMIT market monitoring framework was unprecedented, not only for the energy sector and its geographic scope, but also for its complexity.
Since it started tracking exchange transactions on Oct. 7, the EU watchdog had received data on more than 79 million orders and 23 million of trades on the EU's power and gas exchanges by Feb. 15, according to a presentation by the agency.
The agency declined to say how many alerts had been triggered by its surveillance software so far, or potential market breaches detected, citing confidentiality.
According to ACER's annual report published last September, out of 58 potential breaches in 2013 and 2014, 26 were related to suspected market manipulation.
ACER said it proved market manipulation in two out of the 14 cases it closed in 2014, though neither was sanctioned. Estonia and Spain sanctioned two REMIT breach cases in 2015. Both companies in question have appealed.
NO MAGIC BULLET
The EU watchdog uses market surveillance software SMARTS to monitor trading for suspicious behavior. SMARTS, developed in Australia, was acquired by the U.S. Nasdaq Inc. (O:NDAQ) and is also used to monitor trading in Nordic power derivatives.
ACER said the surveillance software has been adapted and customized to fit the monitoring of EU wholesale energy markets, though some industry sources were skeptical about whether it would actually spot price manipulation.
"The agency is confident that the software enables an efficient monitoring of EU energy markets," ACER told Reuters in an emailed statement.
Still, some industry sources say the software used by the watchdog will have trouble pinpointing transgressions, partly because many of the traded power contracts overlap.
For example, the price of a quarterly power contract could be moved by trading in monthly contracts, and those can be broken up into weekly contracts, making it more difficult to trace manipulation through trades.
"ACER will drown in false alarms," one source familiar with the system said. "It will be up to market whistleblowers to bring cases to the prosecution."
Nasdaq's energy trading arm, Nasdaq Commodities, said most investigations into suspected energy market manipulation in 2015 were based on tips from market participants, including one reported to the Norwegian authorities.
Another industry source said while the SMARTS system would need small adjustments over time to work efficiently with EU energy markets it had already proven successful in equity markets, and would get there in the end.
Last year, the software was used to help prove a case in the British High Court of share price manipulation through "layering", Australian media reported, resulting in a 7.6 million pound ($10.7 million) fine.
"It's not a magic bullet, but the system will be able to lift the fingerprints after some tuning," Tony Sio, head of SMARTS Market Surveillance at Nasdaq, told Reuters, speaking about the software being used by ACER.
"There is no other way to search through such a massive data. It's not looking for a needle in a haystack, it's looking for a needle in a stack of needles."