Understanding commodity markets with Campbell Faulkner (OTC Global Holdings)

Hello, everybody. Quentin here, and welcome to the transmission podcast. Today, we're speaking with Campbell Faulkner, senior vice president and chief data analyst at OTC Global Holdings. Now this conversation with Campbell, I absolutely loved, but we go into a lot of technical detail in places, which is quite off brand for this podcast.

And there were at times, there were a lot of, acronyms and technical detail about commodities and trading commodities. Now I'm not a commodities expert. And, if you're listening to this and you felt like it's difficult to keep up, then, I also struggled to keep up with it too, because there was just so much that we talked about. That said, it was a wicked conversation.

Campbell really knows his stuff. It's fascinating hearing what OTC Global Holdings do in the market, and, it comes in waves. So we've got an hour long conversation, and we were deciding in the edit just now whether we were gonna leave it all in or whether we would cut bits out because it got too technical. And we decided to leave it all in.

So, if you get to a bit in this podcast and you're not really sure what's going on, then just skip a bit. But for for many of you, I think you're gonna really, really enjoy this one. As ever, make sure you hit the subscribe button, and we will see you soon. Here's Campbell.

Campbell, thanks for joining us on the podcast.

Thank you.

Pleasure to be here. We should probably start with the name of the company, OTC Global Holdings. So, what does that mean?

Yeah. And that it it's always kind of a inside joke, and I know, our general partners did that intentionally. It's for over the counter, since we are an over the counter interdealer broker, and kind of you know, we started off as a number of interdealers. We kind of agglomerated, and that's that's really what it is. We're an over the counter interdealer broker, which, like I said, I know is a bit on the nose, but it's really who we are, particularly as a hidden industry. Particularly as part of the financial services industry, we are rather hidden. So, yeah, again, there's us and a few others, and that's precisely why we did it that way.

And I know that's kind of a cheeky answer, instead of, you know, we have some, you know, long story history. It's honestly to kinda give homage to the very industry that, you know, our general partners made their money in and, you know, what we continue to do.

And you talk about it being a hidden in industry. So for our for our listeners, this is the first time that we've had someone on to talk about, being an independent broker or an interdealer broker.

And, you're right. You guys perform a function that most of the world doesn't even know exists. So what does it mean to be a hidden industry, and what exactly do you do there?

So we are not the sexy side of the financial industry. We aren't the buy side. We are not, you know, a bank. We're not the reason we mention that is we are very hidden.

Typically, inner dealers like to remain hidden. So some of the largest inner dealers in the planet are BGC Group, TPI cap, traditional financial services, TFS, and there's some others. And these are very, very large important intermediaries in the industry. And to be blunt, kind of outside of direct financials or, you know, strange people like me who like to invest in it, you know, to get access to my own industry, no one knows who the heck we are.

And that's largely because we operate over the counter. So we're facilitating transactions that are entirely off venue. They're if they're traded, I put that in air quotes, largely because we're doing trades off venue, negotiate off venue. Some people's recollection of this has to do with dark pools and equities.

Typically, on at least on our side, we're dealing with, energy derivatives, but we don't exist within kind of the normal financial system, not one that you're gonna normally hear about. You are not gonna trade through us if you are trying to, you know, trade your personal equities. You're trying to, you know, maybe go do a little bit of WTI. You're gonna do that through, you know, a prime broker, you know, basically a facilitator who's gonna be, you know, designed for retail.

We are purely wholesale. We facilitate transactions between Shell, BP. We facilitate transactions between very, very large hedge funds. And then also more relevant to this industry, if, basically, say, a large wind provider is trying to hedge part of their PPA obligations, things like that, that's where we come in.

So we are kind of a big iron. We're not trading single megawatt blocks on ice. We're helping you trade ten thousand megawatts, or probably ten thousand watts, multiplied by megawatts. So it's a very different industry.

And because of that, most people don't know us unless you're a direct trader. And I use myself as an example. I was recruited here twelve and a half years ago. I had no idea what we were.

I thought we were more akin to a prime broker, which we are not at all. And that's kind of why we are hidden. It's mostly a your traders know who we are in trading firms. Maybe if you're gonna be blocking some hedges through us, you're gonna know who we are.

Otherwise, you're not really gonna have much interaction with us outside of, you know, maybe looking at an earnings call for BGC, for instance.

And you said lots of things that all sounded very exciting there about, things being, hedged and dark pools. I I got, memories of reading, Michael Lewis's fantastic book, Flash Boys.

Right, I know what you do isn't quite like that. You did a lot of describing what you don't do. But now let's talk about what you do do. So who's who's the customer? And what service you guys, you've got a very important role in the global commodities world. So who's the customer and what problem do you solve for them?

Yeah. And that's and the reason we make pains, you know, both legally and just kind of in general descriptions to go about what we don't do is largely because we are hemmed in, you know, kind of by design into a noncustodial role. So our role is we're not taking positions in the market. We're not facilitating liquidity.

By that, I mean, we're not a market maker willing to just, you know, make and take. We are something entirely different and kind of, again, very special. We are there to help people who need to trade large positions, people who are there who need to, you know, hedge. The reason we mentioned hedge is we we don't dislike speculation.

There's people who need to do that, and they're providing liquidity, you know, back out into the market. But we are there to facilitate, you know, often you are transactions. You can't put a very large trade through an exchange. You will blow up the matching engine.

They're not designed for that. They're designed to, you know, get small fills that are full. You come to us if you need to have a large position, you know, let's say you're, you know, naturally long or naturally short, you know, power plant, producer, you're a refinery, you have natural long and short positions that are rather large. So by extension, you're gonna go to an inner dealer to ensure that you can get a full fill.

Or if it's difficult to get a full fill, we'll take your I'm just using ten thousand loss because it is a rather large trade size. We'll part that into multiple parts, help you get a more accurate average fill versus putting it into, you know, any straight through processing. You're gonna blow up the matching engine. So because of that, our facilitation is really big super major oil and gas companies, large utilities, hedge funds, people who take outside positions in the market, not somebody looking to day trade.

So we're very institutional.

So have I got this right? So, I said, yeah, just to just to to to ask the question a bit like I'm a five year old, because it's always good to do that. So have I got this right that there are big players that wanna trade massive, massive positions of commodities in general, and you talked about oil there, gas, power, other commodities.

But if they wanna say you wanna buy, you talked to him Watts, which I thought was funny. Not not funny but, you're obviously talking about huge volumes, but you've you've, simplified it to Watts, which is traders always blow my mind with the language.

And so you wanna take you wanna you wanna buy a big position or sell that sell down a big position. You can't do that all in one go because you can you can basically move the market. And so Yes. You guys, are an intermediary, an interdealer between the BP or the Shell or the Exxon, for example, and the market, and that matching that that, that bid and offer, algorithm or the matching algorithm as you call it, to, maybe over a certain amount of time or a certain amount of blocks to spread that trade so you don't move the market or you don't signal anything or there's probably loads of reasons why you do that. Is that correct?

Yes. And and the point where to say it is, you come to us because you can't basically go through an exchange. It's too big.

Too big for an exchange.

Too big. And even back when the four existed, there was always off venue, transactions. You know, they were, many years ago, two steps off the floor, but those were not actually put into the pit. And that's kind of where the voice broker business started, and then it's kinda migrated that way.

When you say the pits, we're talking about The actual trading pits.

Actual Yeah. Physical people often dressed in really funny colors. Correct. Right? Running around shaking pieces of paper at each other and, doing crazy hand signals back in the day.

And, if you're if you're listening to this and you haven't seen photos of, the CME Chicago's pit back in the day, it was just out of this wall. It looked like a it looked like a rave. It looked like a nineteen eighties, Manchester rave.

And so that was always the off venue. And that's again, I put in air quotes because it it sounds a little bit silly, but that's actually how it started. And so, one of our general partners worked on the Nymax for, believe for crude oil.

Don't quote me on that, which I'm sure he'll yell at me at some point about. But and so, you know, basically, a lot of those guys, they would do off venue transactions because they were too big. Even with humans involved, if we're trying to trade, you know, thousand lots and doing fake hand signals, but, you know, we're trying to trade a thousand lots, you will materially move the market because each fill is going to push the price up or push the price down. So the purpose of us, you know, as interdealers is basically, we're gonna go to the market. We're gonna function as an intermediary.

Now let's be realistic. Most trades, even when they're above minimum block size, which is statutory, we're not gonna have multiple fills. But we do get trades that are sufficiently large where it may take a a couple days to essentially get a trade, not because you're doing something illegal on holding trades. Have also have to caveat that.

What it is is we know that, you know, a customer has, you know, fifty thousand watts they need to offload. You know, they are wanna fill here, fill here, fill here to keep their average price, you know, well, it's in well within a range versus blowing it out. And so by doing so, you're providing an anonymity to the customers, providing liquidity. You're also providing a fair and effective price for the market that without humans, frankly, if you threw it into an algorithm, it's gonna blow up.

I said as a statistician, my business is algorithmically based, but the human factor is such a crucial part of why interdealers exist in their core function to the, you know, good functioning and healthy functioning of the market.

And so let let's get some scale around this because, you talked about watts, and you guys trade all sorts of commodities.

If we just start with if we just start with hydrocarbons, for example, what kind of size, position are you helping clients move or or trade? So let's say oil. Right?

A typical customer comes to you, which is, of course, like a there must be like a whale sized customer comes to you and says, hey. I gotta shift this oil, or I wanna buy buy a load of oil over a certain time period. And it's your job to spread that out and nibble away at the at the market, as so as not to move the market. What kind of size are these deals?

So yeah. And without going into too specific details around, you know, some of our statutorily regulated stuff and things like that, exceptionally large. So, you know, VLCC container cargo size, six hundred thousand barrels.

Say that again. Sorry.

The the BLCC VLCC, very large, crude carrier.

You know, six hundred thousand barrels, you know, hundred thousand barrels is small. You know, if we're talking pipeline borne quantities, these are very, very, very large quantities.

So this is a whole ship in size or even more of crude oil.

Full of crude oil. Yeah.

Or in our case, LNG carriers full of, you know, full god. I can't remember how many metric tons. Those are the sorts of sizes of deals. And the thing is we're not doing one of those a week.

We're doing multiple of those per day. Wow. And so remember, there's obviously your physical cargo side, which we do do, you know, physical trading as well. And then there's this storage aspect where basically your, you know, financial market is many multiples of your physical, basically, because lots of people have interest in that market.

Derivatives markets by their very nature are zero sum. So, obviously, you're gonna have, you know, multiple size of that market. So because of that, people are using those derivative instruments, derivative off of the physical, to basically provide the risk management mechanism long or short. Doesn't matter if you're speculating or using that to lay off risk.

So because of that, you know, we're dealing with, you know, North Sea Brent cargos all the time, huge barge cargos of naphtha, NGLs, you know, I shouldn't say NGLs. That's very North American, but, you know, like, bottle gas, things like that. And then we do a pipeline based, cargoes.

When I say cargoes that are pipeline based, I mean, like, petroleum products, natural gas. So because of that, you know, terawatt hours per year of power, we're dealing with I don't even wanna think about the notional size in billions. Our fraction is in our deal is teeny tiny.

And that's because, again, we're providing, you know, transaction facilitation. You know, we're not over here taking huge positions in trading. We're not a Vitol or Mercuria. We're not, again, we're not a BP Shell. We don't own assets.

I make pains to say that because some people think we're, you know, an interdealer or probably a prime dealer where we take positions.

We are merely, you know, facilitating the functioning of the market, and that's it.

And so thinking back to the because it's kind of easy. I think about to the olden days where it was humans running around with pit pieces of paper in the pit.

A big whale would come along, big oil company or power company, and say, hey. I I I need to hedge this position, whether that's oil. It could be physical cargo. I I wanna hedge it with nonphysical derivatives.

And they come to the edge of the pit, and they look inside the pit, and everybody's looking at them and saying, what are you gonna do? And so they come to you guys and said, you you split that up across lots of different piece of paper and go and spread it around quietly to get the best price and not move the market and, as you say, not blow the market up. What are what are the key parts about the name of your company is OTC, which is over the counter. And that's a really important part of the role that interdealers play.

And I guess this whole position that you guys take in the market position's a strong word, but the the role that you have in the market is only really possible in OTC. Right? So what is OTC? What does that mean to folks who don't know, that they're new to the world of trading as as I am?

Well, let's let's break down actually over the counter. And so it was either Chicago Mercantile Exchange or Cbot. I forget which. They actually had counters, you know, basically, counters around their actual pits.

And so What What do you mean by a countertop?

A person Base Literally. Almost like a almost like a bar counter. And so you physically go up to I know. It sounds bizarre.

But, actually, if you look at some of the old photos of the pits, you would see these basically counters, and it was so you could go do, merchant transactions or, you know, basically go make sure clearing's good and things like that, settle up. So, typically, what would happen is that they'd be off venue, lunch hours, things like that. Or if you had a particularly large position that somebody called in, you would go do an over the counter transaction, which means you would basically go get guys on either side of the counter and transact, which is a little bit like I said, it's on the nose, you know, but it actually makes perfect sense because that is our legacy.

And so that's where kind of the OTC term came from over the counter. We're gonna go basically do this off venue so we're not in the pit. So we're off the venue. So there's different governing rules for if you're in the venue or off the venue.

And And so The folks listening, I'm sure many have already seen these photos, but you're talking about like a it's like a like a stage in the round, a bit like a the coliseum, if you like, not to go back too too far in history. And you've got this pit in the middle where people are running around exchanging stuff. And then outside, there's a whole load of support actors and computer screens and administration and back office and stuff that's happening who are not governed by the same rules as the folks running around inside the pit making the deals.

And, hence all the hidden signals and this the the the great costumes and all that. Costumes is a strong word, maybe uniforms.

And so when you talk about the the rules being different outside the pit, the over the counter bit is about connecting the bits in the governed area and the nongoverned area, isn't it?

Yes. And it's doing so in a way that the reason we emphasize not moving the market, and that's really why we continue to exist all these years later. You know, we have very sophisticated algorithms and things like that.

They don't deal with large block sizes. And blocks are important because, you know, that's the governing term for, you know, basically, the lot sizes of what you're actually transacting.

But that's really where it came from where I need to move some large amount of, you know, typically ag commodities where it started, potato futures, which you can't trade anymore because of, you know, some lovely activities in United States. But those sorts of agricultural derivatives, I need to sell you know, I have fifty barnfuls of potatoes.

I can't do that on the floor. You know, we're typically doing small transaction sizes. We're trying to facilitate those. We're gonna go do those over the counter.

So I'm gonna go get a representative. I'm gonna talk and be like, okay. I need to go back to the four and maybe sell this in five, ten, fifteen different shots to move that entire transaction. Here's each fill.

Instead of moving the transaction price this wide, we move it that small because we're actually trying to part it and we're not showing our hands. So, essentially, again, we're an intermediary.

The broker functions to basically act as an agent on behalf of both sides. So you're basically making sure everybody's getting an effective fill. You know?

Yes. Spreads are wide in OTC derivative markets, but that's largely because of liquidity spreads, not because the broker is doing something untoward, you know, spreads are fixed. So it's more we're gonna make sure that those sides get matched. Everybody goes home happy. You know?

You get your risk profile you're looking for. And how do you guys moving on from the mechanics of the trading pit, which is just fascinating that it's it's been a long time Still informs everything today.

Yeah.

Yeah. Yeah. Oh, it's all the parlance of that whole world, even in now everything's digital still stands. And the operating models of the different partners and, people in in in the process.

But how does so so your company, OTC Global or OTC Global Holdings, how do you balance the traditional products, so, the commodities like crude oil, with emerging areas to you like power and renewables in your operations?

The blunt way to say it is, if it's a derivative, we like it, particularly an energy derivative. For us, it's all pretty much the same.

Again, this is a very it seems like we're just, you know, trying to make crosses in the market, but we are.

You know, we look at emerging desk all the time.

You know, ethanol is a huge business for us. I just mentioned that as, you know, we have, like, a lot of biofuels.

We do carbon's growing. It's, you know, obviously, EUA and UKA and Europe are big, carbon markets, but, you know, in the United States, it's not quite as big. We do, you know, some nature based stuff. The reason I'm saying that is we're always looking for the next derivatives market, and it's something that from an energy side, our customers be it, you know, an Exxon on down to, you know, very small renewables developer. We wanna service them.

And from our perspective, it's difficult to deal with these products. You're trying to trade into a market that is often opaque by design.

There's often very few counterparties, and so it's our job to help you on either side if you're a buyer or sell, get an effective cross. So we don't look at it and say, we're just gonna stick with crude oil. We're just gonna stick with natural gas.

We're very agnostic towards, energy derivatives. Reason I keep saying energy derivatives is our business is focused on energy.

We kinda don't do anything outside that. We have a tiny bit of metals. That's not to disparage our metals desk. They're very successful, but it's just our core focus is energy.

So as such, if it's an energy derivative product, we're always looking to be in it, particularly if we can find an edge.

And I should have asked this at the start, but the the the baseball card for the company, how many people are in the company, and, what are the stats?

Yeah.

Without going in anything proprietary since we are private, and that's kind of an important function, you know, kind of as we operate.

We have probably between contractors and full time. We're probably around six hundred people, and that's spread across globally. So that's Houston, Chicago, Louisville, New York, Geneva, London, Singapore. Good lord.

And we're, you know, we're fortunate that we're growing.

You know, the inner dealer market is pretty ruthless, and a lot of inner dealers are slowly contracting. It's it's not a bad thing. It's you know, the markets are difficult and, kind of like a lot of different markets. It's Pareto principle, you know, twenty percent of the brokers get eight percent of the revenue, and vice versa. So we've been fortunate that we've been able to grow where we have, and maintain our market position and grow market position elsewhere.

So, yeah, long story short, yeah, kind of our baseball card, we're a little private about, and that's just kind of by nature of the fact we are a limited partnership.

But imagine big, long numbers. That's that's all we need to do. Imagine lots of big, long numbers.

Yes.

High trade numbers each day. One thing I will say, the interdwar market, you know, it's a great market to be in. It's a good market to own.

It is ruthlessly competitive. So as such, you know, commissions for the brokers, you know, it's we're not there's no collusion. It's it's shrinking.

And so that's one of the difficult parts since that's why, you know, if I am gonna use our pitch book, we're very technology focused. You know, brokers do a lot of their own work here. We don't have, you know, fifty corks per broker. It's it's trying to make sure we streamline that.

By extension, that means that we can provide better service to customers. We can offer lower commissions. We we don't want to lower commissions, but, you know, if we need to to maintain market share and things like that, gives us a tremendous amount of competitive advantages, allows us to continue to employ brokers and have the brokers be successful. So it's it's the complicated way to say it is we're a very old school business with a very new school feel, in terms of, you know, technology enablement.

And we're pretty lucky that we have, you know, by investment, by also some of the technologists we have inside, we've reduced a lot of our cost, which is good for the broker, good for the company.

Sorry. I am talking our book a little bit. But it means that, you know, reduce errors, reduce, you know, regulatory fines, which is a growing problem for the industry, and also provide, again, you know, quality execution for the customer.

One of the unique things about being in your position is that you get to see both sides of the market in a very you get to see the in thinking back to the pit in Chicago. You get to see inside the pit and outside the pit behind you. You get to see both sides, and you're doing you're working on the buyer side and the sell side in both physical and nonphysical. And for this reason, you must get really, really good data on trends in the market because you see that you see the opaque things as well as what's public.

So as you're looking at global markets and commodities, what, a bit of a cheeky question, but what what trends are you seeing, from your position or the firm's position, particularly through a energy lens?

Oh, man.

One of the best ways to say it is we're both, behind and ahead.

And I say that not because, you know, trying to, you know, hedge or provide a politically correct answer. So we we definitely see where people are willing to, put their money on. And that does matter because across in the market is a very material amount of information. Someone took the position, put the trade on, is willing to commit capital for it. Regardless of however long it went on, you know, and then insufficient number, which best part of being an air dealer, as you said, is we see both sides.

You kinda do get general trends.

You know, we have you know, particular markets. North America, we've seen kind of a shrinking, and that's largely due to regulatory structure.

And there's kind of a big desire, and I'm not talking OTC's book here or mine necessarily. There is a big desire for people to be able to trade out, you know, for power price agreements and stuff like that, and it's too expensive to do so.

We've seen in other parts of the world that that What what just to stop you there before you carry on.

What what does that mean? It's getting expensive. Expensive for whom and why?

So we we had a big shift starting in twenty twelve. We had swaps to futures, which is part of Dodd Frank, you know, two thousand eight, basically, financial regulatory bill, which touched through of this market, probably shouldn't have, but was tied up with kind of MBS stuff, and then that back fed into the energy derivatives market as well. And so what that did is swaps were typically traded and were a very big name in North America because they were less expensive.

Capital meant that, you know, ICE may have had an unfair advantage, but they did have an advantage over, you know, the other derivatives exchanges, basically saying, hey. Small amount of capital. You can go trade these positions. That was good.

A swap as in we're talking about not the physical here.

We're talking about, so no no physical is it The change of cash flows.

Yes.

So there's no it looked like a few yeah. So even though it looked like a future, and that's the you know, from a derivatives modeling standpoint, I'm gonna really out myself. Everything can be modeled as a swap, even options. You just have swaps with timing.

So it's either multiple legs, things like that. It's gonna net out. But since everything could be modeled as a swap, we can create a futurized product that's not a future, that it functions as a future that's a swap. So prior to that website I know.

If you're listening to this, well done for sticking this is well, firstly, not legal advice. Secondly, if you're running to a whiteboard to draw this out, there's lots of arrows moving around. Well done for sticking at it. It's gonna get simpler in a minute, but we'll carry on. So carry on.

No. So, Dodd Frank effectively closed that. So in fall of twenty twelve, basically, swaps were futurized. You could have had SEFS, swap execution facilities, which do exist in other markets, you know, fixed income, FX. But in the energy space, it's effectively dead.

Everything got futurized. Everybody kinda said, okay. Yeah. We understand these instruments. But what that did is because the SPAN margins and everything else, will set aside nodal exchange and EX because they have a slightly different model. But, you know, span margin and everything else on futurized products is expensive.

You know, your maintenance margin could be a lot. So that provides a huge hurdle for a lot of people in the market. So why am I saying this? Well, we've had notional open interest expand, since that time. The total between and, obviously, these numbers are not concrete.

Just to just to Total. Clarify for our audience. So open interest means people with buy or sell orders. Right?

Correct. It just means standing open, so not close positions in the market that are still active.

Yep.

And the and the reason that's such an important, you know, volumetric measure is it basically shows a willingness to enter into a zero sum market because derivatives markets are zero sum. Equities are not fixed income are not. Most other markets are not. But within derivative space, those are in fact zero sum, and I have to caveat that because people will try to, you know, take me to the woodshed over it.

But there's lots of the the point is there's there's lots of money on the sidelines that that wants to transact, but just isn't because the price or the products aren't going where they need them to.

Sure. And and so the one point I'll make is while we've had notional OI go up, which is notional just the outstanding, We have actually had, you know, overall trading volume come down. And that's what I can say as an interdoo or, you know, sitting in an interdoo or broker, and that's largely because it's just so darn expensive. And so because of that, that has makes it more expensive if you're trying to hedge certain things in the market.

The old joke used to be if you had fifty thousand bucks and a computer, you were a hedge fund. That's because, you know, basically, the barrier I know it's a horrible joke, but the barrier to entry used to be sufficiently low that you could go start trading on ice and call it good. Once all that got futurized, that means that it's much more difficult if you are a small time, developer to hedge out, you know, PPA, hedge out, you know, something you're doing for building out a facility, things like that. So that's actually screwed up some of the capital formation tools that actually allow you to ensure cash flow.

So what's so what's happened is we had we had the, the the boom years in the two thousand eight financial crisis, and then, both sides of the pond, we had different, regulations.

We had Dodd Frank in the US, and I can't remember the one in in Europe and UK about, essentially Oh, there's the Basel series that are all tied up.

Yeah.

All that kind of stuff. Yeah. And but what you're saying is I think I understand is then the regulator stepped in and said, we gotta sort out the system because we had the financial crisis. But what that's ended up doing is making the making it much more expensive to transact, and that's reduced liquidity and reduced trading volumes. So the we had the financial crisis almost fifth well, yeah, over fifteen years ago.

Plus years ago.

But since then, the reaction has actually reduced liquidity and reduced, the amount of money flowing in the sector.

Well, it and yes. And it's done that, and that kinda got papered over with, you know, basically low interest rates. And that's really one of the things we've seen as interest rates have, you know, pulled back the curtain a little bit. There's really kind of that big yawning gap of, oh, shoot. You know, we can't lend anymore because we don't have basically a zero, you know, interest rate or effectively zero interest rate that, you know, we're borrowing at, you know, as a lending institution. And that's really where we've seen from our side and obviously without, you know, outing anyone. Our private equity partners are much, much more concerned about, you know, who they're actually gonna do project financing for.

Five years ago was kind of whatever we're gonna throw it at it. We can, you know, find a way to make it work. So because of that, we've kinda hit that inflection point where, you know, you're trying to make sure that you can maintain cash flow using derivatives as a tool to do so. A lot of folks are like, well, shoot. It's too darn expensive. We don't have zero interest rates.

It's really kind of crimping a lot of development. It's it's one of those strange things where I sound like I'm talking, you know, our pure interview or book because I want volume. I'm actually not. I'm saying this more as kinda working with our product development and finance folks and, other parts of our business, and they're really struggling because they're like, look.

I wanna do this deal, but it's too darn expensive for us to go basically hedge this out and use, you know, a very vibrant derivatives market. But the problem is there's not enough folks like us transacting in it. So when we go actually trying to, you know, post our, you know, collateral and everything else, go get an FCM. The FCM's like, the heck you guys doing over here?

You're not really trading. It's like, well, no. We're not we're trying to make sure we hedge this. Then they go to our credit sleeve and get, you know, scalped essentially because the credit sleeve's wearing that and then trying to make their margin on.

There's nothing wrong with the credit sleeves. They're providing the service, but all that's done is basically have kind of a knock on effect of, you know, the industry. And so you're asking, will we see these plants getting developed? And now we're no longer seeing these plants getting developed.

It's kind of that double edged sword, interest rates plus basically, cost of capital if you're gonna trade.

And coming back to the question about trends and what you guys see, if you had to look at the the North American market and European market and say, this is a broad market, but say let's say the Asian market, what are the how are they comparing against each other? Is it are there markets that are growing in liquidity and growing in significance globally?

Is there a move of liquidity from and I'm putting words in your mouth here, but is there a move in liquidity from Europe to the US because of the shale oil revolution?

Or is there because of so much demand growth in Asia, is that now having a big, big impact? What what are you guys seeing, on the macro side?

Yeah. And that's that's actually a very, very good question. So we've seen kind of not a not a full wholesale movement, but we've seen a lot of interest go to Europe, particularly from the US.

And I'd say that's not because the derivatives market is less mature in Europe. I'd just say it's been kind of a you know, a great example is the power market in Europe is now a very vibrant trading market where it used to just function for utilities to kind of trade day ahead and real time power five years ago.

And that's, you know, basically born out by the Danish experiment, which has been massively successful and massively profitable. That's huge. So there's been a big inrush of capital there. Typically, how this works, there's inrush as a capital and things like that.

You know, gas basis was, you know, my god, that was kind of the late nineties tied up with Henry Hub. So we've seen a big movement of capital there. We've seen a movement of capital, more so than I would have thought, but massive movements to, European refined products, bottled gas, things like that. It's just largely because of kind of the importance of the continent.

Additional, you know, fuel for that fire. I know a bit of a bit of bad statement, but was because of the Russia Ukraine war, and then we had basically the large, you know, boost in energy prices that just kind of put a focus on, you know, European energy.

And then Asia, there's been an interest there for years. I mean, for example, is Japanese power just recently started trading as futurized products a couple years ago. It's It's still kinda trying to get along, but we've kinda seen, you know, the old Enron model. We can, you know, create a market around anything, so to speak. And that's kinda been I I know it's a horrible example, but it it is true. It's we've seen kind of this continuation market didn't.

Works in works until it didn't. But in a lot of these cases, there are places where these markets are not sufficiently developed. You know, the US domestic, you know, power markets, you know, if we're talking about futures is insane. It's very complex, large amounts of competitive venues. We're starting to see that Europe really went from not gonna say a backwater of, like, gas and power trading. It's always been very important, but it was much more constrained to utilities.

Now we've seen a large amount of interest. So it's not that it's growing away from North America. It's just that it's in a different phase of its development.

And so there's always interest in, like, South America and places like that. A lot of it's gotta deal with working with government agencies, to be totally blunt and, you know, is it permissive or not? EU is rather permissive. UK is permissive.

Certain parts of Asia are permissive.

Those aspects will help grow those markets. Crude oils will always been international, particularly cargo born, so those are growing.

The large implied way to say it is, you know, there's a lot of growing derivatives markets.

Once they become boring, it's good for consumers. It's bad for us, because, obviously, we like volatility. And there's always naturally volatile products, like natural gas, for instance, and domestically here. But I'm not I'm not trying to give a non answer.

It's one of those where, you know, without showing our cards, yeah, there there's a lot of investment. There's a lot of, continued movement, you know, where you're not gonna see, in my opinion, huge growth is, like, Abu Dhabi and and, you know, like, the Merban contracts and stuff like that. That's largely because you're a single seller. Yeah.

And those markets will kind of always be relatively constrained because of that. It's really when you can kinda get dynamic markets like you're gonna have, you know, Southern Europe, places like that, Eastern Europe, which difficult markets, but they're kind of, you know, interesting as well.

Places like Singapore, Japan, you know, those are the places that we we kinda see growth.

But, again, it's derivatives market. There's always a need for additional new products.

And you talked about, volatility being good for you in in your role. Volatility is now a defining characteristic of, energy markets, but especially power markets, for lots of different reasons, but predominantly the the the move from, base load fossil power to, more flexible or intermittent renewables alongside lots of other reasons.

And so you you mentioned earlier about your firm having a your your secret sauce putting words in your mouth is about data and AI and access to information.

And so if we if we tie those two things together, where where where volatility is now a defining characteristics of of power markets, and you guys spend a lot of time in the data.

What what are you guys what what what's your firm doing from a data perspective to get a handle on the volatility in power markets?

And and I I make that kind of biggest side as, you know, someone who's personally been modeling power markets for approaching fifteen years.

And as a, you know, aside to that, it's absolutely flipping brutal. You know, just, like, jeez, what was it last week?

Right before the end of the year, we had some weather reports that, you know, said large part of the United States is gonna freeze, then we had power natural gas prices, you know, spike to the moon for the, you know, December Balmo and then, you know, Jan Feb strips.

So as a part of that, you know, the point where to say it is the broker's job is to be in touch with the market. So they're listening to their traders. They're taking the orders.

They're also getting information to help their traders. You know, good brokers are they know their positions. They know that, you know, this may be an advantageous time to go to their trader and say, hey. You know, do you need to hedge this? Do you wanna offload this? You know, how can we help you optimize your portfolio?

Not because we're telling them how to trade, very important part, but we're not telling them how to trade. It's it's one of those where you're helping facilitate transaction.

So as a part of that, our you know, our guys are probably more in the weeds than even I am about a lot of markets, trying to make sure that they understand, you know, the weather, what's changing. You know, they're looking at zero zero z, twelve z, trying to figure out how can I help their customers? And as part of that, you know, from my data analytics side, you know, we're very different from the other interviewers. You know, we're not just taking broker data and then saying, this is what the market is.

Far from it. You know, the the brokers know their their aspect of the market. You know, a broker typically maintains, you know, four or five different individual we're gonna say curves. Those are kind of their markets.

But, you know, a great example is in North American Power, there's, like, nine hundred different curves that are actively traded. So even if we have the largest Powerdesk in the industry, it's a teeny tiny proportion. How do you mark all that? And as a function of that, we provide the analytics back to the brokers so that they can say, we have an off quoted, you know, PJM, you know, market location.

We need to know where it is, but we don't just wanna, you know, try to go pull fifty different people because one, you're gonna show your, you know, market position to other people in the market, and so that kinda negates the purpose of the inner dealer. So by being able to, you know, warehouse a lot of that analytics in house, they can then go to their customers and intelligently say, hey. This is where, you know, our internal analytics is seeing it. You know, we have a bid ask about this wide.

You know, we should be able to transact within that. Not always because you may have somebody saying, no. I will not sell unless we move it up here and move it down here, and it's gonna actually be that much wider. But that gives them the ability to actually mark and cover those, and that's really where we do it.

It's not so much AI.

So we do use AI models.

You know, ordinarily scare you know, generalized ordinarily squares, things like that, you know, some autoregressive models, stuff like that are classified as AI. We're not using, you know, XGBoost and a lot of, you know, other things like that.

And the reason I make those pains is, you know, we you know, as as a practitioner of statistics, it's it's much more rooted in we need to provide something that's predictable. Broker understands it. We understand it. We understand how it's priced, and that's really the value we provide back to the market. We're not trying to beat the market, neither the broker nor the data analytics side. What we're trying to do is we're trying to provide something that is a fair value.

And the fair value assessment is the most important thing. You need something that's reasonable. You can go negotiate because, again, these are off venue. And so, you know, that's the broker's job is, you know, you're, you know, thirty five bid forty.

This guy wants to pay thirty two. How do we, you know, get closer to thirty five where we may have to move down to thirty four? And that's, you know, the natural function of the market, and it's a good thing, because it allows for often venue negotiation with intelligence, versus, you know, we're gonna say thirty bid at forty five, and then no one's gonna transact. And that's not good if you're trying to lay off risk.

And so, Campbell, I need to ask you about I wouldn't be doing my job if I didn't ask you about energy storage. So so what role do you see energy storage playing in power markets? It's obviously a small part a tiny part of the market compared to some of the mind blowing numbers that you're talking about. But in an industry that's growing really, really quickly, and looking at how storage is used in other markets such as, you know, traditional commodities or anything really, how was the last bastion where find that we have a storage, solution? And so what do you think that's gonna do to these markets?

It's weird. So we're fortunate to work with, directly on my side, a number of energy storage units, or from energy storage companies, traditionally around battery storage.

No one's gonna like me saying this. It's essentially just pump storage with a different type of medium. You're pumping electrons instead of water.

How dare you? Right. We've had enough. We're gonna switch off now.

Yeah. But, functionally, it it is the same. And that's and that's part of the optimization problem. That's part of the development problem.

And I know that's part of the trading problem that a lot of these firms face is, you know, it's like you have a call option. You know, you're naturally long, but you have a discharge. You have, you know, basically structuring that. How do you actually time it?

It's a very, very complex problem, particularly given the current technology and design parameters. You know, typically, three hour duration or less, oftentimes, sixty minutes or less.

Effectively pricing, that's hard. Effectively dispatching, that's incredibly difficult.

So because of that, I look at it from the standpoint of, I think there's a tremendous amount of opportunity there. Right now, I'm gonna just pick on ERCOT since I happen to live there. Right now, it's basically a rent seeking activity where you can kinda bid in the ancillary services. When I say rent seeking, that's the economic term.

I'm not, you know, criticizing the battery developers. They should be bidding in there. It's it's exactly what you should be doing. Maximize for your shareholders.

Maximize your ability to bid.

So because of that, how do we deal with that in the future? How do we deal with that from a derivative space? It's it's complicated. We've seen iceless products, nodaless products to help deal with that, your charge discharge cycles, you know, your solar incident curves, which, you know, coincide kind of with battery charge, you know, charge curve level, stuff like that.

But as a consequence of that, we've started seeing fun things like in, you know, Kaiso where now off peak is often greater than peak in certain months, not just, like, in day ahead in real time months.

Those sorts of changes really sway kind of the pricing dynamic and things like that. They also make investment decisions exceptionally difficult, because the reality right now is we're we're just again, use ERCOT before real time co optimization.

You kind of have a nice rent. And if I'm gonna build my new storage, particularly long duration storage based off of a rentier assumption off of ancillary services, that may not be the case in January of next year.

And because of that, does that mean that we're gonna then have generation problems or generation shortfalls as we continue to have load growth?

And this is where, you know, people get paid way more than I do. You have to kinda have the vision, the insight, and frankly, the balls to say, no. We have a view as to how we compete in an energy market, how we can actually model these, and how we can actually operate these assets correctly.

I guess, ERCOT's a special case, isn't it?

Because the the pace ERCOT's a special case, but ERCOT's just a leading case.

It yes. Yes. Yeah.

Yeah. It's a leading case.

But if you buy into the which another world doesn't it just feels like a lot of the world hasn't woken up to this yet, but I a hundred percent believe into this narrative, the electrification narrative and what that means for global load growth. Then, yeah, ERCOT is the ERCOT is the the canary in a coal mine for this.

Correct.

But, yeah, at the moment, it feels like an edge case because load growth is so aggressive.

I mean, even when, you know, there's no even when power systems were first designed, and they were never designed in you know, they didn't really grow from scratch to a to a design like they are right now. No. But the kind of growth, add adding ten gigs in a in a a year or two, is just bonkers.

And so no one's really known how to handle this stuff. And then yet, in the year twenty twenty four, you actually or twenty twenty five where we are now, you have more red tape than ever. So you have this competing issue of, more bureaucracy and more tree call to walk through, and then the fastest load growth in absolute terms than really the world's ever seen. And, yeah, Tricky old scenario.

Hey. Let me, let's let's switch to some predictions.

So you if you, from what you guys see in the market, if you had to predict, what do you think is the, and you can have a couple here.

But what what would you say is the the biggest transformational shift in the global commodity markets? What's the big picture thing that you guys and your strategy meetings are really talking about? What's the big trend?

And and and this is the hard part, because to be blunt, we've been wrong so many times. You know, I could personally state that with, you know, prognostication, predicting stuff.

Really, the big one, that kinda caught us flat footed and caught or caught flat flat footed is low growth.

You know, the assumption was we had thirty years prior to probably the last seven, ten years of essentially stagnant low growth globally, outside of developing markets. I'm talking about, you know, kinda all the Europe, places like that, even Japan, set aside any population concerns. It was kind of, you know, the energy efficiency, you know, hallmark. Like, we built up a bunch in the forties, fifties, sixties, rural electrification in the United States, all also across other parts of Europe after, you know, post World War two.

And then we just kinda stopped.

And that was interesting. And then we started kinda having low growth around IT starting in the late nineties, but nobody talked about it. Like, you built a data center, it was fine, it was a load, okay, and we had, you know, excellent plants. And then all of a sudden, it kinda hit you know, everything started hitting the anvil very tightly and getting smashed, and then people were saying, oh my god. What the hell is this? And that's really been the big thing. So, you know, not just because I like electricity, and that's a big part of my portfolio.

The explosive growth of electrical consumption is unbelievable.

You can attribute that to a number of things, EVs, heat pumps, god only knows what else, and the current one is, you know, AI and IT.

Fifty point is Bitcoin minus.

It's like it's like coming as an Englishman living in Texas. You, that is, give or take a couple of gigs here or there. But it's like the total base load nuclear power of the UK consumed to all of the nukes in the UK All.

Going all of them all the time going straight to Bitcoin mining in one state in one state.

And then they'll turn off. And then they'll instantly turn off if they get a sched that's that's the even more bananas part.

I'm not saying it's a bad thing.

I actually think it's a good No.

No. No.

No. No. No. No. It's just crazy.

Just like as an intellectual experiment, it is just crazy.

No. It's like, how do you go from having, you know, basically ten gigawatts and you can turn it off within thirty minutes? It's like, that that's not a normal industrial load. No. So electrification's been huge, and that's had a massive amount of knock on effects in the industry. A great example of that is, you know, gas.

Holy cow. The spark matters more than ever, particularly in North America. It matters in UK. It matters the end of the day, still driving the marginal, you know, price is spark.

Spark being the difference between the Yes.

On the case.

Sorry.

Yeah. Basically, how how much does it cost to take, you know, an MMBTU or gas and then turn that into kilowatts?

Apologies. So the spark spread yeah. So the spark spread really does matter. You know, dark spread, which I would have said a couple years ago was still gonna matter. You know, coal's really been effectively pruned, because it's bad dark spread versus spark.

So that's been a big shift. Kinda one of the other ones for us is basically the decline of Brent.

And everyone's saying, oh my god. Brent's a huge benchmark. They had to include domestic grades from the United States and Brent. That's that's interesting. You know, we've kinda had the North Sea decline. That is gonna change markets pretty dramatically, particularly if ICE and Platts, by extension, are not able to be defensive of that benchmark.

What then becomes the global waterborne benchmark? Sure as hell isn't gonna be WTI given, you know, Platts fighting around it. It's just a bit of stuff like that.

Itself.

But, I mean, for listeners Oh, yeah.

So the the oil you buy in different not to condescend. If if I'm condescending you as a listener, I'm very sorry, but trying to trying to keep everyone up here. The the the the quality and specification of the oil that you buy in different places around the world to different benchmarks is different. And that that blows my my mind in itself. You'd think that a barrel of oil is a barrel of oil is a barrel of oil, and it's not. And as, production moves from legacy production facilities in Europe to and other places to predominantly fracking in the US, you end up seeing a a a lot more, volume in a different place measured in a different way.

Yeah. And it it's and that's one of those, speaking about our crude oil, you know, book specifically, that's drastically changed, you know, our customer base, what people want. You know, great example is most, sophisticated, you know, refineries run on heavy crude because it was cheap and available. Well, now predominantly, you have light crude. This is why we export crude from the United States now, which is just unfathomable even, you know, ten years ago.

That's the sort of stuff that does trade, you know, change trading. It does change, you know, consumption behavior.

That sort of stuff has really kind of had a knock on effect in our industry as well.

Unrelated but related, you know, we still have diesel powered, you know, basically generators like in the northeast simply because of political decisions to not build pipelines to places like Massachusetts.

We are burning diesel. You know, the these are the types of things with having diesel and oil units that you're like, well, why do I care about oil prices when I talk about electricity?

That's your marginal spark there, you know, as a bad analogy. So these are the sorts of kinda confounding things that I've gotten wrong, firm's gotten wrong. We're fortunate that we are not a long short hedge fund, so all we have to do is make sure that we have, you know, good quality human capital there to, you know, help facilitate transactions, which I'm not reducing the brokers. They're very important, but it's really it's a human capital management exercise.

Well, I guess the only thing you can predict, the only thing you can predict is that with the transition to net zero and, all of the stresses and regulatory issues around that, that you can expect a lot more government intervention in markets in the next decade or so. Which means which is the probably the hardest thing to predict at at all because governments themselves find it very tricky to figure out the impact. You know, it's just a whack a mole thing. Right?

You do something over here. We talked about there about not building a pipeline and ending up with, essentially the spread being defined by diesel in the northeast. So you have all these little things. And I guess, if you you can put it one thing for the next next decade for global commodities, which, you know, I I know very little about at all compared to one like you, but is that the government is gonna be putting their hand in the market a lot more than they have been historically.

So Yeah. We shall see. We shall see.

We shall see. It it's one of those where, you know, stuff has been successful largely be you know, particularly where it's been emergent, and that's, you know, purely kind of on its own, you know, the very Smithian view, you know, emergent phenomenon.

Any anywhere where We're getting we're getting niche now.

Yeah. I was supposed to say any anywhere where it's not, you know, and and this is me, you know, kinda speaking as a, statistician. And, like, I I you can see very strange trends in data, and it's almost always what the hell happened regulatory wise. It may it may not be. It could just be something like, you know, pipeline blew up, but it's always something very shock, and you're like, okay. We can point to that. Those are existential, and those are tough.

You know, particularly if you're trying to make investment decisions, you're trying to, you know, do build.

The point where to say this again, people get paid a hell of a lot more than I do because they're willing to, you know, make calculated bets around that. And that's a huge issue for us. You know, bringing it back to the end of the order side, we survive because of, you know, minimum block sizes. So, you know, if you trade over a minimum block size, it depends per instrument. You know, it's gonna come to us because that is essentially negotiated between NFA, us, you know, the regulatory agencies, CFTC exchanges, etcetera.

Let's say that an administration, doesn't matter what the political bent is, but they change and they decide we don't want over the counter trading anymore.

Not good for our entire industry, and I'd argue not good for the industry, or just general people overall because it's gonna increase transaction cost.

But, you know, again, I I am talking my own book, but there's a lot something that you guys talk about.

Is that is that so what? A government could a government could come in and say no more. Just trying to think about European power, for example. Is the is the kind of the market that I know best?

We we talk the amount of the amount of happy hour times and the amount of very serious sober conversations at nine o'clock in the morning about regulatory shifts that could basically put us out of business happen every day. Yes.

And it's it's one of those where it's both personal because, you know, obviously, our livelihoods and business are tied up in it.

We've also seen you know, the the best way to say it is the NFA, National Futures Association, without getting into trouble with my general counsel.

They are a regulatory body that is a self regulatory entity, and you're like, what the hell is a self regulatory entity? Well, those basically go to the actual statutory regulatory entities, both UK, US, and otherwise, and say, let us regulate ourselves.

Seems strange, and then that those regulatory powers are delegated. So as a function of that, we kind of have, like, a strange interface where we're like, well, why are we getting pushed here? How do we not have that?

And what it all boils down to is we're constantly afraid that, you know, essentially, our markets are gonna be told everything has to be cleared because, again, the exchanges are also our regulator, which is an even more complex position. So we're we're kind of constantly in a limbo where we're trying to provide the best transaction, the cheapest transaction for our customers over the counter that doesn't move the market, doesn't reveal their positions, provides all these, you know, residual and tangible benefits that there's a large part of people, Elizabeth Warren, for instance, who are like, why the hell is this occurring? This should all be, you know, purely where we can see it because everybody needs to know everybody else's transaction. And, you know, we come back to the whole argument of these are transactions between, you know, adults as in you can't just go trade commodities. You have to have a big boy account because these are institutional by design.

These cannot be public. And it's not because someone's trying to hide something. It's gonna come out if somebody's manipulating a market. We're not talking fraud. We're just talking about ensuring people can transact and delay risk. And largely, what does laying off risk mean? It means that you basically have a way to hedge your cash flow so your company doesn't go bankrupt if you have a shift in commodity prices, which your company can't control.

So, again, like I said, we we do worry very much about I didn't realize that it's become so political. And, the the idea that, you wanna It is nothing to do with any particular political party.

So I I will make that clear. I'm not staking out of staking out of political position. It's one of those where no. It's more people don't understand what over the counter trading is. People think it's some nefarious thing. They think that they because they saw the big short that they have some deep insight into our market, which couldn't be further from the truth.

And explain this to me in a bath of bubbles.

That's what you need to do.

Yeah. Exactly. Like, I lift I lift weights, but I'm a little stuck around the midsection. I don't think anyone wants to see that. But, yeah, that's that's kinda what we're struggling against because the assumption is that because it's not a transparent market, we're doing something, you know, nefarious.

Far from it. We're trying to help people manage risk, to allow development. Again, like I was mentioning earlier, we're trying to help people, you know, develop photovoltaics and wind and everything else or carbon capture. But if they don't have an effective derivatives mean to do so, you know, that that's kinda what we're up against.

So, yes, we we wake up every day all terrified there's gonna be some news article that, you know, magically, this is banned. And I know people are saying that wouldn't happen, but, you know, we're not we're not effective cheerleaders for ourselves as an industry. Again, we're very private. We're very hidden.

And that's one of the hard parts where, you know, trying to communicate to even I mean, I fully admit this, which makes me seem like a total moron, but when I started here, I didn't really know what a near dealer was. You know, I worked in trading, worked as a consultant, been a bunch of places, but showed up, and I'm like, what is this place? And that's kind of the disservice we do even though as an industry, we're we are providing kind of that valuable risk management function.

Alright. Always good to talk about self regulating entities, isn't it? Everyone's got the old self regulating entities.

Some sorrows.

Yeah.

Very Orwellian. Right. So, to finish up, I wanna know all about your, this is the best my favorite question in the whole podcast. Wanna know all about your contrarian view. I bet you've got loads. But, which one do you wanna share?

Probably power related just because, I like electric power. It's kind of one of my favorite things. Obviously, do every, you know, energy commodity, the firm brokers, and model it. But, you know, particularly contrarian that I'm not convinced about net zero, particularly from a thermal standpoint because we just there's not enough energy there. So then the question becomes, how do you actually adjudicate that, and spending around it?

I also think that, you know, we're really running into some dangerous areas to stick around, like, voltage ride through. These are all extremely technical, but they all matter because we look at where, you know, gross investment is. We look at order books for things, you know, like gas turbines and things like that. We're not building nukes. You know, even if we have some interest in, you know, reviving nuclear plants, NRC and stuff like that's not gonna move fast. So I'm convinced that we're gonna have, you know, thermal plants here for a long time. I we're not gonna replace basically the thermal fraction just largely because it is so damn energy dense.

I don't believe in one hundred percent electric EVs. Just again, it's thermal density and stuff like that. And then, you know, when you have you know, adding fifty megawatts of, you know, charging, you know, outside of the city just to do Amazon delivery vans, that's a problem.

Then you mix that with, are people going to allow transmission to be built?

No. There's going to be a lot of litigation around it. I don't want that in my backyard. It's gonna be what everyone says. So because of that, I think there's not gonna be the rapid, basically, move to net zero electrification.

I think it's largely because it's a political science problem, not an engineering problem. And engineering problems are relatively easy to solve. They have constrained, you know, defined areas. Political science is not.

You start here with your maximal set. Anything below that's worse. So as such, I want my maximal set, so I'm only going to do politically to get my maximal set versus economics, you know, that's upper continuous. So simply because of preference functioning and stuff like that, it's gonna be a bear.

So I think we're gonna start to see a lot of complex pushback around electrification, batteries, everything else. And I think it's largely because when you're operating a socialized machine like the power grid, you're gonna deal with the implied social cost, much to the chagrin of people like the engineers at ERCOT, people working genuinely hard everywhere else, Europe.

You're getting pushback because it's, again, fundamentally a political science problem that is not solved even when you've mapped it down, you know, relatively simplistically.

These are complex and people just again, they don't want transmission in their backyard. They probably don't want a giant, you know, battery bank next to their house. They don't want an additional, you know, coal fired plant, natural gas plant. These are all gonna be issues that are gonna be hard to solve, and that's why it's difficult to move beyond kind of our current construct.

Interesting. Interesting.

I know it's very contrarian, especially for the industry.

Especially for our listeners. I would say, well, there is some truth in what you've said there. Right? I I do disagree with a lot of it, but there is certainly some truth in that We've got a big challenge in convincing people that this is the right thing to do and that getting stuff built is more challenging than a a a lot of the low hanging fruit has already been taken.

Right? The the spaces where people are happy to have transmission lines, there's already transmission lines. I think a lot of the operability issue, you talked about low voltage ride through there. I think a lot of it comes down to, I think some of it can be can be solved in a for market design, and some of it is an interconnectivity issue.

And, of course, where we are at the moment, you're in Houston, I'm in Austin, Texas is not, is is an island within the states. But I think over large masses, particularly across it's argued that the European power grid is the most the largest or most complicated or something fabulous, to describe the biggest system ever or whatever. And I guess over large enough distances, renewal renewables penetration, can be managed, with with interconnectivity and, market design. But I agree with you.

We've got a big hearts and minds problem, and we've got a big we've got a massive cost problem.

Yeah. I'm talking about dollars. You know, euros, dollars, pounds, cost problem, which has been totally underestimated.

And the the the people who will end up paying for it hasn't really been worked out who that's gonna be yet.

Correct. And so, yes, we we do have a huge societal problem, but I'm hopeful. I'm I'm extremely hopeful, and I really do hope we can get off gas as much as I love gas turbines. And I look I watched in, in awe, been the geek that I am, a YouTube video about Siemens order book over Christmas Yeah. And the amount of, orders they are taking for turbines right now. You mean, if you wanna buy a Siemens gas plant, you gotta wait three or four years right now.

Anyway, that was what I did in my Christmas holidays, and there's nothing wrong with that.

It's yeah. It's one of those where I like I said, I know I'm being contrarian. It's it's more I'm pessimistic because of the political science aspect. I I'm not sticking out of political business or anything else. I'm just saying, you know, I've gotten phone calls from, you know, people I know who are like, how do I prevent, you know, a transmission line from being, you know, operated and, you know, raised in my backyard in the Hill Country?

There's there's a sufficient number of people who are cranky about that that that adds an issue. And then as you bring up the affordability issue is, you know, nobody at least in Houston likes the TDU pass through, which is basically our distribution cost for how much the power bill cost. You know, particularly this time of year when they're like, why am I paying a hundred and fifty bucks to CenterPoint when I'm only using, you know, fifty dollars worth of electricity?

You know, trying to explain that and manage that is a difficult issue. And, again, it it's a political science problem.

So, again, I'm not pessimistic about either technology or anything else. I'm pessimistic about you're trying to explain this to people, and most people just wanna have the power work and come home after work and watch Netflix. And those are very difficult things when you're watching, you know, things about, you know, turbine engineering. And I'm reading, you know, release documents from the TRE and ERCOT. So this this is kind of a little bit of a different audience, versus your normal folks.

Yeah. Which is fine. Alright.

Well, I've gotta say that was an absolutely fascinating discussion. For anybody who we we we went really technical on a few things there. I'm sure some of the listeners, there was there were some bits where where people are like, can you just get on with it? But I'm really glad we no.

No. Don't say sorry. I'm really glad we're stuck at it, and there'll be the odd the odd listener out there who's thinking, oh, I really enjoyed that. So if you're that listener, thank you for sticking with us.

You really know your stuff. Your place in the market as an interdealer broker is fascinating and how it links back to the the old ways of trading commodities and power and, you know, all sorts of things in Chicago and elsewhere. So I wanna say a massive thank you for taking the time to speak to us. I absolutely love that conversation.

And, it was fascinating. Thank you very much.

Thank you. I really appreciate it.