On Wash Trade Detection in Energy Markets

Abstract

A wash trade in energy markets refers to entering into arrangements for the sale or purchase of a financial or physical instrument, a related spot commodity contract, or an auctioned product based on emission allowances, where there is no change in beneficial interests or market risk or where beneficial interest or market risk is transferred between parties who are acting in concert or collusion. Market abuse scenarios such as wash trade compromise the efficiency and integrity of energy markets. The research of abusive trading behavior in financial markets is well ahead of peers in energy markets. Effective solutions for monitoring abusive scenarios such as wash trade in energy markets are yet to be developed. This paper describes a practical implementation example of detecting wash trade behavior in energy markets using simple techniques. An easily reusable method is then proposed to detect the potential wash trade activities involved in an instrument by first detecting trades resulting in no overall change in market risk and then further identifying the collusive behavior between the counterparties. The proposed method is tested and evaluated on energy instruments order data sets from the Trayport trading platform. We find that the proposed approach can effectively detect all primary wash trade indicators across energy instruments.