Cousins Start Broker Firm With Focus on Illiquid Power Marketsby
Arax Commodities on schedule to complete first trade this week
To work with exchanges to stimulate cross-border activity
From a startup hub in southwest London, aptly named The Light Bulb, two cousins are opening a niche European power brokerage.
Tom Roberts, 32, and Will Rigby, 27, started Arax Commodities Ltd. in January to match buyers and sellers of electricity in nascent markets in southern and eastern Europe. They may conclude their first trade this week, Roberts said Monday. Arax’s plan is to work with exchanges and clearing banks from Germany’s European Energy Exchange AG to Power Exchange Central Europe AS in Prague to develop markets in the region, including Greece and Hungary.
The cousins think they can succeed in stimulating trading in illiquid markets, which would then open up cross-border opportunities to attract traders. They will be competing with other firms including 42 Financial Services AS in Prague and Compagnie Financiere Tradition SA, which also have desks focusing on the region.
“We want to be a driver of new markets,” Roberts, a former energy broker for ICAP Plc in Madrid and Amsterdam, said in an interview at his office. “There’s no reason why there shouldn’t be good liquidity in countries like Greece.”
For example, buying and selling in Italy’s power market increased when EEX started guaranteeing trades in October 2013 to help limit counterparty risk. The bourse listed futures contracts in April 2014 and has seen much of its volume coming from people wanting to trade cross-border with France, according to the exchange. Roberts is hoping the same will happen in less developed markets in eastern Europe and east of Turkey.
“Counterparty risk is the biggest issue in emerging markets so you need clearing through an exchange to be in place already,” Roberts said. Exchanges are an “enabler and also a competitor” once they list their own order book for trading, he said.
Arax is steering clear of Germany, France and the Nordic region, Europe’s most liquid markets. There is more need elsewhere for a new broker that can start a new market within a few days if needed, Roberts said. German over-the-counter trading is dominated by interdealer brokers ICAP, GFI Group Inc., Tullet Prebon Plc and Tradition.
Three new exchanges also plan to capitalize on the interest in trading in the region. Bulgaria’s Ibex opened day-ahead trading in January. South East European Power Exchange, a joint venture of Epex Spot SE and the Serbian power grid operator, started day-ahead trading last month, while Cropex of Croatia also began to offer contracts in February.
Arax also wants to attract funds as clients and aims to extend to natural gas markets to also offer basket trades, where you buy or sell a group of products simultaneously, Roberts said. The company has more than 30 clients interested in trading with them, Roberts said, declining to provide further details.
“We thought it would be tough to convince people to work with us,” said Rigby, who previously worked for Cantor Fitzgerald LP and Royal Bank of Scotland Plc. “There’s a lot of interest and we’re getting a good reception but we’re taking a big risk.”