Liquidity provider of the year: Grey Epoch

Energy Risk Awards 2023: Options trader provides vital liquidity to turbulent carbon market

Ken Schneider, president, Grey Epoch

While carbon markets continue to grow in importance as decarbonisation climbs up corporate agendas, the events of last year made emissions trading, particularly in Europe, extremely challenging. The war in Ukraine and its impact on the supply, price and use of natural gas and coal in power generation, coupled with weather risk, created unprecedented volatility in the European Union Emissions Trading System (EU ETS).

These events left many firms needing to revisit their hedging strategies, either to increase activity or unwind hedges, at a time when market liquidity contracted due to the uncertainty. Throughout this challenging time, carbon markets options trader Grey Epoch provided uninterrupted markets for clients, playing a key role in enabling participants to liquidate or build their positions, and to manage their risks.

“Throughout the tumultuous markets of 2022, Grey Epoch showed prices for almost every request we received,” says Ken Schneider, president of Grey Epoch.

“We don’t pick and choose when we want to trade,” says Justin Lansburgh, senior derivatives trader. “We provide competitive prices for the brokered market, every day, from open to close.”

Grey Epoch has been the number one liquidity provider in Ice Exchange-cleared EU allowance (EUA) options since 2013. The firm is also active in the UK ETS, executing the first exchange cleared UKA options trade in 2022.

Grey Epoch set up its client-facing operation, Grey Epoch Europe in 2021. “We worked directly with clients to help them navigate the volatility and risk and to provide access to price risk strategies,” says Edmund Lehmann, director of Grey Epoch Europe. Through its Grey Epoch Europe business, the firm helps corporates meet their compliance obligations under the EU and UK ETS by structuring innovative and bespoke allowance strategies and offering procurement services on behalf of the parent company. Grey Epoch Europe is an appointed representative of Thornbridge Investment Management.

Throughout the challenging events of 2022, rather than withdrawing, Grey Epoch stepped up its trading operations, servicing compliance users and providing liquidity to various other cross-commodity desk and asset managers. This involved Grey Epoch trading various options structures such as zero-cost collars, straddles, strangles, butterflies, iron condors and time spreads, as well as any customised or ratio spread requested by its counterparties.

“Our coverage of the market and ability to competitively price these structures ultimately lowered the cost for our counterparties and helped them manage their financial risks,” says Schneider.

Over the past 12 months, Grey Epoch has traded options structures as small as 25 contracts and as big as 5,000 contracts on any given day. The firm has also helped customers accumulate significant size in their desired position over time as market liquidity in both the futures and options allow. The risk it takes on with these deals is mitigated by adjusting its own portfolio and by trading dynamically to manage risk overall.

“The firm manages this portfolio of structures through the options term expiration and by repricing and rolling any of these structures at a customer’s request to reduce additional future risk the customer may have in covering its emissions costs,” Lansburgh says.

Grey Epoch’s “vigilant approach to risk management” underpins all its achievements, he adds. The firm uses real-time risk software and teams meet post-close every day to assess its risk profile and test its Greeks and shock risk by looking at multiple arrays and scenarios.

Grey Epoch’s clients appreciate the firm’s consistency and willingness to provide liquidity, and credit the firm with making a large contribution to developing the EU ETS to the stage it is at now.

“Grey Epoch has provided a consistent source of liquidity and coverage since the inception of the traded carbon markets in Europe,” says a broker at a large environmental markets brokerage. “Its willingness to provide liquidity in a timely and professional manner, even when others would not, has been a constant throughout that time and has been key to the markets developing to where they are today.”

Grey Epoch’s new client-facing business, Grey Epoch Europe, coupled with the firm’s position as the largest EUA options liquidity provider, enabled it to step up just in time to help clients navigate one of the most challenging times in the EUA carbon market.