Measuring Liquidity in Gas Markets: The Case of the UK National Balancing Point. ESRI Research Bulletin 2019/06

de Menezes, Lilian M. and Russo, Marianna and Urga, Giovanni (2019) Measuring Liquidity in Gas Markets: The Case of the UK National Balancing Point. ESRI Research Bulletin 2019/06. UNSPECIFIED.

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Abstract

Liquidity is the ability to match buyers and sellers at the lowest transaction costs. Therefore, in a liquid market, executing a transaction over a short-time horizon does not imply higher costs than spreading the same transaction over a longer horizon. Policymakers and practitioners traditionally use the churn ratio to measure liquidity in gas markets. The churn ratio is the ratio of traded volume to actual physical delivery. However, this measure does not consider the impact of trading activity on prices. This research focuses on applying different measures of liquidity, which are used in financial markets, to measure and assess the impact of trading activity on prices. The UK National Balancing Point (NBP) is used as a case study, since it is the most mature hub for gas trading in Europe. Therefore, conclusions from this study can be extended to other gas markets. The research shows that a positive correlation exists between trading activity and prices in the market. However, the strength of this correlation changes over time, depending upon market conditions. Specifically, in the presence of oversupply the impact of trading activity on prices is lower, thus implying that trading a high amount of gas is less expensive, and liquidity is high. Consequently, risk management costs are also less expensive.

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