Why Power Trading Is 10 Times Crazier Than Crypto ft. Cory Paddock

[00:00:01] Cory

And that scenario happens a lot in trading. And as one gets more experienced, the ability to just recognize those days and recognize, you know what, today’s not the day. Today’s not the day to fight for this loser, for this losing position. There’s more trading days ahead. Let’s move past this one and go on to the next.

[00:00:25] Intro

Welcome to Top Traders Unplugged. In markets success doesn’t come from predicting what happens next, it comes from being prepared for what you can’t predict.

In each episode we go deep with some of the world’s most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no short-cuts, just real conversations to help you think better and invest with confidence.

[00:01:02] Moritz

Hello and welcome to another episode of the Open Interest series on Top Traders Unplugged. This is episode number 24 and I’m your host, Moritz Seibert. So, today’s episode is a little different. For the first time, I’ll be speaking to a prop trading firm rather than a hedge fund or investment manager running external client money.

Specifically, I’ll be chatting with Cory Paddock, one of the two founders of GBE Energy, a power trading business based in Calgary, in White Rock, in Canada. GBE, which by the way stands for God Bless Everyone, was founded in 2013 and trades US power markets with a particular focus on PJM, the large electricity market covering 13 US states. The team combines traders, meteorologists, quantitative developers and market analysts, all working to identify opportunities in power prices across different locations and time periods.

Before we start, I want to give you some background on why I wanted to record an episode with GBE. Firstly, although power markets are very niche, they are opaque and they don’t have as many market participants as, for example, the US equity markets have. I personally find them super interesting.

I mean, unlike equities and bonds and futures, power markets sit at the intersection of physics, weather, economics and market design. And understanding these dynamics better than other market participants is how GBE makes money.

Moreover, electricity is central to all of our everyday lives. The functioning of societies, our economies, the energy transition, the increasing popularity of EVs, and more recently, the massive growth of AI data centers. We’re going to need a lot more electricity in the future, and that is already having a major impact on power markets and prices.

Secondly, and this is the other part of the GBE story that I found particularly interesting, that has to do with how they recruit and develop traders. The firm has developed quite a bit in how they built their trading teams. In the early years, they mainly recruited experienced traders and gave them the capital, technology, and infrastructure to run their own books. But more recently they’ve shifted toward finding young and hungry people with the potential to become great traders and then developing them internally.

So, the philosophy behind all of this is that trading is a high-performance discipline. Analytical ability is important, but so are probabilistic thinking, conviction, emotional composure, resilience, and the ability to learn from your results without being fooled by them.

Okay, so that’s a lot. But before we really get into the deep weeds, here are a few fun facts and quick facts about Cory.

He’s got an MBA from the University of Calgary. He started his career at TransAlta, a Calgary-based utility and wholesale power marketing company. He then moved to a power trading hedge fund in Houston before starting GBE in 2013. He is, I find that very interesting, a lifelong athlete who played professional volleyball in my home country’s Germany, second Bundesliga, and he has run a marathon in under two hours and 55 minutes. Boy, that is quick.

That has been the longest ever introduction I’ve made, Cory. Probably a little bit scared because this is about electricity and not a lot of people really know the power markets that much or that well, but you do. At any rate, welcome to Open Interest. It’s great to have you on.

[00:04:31] Cory

Thank you for having me. Yeah, that was quite an intro.

[00:04:34] Moritz

Well, there we go. Well, let’s get going. I mean, go from simple maybe to more complex.

If you don’t mind, could you give us like a 30,000-foot overview of how the cost of power has developed, how the US electricity markets work? Just something simple to get started. What are we talking about?

[00:04:57] Cory

Oh my, that’s quite a substantial question.

[00:05:00] Moritz

Yes.

[00:05:00] Cory

Well, I think it’s a very recent development in history compared to other commodities, other asset classes. And it goes back to kind of the ‘80s and ‘90s, early 2000s, when a fundamental insight was discovered where there could be this intersection between physics and economics in trying to optimize the economics of the power system.

And this was not a super easy insight to come to a conclusion to. And there’s a number of academics that I think deserve a lot of credit, going back into that period, and then, also politically, for a number of red and blue states and purple states to come together at that time and decide this is a good idea to put together this kind of optimization effort. It’s kind of impossible to imagine in today’s political environment.

So, that’s kind of setting the stage for, I guess, how this came to be. And like you alluded to, it’s a very interesting market that needs to combine the physics of how actually power flows. And there’s this constant tension for system operators to maintain system reliability and to do so to minimize production cost. But always the scales are going to be tipped towards reliability and trying to figure out how to manage that in real time.

I guess the other piece are the actual machines and fuel sources for all of the North American grids are quite substantially different depending on what the actual resource endowment is of a particular area. So, in Canada, we have quite a bit of hydroelectricity just based on our geography, centered mostly in British Columbia, and Manitoba, and Quebec. Whereas the United States is really not endowed with much hydro resource, so it has to depend on other resources.

So, historically that meant a lot of coal in most areas of the US, and then gradually transferring to nuclear, and then incorporating a lot of gas, and then more recently wind and solar. So, the actual fundamentals of how power is generated and has been generated has shifted a lot over the years. And market designs often are in response to what those technologies actually can do, not only economically but to maintain grid reliability.

[00:07:46] Moritz

Yeah, and grid reliability means that you have to balance that grid and the load pretty much continuously, otherwise you have blackouts.

[00:07:52] Cory

Instantaneously, and 24/7, 365.

[00:07:58] Moritz

Yeah, exactly. No breaks, no holidays, no Thanksgiving, none of that. It has to be there all the time.

You mentioned the fuel mix and how things have changed, Canada more with hydropower, the US less so. What is the current fuel mix, roughly? I mean, is it predominantly gas I guess still, but I guess it’s changing?

[00:08:21] Cory

Yeah, I mean, we could speak about PGM, the market that I know the best. So, this is geographic.

[00:08:29] Moritz

Let me interrupt. What does PGM stand for? Most people don’t know that.

[00:08:32] Cory

Oh, yeah, that’s a good question. So, it would be… It’s going back to historical Pennsylvania, New Jersey, Maryland, I think, interconnection. But PGM Interconnection would be the market or Independent System Operator ISO, you’ll hear that term reasonably often. You also hear RTO or Regional Transmission Operator. I think I’ve got all those acronyms. Anyway, so, PGM runs from New Jersey, Pennsylvania, Maryland, Virginia, West Virginia, Ohio, and then metro Chicago as well. So, it’s the biggest deregulated power market in the world. And it actually has a pretty distributed fuel mix and is pretty representative, I would say, of just the American fuel mix writ large.

So, historically the backbone would be coal. And then on top of that, nuclear. And then, as we went through the shale revolution, there’s a bunch of inexpensive gas that sits in the Marcellus, in western Pennsylvania. So, that initiated a pretty substantial coal to gas switchover. So, this is going back roughly about 10 years is when that really started to come through. And meanwhile, a lot of coal generators were kind of getting to end of life anyway and weren’t really able to compete economically with gas. And then more recently, the additions of wind and solar to the mix, but those would be in the kind of 10%, 15%, 20% range.

So, the rough pie, I don’t have it exactly in front of me, would be 40% gas, 15% or 20% coal, 20% nuke (depending on the day), and then wind and solar for the rest, on a lot of days, a lot more gas, a little bit of oil in there as well. But yeah, that’s the mix for that particular area.

[00:10:41] Moritz

So, this is one grid, one geographical area that is connected across the 13 states, some of which you have mentioned. But then the US is heterogeneous. It has other electricity grids that are connected. Like Texas has its own ERCOT, which I think, from what you’re saying, is not at all connected to PJM, which then also means that power prices in Texas can be way different than in New York City, for example.

[00:11:06] Cory

Yeah, substantially different. Yeah, the mental model to think about North America, it’s actually set up in three major interconnections that actually span across Canadian and US borders. So, the Western interconnection, the Eastern interconnection, and then ERCOT or the Texas interconnection.

And each of these runs as their own giant machine with very little interconnection points between them, very little in the way of… next to nothing in the way of AC or alternating current lines. There are a few direct current lines that connect these areas, but, for the most part, you should think of them as their own separate grids.

So, the western interconnect would include British Columbia, Alberta, and then all the western states going down to California, Arizona, Colorado, etc. The eastern interconnection, on the Canadian side, would be Saskatchewan, Manitoba, Ontario, and then everywhere south of that, so, getting into the Midwest states, New York, New England, and then running all the way down into Florida. And then Texas, liking to do its own thing, has kept separate all these years.

And really this is going back to kind of the history of electricity and how systems are built, where each of these interconnects started as smaller things and they just gradually got built out further and further based on where population centers were, industrial load centers, etc.

[00:12:43] Moritz

Yeah, you mentioned that you were, I think if I remember that correctly, you were exclusively trading the PJM market. Is that right?

[00:12:50] Cory

Almost exclusively, yeah. We were also participants in the MISO market, Midwest ISO, the New York market, the New England market, the Ontario market on the Canadian side. But most of our participation, yeah, is in PGM and that’s where most of our expertise lies.

[00:13:09] Moritz

Yeah, well, you have the expertise there in your background but is it also because it is maybe the largest or does it have the most products available for you guys to touch and trade and arb?

[00:13:20] Cory

Yes, I think that’s also a good representation. Yeah, so it’s the largest market, the most liquid in the eastern interconnect. There’s been substantial increases in liquidity on the ERCOT side, in Texas, over the last several years. But we’ve stayed within our expertise on the PGM side.

I think what’s interesting about it, and I came across this concept several years ago in studying games, I think a lot of the contracts in PGM have this right mix of skill and chance that make them particularly addicting. So, maybe that’s one contributing factor that has contributed to the liquidity over a period of years.

Just when you think you have things solved, something weird and strange happens. Maybe you get some bad luck or there’s some piece of chance that enters the equation that just makes it more engaging.

[00:14:20] Moritz

The other thing that might be addicting, at least to some, is the volatility that’s included or comes with these markets. We’ll speak about that in a bit, I guess. But when you speak about the PJM market, what is it that you trade? Because you’re not logging into a Robin Hood account, putting in a ticker and trading PGM power. What is it that you trade?

[00:14:42] Cory

Yeah, it’s a good question. So, most of our trading is done on the ICE Exchange, the Intercontinental Exchange where a lot of commodities are traded. But we trade a product predominantly called PGM West Hub, which is a very strange product in that it’s a hub of individual trading nodes within the PGM system. A bunch of those trading nodes sit within Western Pennsylvania. A bunch of those nodes sit in and around Washington D.C., and so, somewhat geographically dispersed. But that contract and that hub roughly give a good representation of power prices in PGM.

Increasingly there’s a lot more volatility throughout the entire pool. But historically that’s where most of the market is done, most of its trading. And so, this futures contract works in similar ways to crude or gas in that there are contracts that go out calendar years and then gradually move into prompt months or several months ahead of time.

But where it’s different compared to North American gas products is you start actually getting quite a bit more granularity, getting into individual weeks and balance of weeks, next day, and then even the current day or balance of day, or Bal Day PGM, which is a product that we spent a lot of time on throughout the years and continue to spend a lot of time on.

And so, that product itself is the weighted average of 5 minute prices in all of those nodes, from hour ending 8 to hour ending 23, every single heavy load day, which is just business days during the week. And so, every day… The uniqueness of that contract, as well, is, as you move throughout the day a bunch of the individual 5 minute prices and then eventually hourly prices become known but then there’s still a bunch of unknowns for the rest of the remainder of the day. And still lots of intraday volatility can happen.

So, as much as information has improved over the years, particularly on the weather forecasting side, you would think that we know how the grid is going to behave tomorrow when we’re only 24 hours out. But it turns out actually no, we don’t really know how power is actually going to flow on that day. And the fundamentals can change substantially just in that kind of quick period. So, that’s a quick overview, I guess not so quick overview, of the product that we’ve traded.

[00:17:38] Moritz

Yeah, well, that is why these markets are interesting because, I mean, in some ways they are different to crude. I mean, there’s peak, and baseload, and there’s, I presume, different contracts for that. And you have, maybe not in PGM, but you have seasonalities and you know all these types of things that do play a role.

By the way, are there options on these futures contracts as well?

[00:18:00] Cory

There’s a little bit of monthly options, yeah, some monthly options, but not getting into… Historically there’s been a little bit on the balance of day and next day side that has dried up a little bit more over the past several years. But yeah, not so much on the option side. Increasingly though there’s been, and this is, I’ll give a quick shout out to a new exchange called ElectronX. We actually just joined a couple weeks ago. They’ve taken this idea to a more granular level. So, when we’re trading on ICE, we’re typically trading that entire strip. But now, on this new exchange, ElectronX, you can actually trade each individual hour as an individual futures contract. So, that’s been interesting for us.

And my forecast is that a lot of market participants will join that game as well. It gives a lot of optionality and tools, particularly for either load or renewables that have different shapes and don’t necessarily want the entire exposure for all the hours. Maybe they just want exposure, or want to be able to hedge out their positions for select hours.

[00:19:20] Moritz

You mentioned earlier that electricity, because it needs to be balanced, is 24/7, 365. Does this mean your business is 24/7, 365? Or maybe put differently, do you take markets into delivery or do you kind of get out a day ahead so that doesn’t become a problem and then you can have a good night’s sleep?

[00:19:39] Cory

Yeah. No, we don’t sleep very well. No, that’s the nature of the job though. We currently do not run a real time trading desk where you’re physically flowing power between different regions. Maybe check back with me in a few months on our progress there.

And that’s actually where I learned, and how I learned the business in the first place. Kind of going back to my time in TransAlta, where doing shift work 24/7, 365, and at that point scheduling physical power between the different interconnected regions. And so, that market still is happening kind of non-stop.

But then meanwhile, I guess, for our type of trading at least, the exchange, ICE, closes down at 6pm every day to actually do server maintenance. Otherwise, I think actually traders would continue trading it kind of all through the evening on the east coast. So, that usually leaves a bunch of unsettled hours kind of going into the end of the day. And we typically would have positions, open positions, not only for the rest of the day going into delivery, but then also the next several days.

[00:21:02] Moritz

Yeah, right, yeah, let’s speak about some of these trades or the way you trade maybe in a little bit more detail. I mean obviously, I mean maybe you want to speak about what is GBE’s edge is or if there is something like that, things that you focus on. I presume that you’re trading research driven, fundamentally informed, as opposed to systematic or quantitative, it comes with the nature of that business.

But speak to us a little bit about what would be kind of like a, if there is such a thing, like a standard trade. Would that be more like a spread trade, or an arbitrage, or a position that you’re taking to hold for a day or a couple of days? What usually gets you interested?

[00:21:48] Cory

Typically, I mean, this is going to sound a little bit pithy, but we try to understand what demand is going to look like, and we try to understand what supply is going to look like, and if there’s a mismatch. So, I mean, it’s a little bit more complicated than that.

But on the load side there’s a lot of interesting variables. So, it’s a lot more tricky than just saying, oh, we think demand is going to be high or low. There are differences in demand between different sub regions and that can impact power flow. So, we pay a lot of attention to that.

There are various inflection points for load, depending on the weather. So, actually, typically PGM remains a summer peaking system, meaning demand is highest during the summer when kind of AC is running highest. But there’s actually some sub zones within PGM that are transitioning more to winter peaking, whereby winter heating demand is actually exceeding summer AC demand. So that’s one thing that’s gradually shifting over time.

And so, throughout the day, each of these days has different load shapes and those shapes differ by season, by time of day, by sun angle. And so, there are quite a few variables that go in to try and actually understand whether basically the market or the market writ large has a good view on actually what load is. And so, we try to understand load really, really well, first and foremost. I would say yeah, a lot of our trades are kind of downstream of that.

And then on the gen side we’re trying to figure out, is there enough generation in the areas that actually need it? And then if not, what’s the kind of next megawatt up and what will that price be for that next megawatt once transmission is basically at its limit, trying to feed kind of areas and pockets of inexpensive generation into areas where load is high.

And so, every day we’ll go through a systematic routine of basically like a large checklist of okay, where do we think load is going to be for all these sub regions, all these regions writ large? What do we think supply looks like? Which generators are on, which ones are off? Do we think this one should be on, etc. And then is there enough actual transmission to get the inexpensive gen to the pockets that need it?

And then from there, over time and through experience and through the pattern recognition, we basically make calls on whether the futures prices are trading too high or too low. And we take bets in either direction.

[00:24:56] Moritz

Where do you get that info from? I mean, other than the meteorologists who do weather forecasting. But how does one figure out what demand or generation is going to be? Because it’s probably not a Bloomberg ticker that you can just put up and look at it.

[00:25:11] Cory

No, and it’s not quite vibes either. So yes, we have a couple meteorologists on staff. There are a number of load forecasting vendors in the market that we subscribe to and then we also have our own internal models to try and ascertain where we think load’s going to be.

Yeah, so, a lot of the weather information is publicly available forecasts generated by not only NOAA, the GFS, but then also the Euro model. So, all of that data is quite public and knowable. But the actual conversion into load forecasts, well that’s, yeah, that’s kind of where the art comes in.

On the generation side, there’s a couple of interesting vendors that actually monitor the production of plants in real time and they do this through some sensors, that are located typically in farmers’ fields, that sense how much power is actually coming out of the high voltage lines coming from the generators.

[00:26:27] Moritz

Interesting, I didn’t know that.

[00:26:29] Cory

Yeah, so those would be a couple of proprietary vendors that we would subscribe to. So, we’ve got a bunch of historical data on that front. And then there’s other publicly available data sources out there on generation. People can look that up. So, it’s a combination, I would say, of publicly available data and a few private data sources.

Power markets in general are very data rich. Even within each of the independent system operators. There’s a lot of public data that gets generated not only for market participants but for the public as well. So, we ingest and save all that data as well, not only for our own trading, but also model and tool building. And going forward, at least, we’ve always taken the view that we’re not quite sure what this data might mean in the future, but we’re going to save it anyway. And I would say, more recently, there has been some interesting developments internally in that approach, or I guess validation over that approach.

[00:27:35] Moritz

Yeah, and then you mentioned the pattern recognition, which I believe is then your experience as a trader so that you have the mental ability to discover if and when something looks out of whack.

[00:27:45] Cory

That’s right, yeah.

[00:27:47] Moritz

These markets, because they’re not accessible to everyone that easily. I mean, if people make an effort, they can get to these markets for sure. But they’re not kind of like open door, here I am, just click on the ticker and use your mouse and trade PJM Power.

I mean, I guess it’s connected. It probably has the right level of darkness and opaqueness that makes it alpha rich. That allows for a prop trading business to thrive.

[00:28:12] Cory

In our view, yes. Yeah, and I can’t possibly imagine trading anything else. And I’ve been thinking about this increasingly, like why this thing is so addicting. But I think it’s one of the very few products that combines this amount of not only volatility but also the ability for your fundamental view to shine through. So, typically in a lot of other markets where you might have some fundamental view, it might take several weeks, months, years for the market to come around to your story. Whereas with power, ultimately the power has to flow, the lights have to stay on. And so, you just have to have the patience of a number of hours to see if your market view is right.

Naturally you have to still control your bullets and your risk management throughout that. But there are lots of instances where you can’t necessarily get bullied out of a position. If you play your cards right, eventually the price is going to be what the price is. I think it’s just an interesting intersection where if your fundamental views are so strong and robust, you can wheel through where it might be trading on path.

[00:29:36] Moritz

What would you say is the average holding period of a trade when you’re putting it on?

[00:29:41] Cory

Let’s say historically for myself and Jerry Zhang, my trading partner, probably 10 to 12 hours, something like that, maybe even less than that.

[00:29:53] Moritz

Yeah, definitely in the intra-day trading business, you have the occasional position that you keep overnight because you have a two or three day view.

[00:29:59] Cory

Still quite a few, quite a few. But we’re still, yeah, a bunch would still stay within today, yeah.

[00:30:06] Moritz

You mentioned risk management. So, when you, I mean it’s kind of like, yeah, within 15 minutes, or 5 minutes, or by the end of the day, you know whether you’re right or wrong. You have the short average hold period per trade. I mean, relative to, say, natural gas, which is a relatively volatile market, how volatile is it, on an annualized basis? If it makes sense to analyze the volatility, I don’t know. How volatile are these power markets?

[00:30:36] Cory

Maximum.

[00:30:41] Moritz

10X crypto.

[00:30:42] Cory

Yeah, 10X crypto, I think, is probably the best way to describe it. And even within that, that’s not just what today can settle versus yesterday. It’s more what can happen in this 5 minutes, compared to next 5 minutes, and whipsawing back and forth.

[00:31:05] Moritz

So, with a setup like that, I mean things like, we, from kind of like a systematic trend following background, we would have a position and it’s sized in a certain way and there’s a stop loss on an exit. We know how much we’re going to lose. But I guess with that type of volatility and also that trading horizon putting a stop loss on the position, I mean you tell me, but I’d say it probably doesn’t make much sense. The trade either works, or you close it at some time with the time stop, or you get wiped out and it closes at zero and that’s it and you do another trade.

[00:31:37] Cory

There’s still enough time to put in stop losses but I think the… and it’s still a very necessary thing but the slippage that can happen, particularly when prices get high, is pretty extraordinary. So, particularly on situations where you’re initiating and having a short position you have to be pretty mindful around not only where the thing can trade on path but then where the thing can actually settle.

And we’re increasingly entering these moments in times where we’re getting into some pretty high-priced power days just based on where the supply and demand fundamentals have arrived at, these last several years. So, there’s definitely been this mismatch of investment and load increase and those don’t necessarily resolve in a matter of months. I think they will resolve over the coming years. It’s unclear exactly when they’ll resolve.

But yeah, there’s an enormous amount of, and this is actually, well, I’ll give you some context as why this is actually happening. But there’s an enormous amount of data center demand that’s entered into the footprint just at the moment in time where a bunch of retirements were still happening in the grid. So that overlap was not seamless.

[00:33:12] Moritz

Not good, not good. When you look at the distribution of your P&L with the volatility of the underlying market, is your business more like a business where you have more winning trades than losing trades? I don’t know, maybe like 70% winning trades, 30% losing trades, and you win a little bit because your fundamental forecast is right, or is it more like nah, many losers. But then the occasional blowout outlier trade where kind of like a handful of trades maybe in a given year are responsible for the P& L, which is what I would call our normal way of trading. But that’s not true for everyone and not for every trading business.

[00:33:50] Cory

So, this is a great question. In working with our young traders, I described to them kind of the four stages of power trading, at least as I see it, which is initially you learn about the business and then you see all this tail risk, right? You see all these like high priced hours. So, all you want to do is be long most of the time. And so, you sit there and you’re long nonstop. And then eventually you’re like, I’m just tired of bleeding all this money. I don’t want to be long nonstop.

And then you enter into stage two, which is okay, I want to be short this stuff. And then so, for the most part, you stay short. You stay short and then invariably one of these tail risk days will kind of wipe out all of your short profits. And then you’re like, okay, I need some new approach here.

And then stage three usually involves being short most of the time and then kind of avoiding the booby trap long days. So, you’re not necessarily catching them and going long, but at least you miss them. So, in that case you’re generally quite profitable. But you miss out on the booby trap long days.

And then the fourth stage, or kind of like the, I would say like the actualized stage of power trading would be, at least in our market setup, would be a lot of the time you’re short because market participants want to pay for that tail risk. And then on the booby trap days you actually pivot and you’re long the stuff. And most of the gains for a given year will come through being long on the right days.

[00:35:42] Moritz

Explosive move to the top side and you have the right position.

[00:35:46] Cory

Exactly.

[00:35:47] Moritz

Yeah, but how is it sized on that day? Because it’s kind of like a small position because you’re like, ah, I’m still too much of a scaredy cat to really go long. Then you’re not making much money. So, probably the most important piece of that is to what extent are you long if and when it happens?

[00:36:06] Cory

This is 100% true. This is the art of the thing. Knowing that this is the day, and then sizing it appropriately, and recognizing what the EV of that trade is before the rest of the market. And oftentimes it will involve a reasonably sized mark to market drawdown. Because to go and initiate a trade against the rest of the market and get enough size, you’re going to need enough people to disagree with you.

[00:36:37] Moritz

Wow. It rings a bell for our type of business. The biggest trades we get in are these outlier trades that go on, and on, and on. But while they’re on that ride, on that trend, you have to accept that give back and the pain and the unpleasantness of the market moving against you but not giving up on the position.

[00:36:57] Cory

Exactly. And that is where, I believe, traders separate themselves from civilians. It’s not a normal characteristic to be comfortable in the uncomfortableness of that level of disagreeability and still have the confidence that you know something or you think you know something that the rest of the market doesn’t.

[00:37:21] Moritz

That’s part of why it is a craft and also a mental and psychological exercise which, I personally think, requires real-time trading experience in the markets with real money.

[00:37:33] Cory

Yes.

[00:37:34] Moritz

That is the only way that you can actually get to that point and learn it.

[00:37:37] Cory

I fully agree. This is not something that you can watch from the stands and gain a bunch of experience.

[00:37:44] Moritz

No, it doesn’t do it in your demo account. It is a great segue into your recruitment program and psychology of trading and what you do there at GBE. But maybe before we go there, I mean, I always like these war stories, looking back in the rearview mirror. Is there one massive standout trade, both part terrible trade and also a massively successful trade, where it’s like, that’s one for the history books. That’s the one that I remember.

[00:38:14] Cory

Okay, I’ll give you a summary of trades that I guess are important in our history because, I guess, the P&L from those trades generated enough capital for us to start GBE in the first place.

So, I would say, any of the really big trades in our careers come from a paradigm shift in the market where something is fundamentally shifted. And we had some view on how that fundamental shift would change the topology of the grid. And oftentimes when there’s a change in topology, it’s a huge scramble to figure out how to solve it. Eventually the market does, in combination with just load behavior, and gen behavior, and then also system operator behavior. But before that correction happens, there’s usually a bunch of volatility.

So, we had, going into this one summer without, I guess, getting into the specifics, a view on the topology change. And it was to do with a couple of zones actually entering in the PGM system that used to be in the Midwest ISO, so, portions of Ohio that were kind of coming into PGM. And we just, we had a view on what their supply/demand situation looked like and how prices would react in response to that. And so, there were six days, that summer, that made up kind of 85% of our P&L that year. But yeah, it comes back to just having that one fundamental insight about how things would behave.

And then on the loss side… Oooo, this is painful stuff. For the most part, to use kind of like the midwit meme, load is strong, gen is weak, buy or sell and then same thing on the top end of the spectrum. But there was a day where there was a very specific transmission constraint on the grid. And I was short that stuff, and I thought that the macro picture would win and it didn’t, and I was too stubborn and then got out way too late. And just an example of how you can be in a position and tell yourself stories around why you still should be in it as opposed to more coldly examining what’s going on and having a more honest conversation with yourself around, do I actually know something here or I’m just hoping it goes in my direction?

And that scenario happens a lot in trading. And as one gets more experienced in the ability to just recognize those days and recognize, you know what? Today’s not the day. Today’s not the day to fight for this loser, for this losing position. There’s more trading days ahead. Let’s move past this one and go on to the next.

[00:42:00] Moritz

One of the reasons I’m addicted to systems trading is that I don’t need to have that conversation with myself as to who’s right or not or whether I’m smarter than anybody else. The system tells us to get out and we follow the system, end of story. That makes it easier, on that front, quite a bit.

[00:42:17] Cory

Yep.

[00:42:18] Moritz

You mentioned that you were too stubborn to get out of the trade. The psychology of trading, I want to move into the recruiting part. My understanding, Cory, is that if I remember that correctly from our pre-call, you’re not currently trading anymore. You’re much more focused on running the business, recruiting people and teaching them how to trade. So, you freed yourself from looking at the markets, running a book, and positions and risk 24/7, or at least for a big, big part of the day, and you have no other people to it.

Tell us a bit about how that works at GBE and why you’ve changed that recruiting process so that you’re now focusing on getting motivated and hungry young, aspiring traders into the firm, as opposed to the veterans and experienced traders that obviously demand a bigger paycheck and have different ambitions. So how does it work?

[00:43:16] Cory

That’s a good question. When I look back on the past couple of years and this whole process, it’s been hugely gratifying, but at the same time infuriating at times because I’ve been coincidentally seeing the market really, really well and trying to teach young people what I’m seeing and when they should and shouldn’t be executing.

So, we came to this insight just over three years ago and we were originally actually inspired by our partner firm in the US, Greenwich Commodities, which trades in the same markets, but trades financial transmission rights. (That would be an entire other podcast to describe that craziness.) But they had been quite successful in recruiting interns and teaching them, developing them, progressing them through internship into analysts and then associate traders and then full-time traders after that. So, we got inspired that it could be done in the first place.

The other thing that happened is, I mean, we, Jerry and myself, we looked at each other and a little bit too late, but not too too late, and discovered, we’re old. I’m 46 at this point, but for a trader, that’s pretty old. And we hadn’t done a great job of developing our own tacit knowledge in these markets into another generation of traders. And so, like you mentioned in the opening, traditionally we’d been working with more senior traders and then offering them a platform to apply their craft, and not only apply their craft, but have a 100% certainty over their compensation, which is a big question mark still in a lot of the bigger firms where bonuses are still very discretionary. And as a trader, one of your biggest stresses is, after you wheel through all the pain of having a great year in the first place, am I actually going to get paid on this thing? So that’s one piece of the equation we wanted to just eliminate, and still eliminate as a part of our strategy and culture, really.

So, anyway, we decided to really get serious about trying to pass along our knowledge and our way of trading. I guess the other insight that we had was we weren’t really that confident that other more senior firms or established firms were recruiting well in the first place. And so, if we continued on with our previous strategy, it would be depending on all those other firms recruiting people into the industry in the first place.

So, we felt like we could tell the story of power trading and why it’s so compelling. And then also the story of why GBE is compelling and a great place to learn. And I think that thesis has been validated now that we’re kind of three years into this. So, those are kind of the fundamental insights.

The other thing that was happening that we felt would be kind of in our way or would help support the view was, particularly right at that time, we felt like we were getting into this inflection point that we would have gone through when we were coming up in that we used to demonstrate our mastery of Excel and our seniors used to think that we were wizards. And now we’re in a period where these young people under 25 and what they can do with LLMs is extraordinary.

Now, do they still need an extraordinary or a high amount of context that sits within the tacit knowledge of firms? Absolutely. It’s not like you can just give a young person a bunch of capital and say, go make money in power markets. No, you still need to know and bully the LLMs into the right answer. But the speed at which models and tools can be turned around has been continuously surprising to me. And I would say just the seriousness in which this cohort of young people takes their craft and takes the work, we’ve been very impressed by.

[00:48:24] Moritz

The, maybe that’s the wrong word, ‘average’ recruiter, ‘average’ analyst that you’re who are getting on board, do they need to have a fascination for the power markets or are you more looking like, yeah, there’s a person that just wants to be a trader, whether that’s equities or bonds or currencies, trading. Like somebody that kind of has an interest in markets and you take it from there. Maybe they should know what a bid and and offer is. And the rest you’re trying to teach them, or are you looking for a little bit more in these people?

[00:48:56] Cory

We are looking for individuals that have a demonstrated passion for trading. They can feel it in their soul that they want to trade and they just don’t know power exists. And really, they’re agnostic into how they want to apply their craft. They just know they want to trade.

And oftentimes that gets expressed in trading their own account, building their own models, being at clubs in school, sports gambling, online poker, online gambling. So, there’s just an inherent drive and will to make money and to put on risk.

And from there that’s, in my view, the unteachable part is whether somebody wants it badly enough. And that’s very much where, that’s my own bias. That’s where I kind of… that’s my background. And then for somebody that has that kind of will, they’ll go and learn the fundamentals, provided that they’ve got enough context, and where to go, and where and how they can learn that stuff, they’ll go and do the work. And we’ve seen this time and time again with our most talented young people.

[00:50:21] Moritz

How long does that process take? So, you have that person that has demonstrated a will to trade. That’s what they want to do, that’s their passion. But then they arrive at GBE. Maybe they know nothing or close to nothing about the power markets. What’s the time period like? I mean, is this kind of like a 3 year or 5 year, 1 year educational process and then they go live or how long does it take?

[00:50:47] Cory

It’s a lot shorter than I would have thought.

[00:50:49] Moritz

Okay.

[00:50:50] Cory

I think when we first started off, our mental model was that it probably would take a young intern and analyst about a year. Like an entire full cycle to go through, and probably longer, probably like 16 to 18 months.

So, see an entire season, see an entire year. So, see the winter season, the shoulder season, see the summer season of just analysis before they would be kind of even ready to make calls and be useful to the firm. But instead, what we’ve seen is, in our most recent cases, that has been condensed down to six to eight months.

[00:51:38] Moritz

Wow. I’d say that’s pretty fast.

[00:51:41] Cory

I think so too. But at the same time, we feel like we’ve seen enough in the work and the understanding of what’s going on for these individuals to deploy capital. Yeah, we’ve been quite impressed and yeah, we’re going to keep going.

[00:52:08] Moritz

So, to the young and aspiring traders out there listening to us, go to the GBE website, give Cory a call. I assume this recruiting process is still ongoing?

[00:52:21] Cory

It’s still ongoing. It’s still ongoing.

I say this pretty often, depending on a number of different circumstances, but Jerry and I are quite rational, greedy business people. And when something’s working, we’re going to keep doing it. And it’s working, so we’re going to keep doing it.

[00:52:40] Moritz

Good. As we’re closing this down, Cory, what’s your outlook for the power markets? I mean, yeah, I’m not sure if it makes sense to talk about prices, but more like, I mean, I guess these markets will grow. We’re going to electrify our societies. We’re going to be more dependent on power for AI, for EVs, for the ecological transition that we’re all working on.

I mean, do you foresee that these markets will become larger, more liquid, more volume, more participants, more competitive, which wouldn’t necessarily be a good thing for the alpha generation piece of your business? Or would you rather think, no, that’s kind of like it’s still too much of a niche opaque stuff, too complex and a lot of people will therefore stay out of it?

[00:53:31] Cory

I think both of those scenarios are possible.

[00:53:34] Moritz

Okay.

[00:53:37] Cory

Going back to, even back 10 years ago, I would have thought it would have been inevitable over time that the market would have grown and we would have seen more and more participants enter into the arena. And we haven’t necessarily seen that it’s been a little bit more of a slower growth. But we can have a conversation around how bullish we want to be about AI, but the direction is still up and to the right. It’s just a matter of how steep the curve is.

So, the data center build out is still going to happen. Electrification of vehicles is still going to happen. Electrification of heat and buildings and further additions of air conditioning, that’s still going to happen. It’s just a matter of, again, what are the time periods and the speed in which it’s going to actually happen.

But I think largely speaking, there’s not a better commodity to be in (I mean, I’m pretty biased) for the next 10 years. And there’ll be cycles for sure. There’ll be some stint of oversupply and then probably some stint of undersupply, again, in the same way that commodities have always been. But as you said, it’s pretty impossible to imagine any kind of future human civilization with less electricity.

[00:55:03] Moritz

I mean, it goes through these cycles, here in Europe too. Sometimes you have a bank offering a product for retail investors to invest. And I think (I might be completely wrong), it may have been Barclays or Citibank, and that’s 20 years ago, they came up with an index kind of like an ETN tracking US power markets. And I think more recently an ETF came out doing the same thing. I’m not entirely sure.

So, it kind of goes to show, yeah, there’s like… If things are in the news, AI, power, demand, lo and behold, sooner than later, there’s going to be a product, most likely in ETF form, coming to the market so that everybody can participate in it. But then it’s more like tracking long power exposure, which may not necessarily be the best thing to always be long, that stuff, given that you’ve explained to us that there is a risk premium in there and most of the time you like to be short.

[00:55:57] Cory

Unless you get into this new paradigm shift, which I feel like we might be halfway into. I guess the argument against a huge proliferation or expansion of the industry writ large would be there hasn’t been a market design that has really solved the physics and economics problem. So, if that’s the case, then you can imagine a world where pockets of power markets exist kind of throughout the world, and each of those pockets have their own idiosyncrasies, different rules, different politics, and then they stay reasonably insular and very niche. And that’s another scenario that’s entirely possible. But in either direction, I’m comfortable. I think we’ll be fine regardless.

[00:56:54] Moritz

Great, Cory. I think this is a great time to bring the conversation to a close. It’s about an hour and I hope that we have not overwhelmed the audience.

I mean, that has been absolutely a more niche topic than usual, but nevertheless I think extremely relevant and personally, for me, super interesting. I think these markets are fascinating. So, thanks Cory, for coming on the podcast today and telling us a bit about yourself, GBE, how you trade, how you recruit. I thought that was really cool.

And as usual for our listeners, I’ll put some of the most important takeaways into our show notes and if you’re interested in learning more about Cory’s business, you will find him on the web. Should be pretty easy. And if you have any questions, you can, of course, always send us an email to info@toptradersunplugged.com and we’ll pick it up from there.

So great, Cory. Thank you.

[00:57:49] Cory

Thank you. My pleasure.

[00:57:52] Ending

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