Bloomberg News

Carbon Spread Trading Surges 70%, Outpaces ICE Total CO2 Growth

September 28, 2011

Sept. 28 (Bloomberg) -- The volume of carbon spread trading surged 70 percent in the past four months amid increased volatility, outpacing a 65 percent rise in the entire greenhouse-gas market, according to data from ICE Futures Europe.

There were 391.5 million metric tons of spread trades in the period through Sept. 20 from June 1, e-mailed data from ICE in London show. There were 229.3 million tons handled in the same period last year, according to ICE, the biggest exchange for carbon trading. Total volumes jumped 65 percent in the period to 1.98 billion tons, the data show.

Traders can cut risks by buying and selling spread contracts when outright futures are volatile, said Dennis Mignon, a trader with First Climate in Bad Vilbel, Germany. “When people are unsure of where the market is going, they sometimes stick to spread trades.”

Spread trading in the year to date, including European Union carbon allowances and United Nations emission credits, jumped 42 percent, compared with 27 percent for the whole market, the ICE data show. Stable prices in the first five months of the year prompted traders to buy and sell spreads partly in a bid to get returns higher than interest rates, Mignon said. Since May 31, December futures have dropped 38 percent, on concern a second recession in the bloc would exacerbate an oversupply in the market through 2012 and beyond.

The increased volatility the past four months boosted trading of both spread and outright contracts, Mignon said. So- called carry trades, where above-interest-rate returns are available are popular in the carbon market, he said.

The 2011-2013 EU carbon spread contract today indicates a profit of around 12 percent by buying December futures and selling them in December 2013, according to prices on ICE. That’s compared with a 1.5 percent return for two-year euro interest-rate swaps.

Some brokers clear trades on ICE. The London Energy Brokers Association said it does not detail spread trading compared with futures volumes.

Editors: Alessandro Vitelli, Rob Verdonck.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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