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Former Enron Trader Pioneers Hedge Fund Use of Int

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STAMFORD, Conn. (–Centaurus Energy LP is the first hedge fund to use ICTS Symphony, an energy trading and risk management system from TradeCapture, but others may follow as hedge managers become more active in the energy market.

Centaurus, Houston, founded in 2002 by former Enron energy trader John Arnold, recently decided to automate its energy derivatives trading business with this software. Symphony has a straight-through-processing feature that integrates all functions, from trading to accounting and invoicing.

“We are active players in the energy derivatives and futures market and were in search of a system that could handle our fast-paced trading environment,” said Mr. Arnold, in statement. “After a review of the energy trading systems in the market today, we decided upon ICTS Symphony because its ease of use and integrated applications offered us the best opportunity to manage our trading functions more efficiently and streamline our business operations.”

Various developments suggest that the hedge fund presence in energy markets is growing. Some large hedge fund firms started building up energy trading operations after the collapse of Enron and problems at other companies such as Dynegy. Chicago-based Citadel Investments, for instance, hired several researchers from Enron last year. What is more, other Enron traders besides Mr. Arnold have started their own hedge funds.

The Enron Legacy

The big barrier to trading in this market has been counter-party credit risk, explained Steve Oppenheimer of TradeCapture. Since the Enron debacle, many companies have been concerned about the creditworthiness of the counterparties to energy deals. But New York Mercantile Exchange Inc. has introduced a clearing service to mitigate counter-party credit risk.

The clearinghouse acts as the buyer to every seller and the seller to every buyer.

By settling through the clearinghouse, market participants are able to net positions, reducing the required collateral. They can trade against any registered counterparty, with the clearinghouse guaranteeing every trade.

“So now you can focus on trading, you don’t have to worry about your counterparty being good on the deal because this clearinghouse will be the credit,” said Mr. Oppenheimer. “Now more hedge funds can trade. They can trade derivatives instruments and have the trade clear through the NYMEX clearing mechanism.”

The TradeCapture software is not confined to energy but can be used for all commodity trades, both physical and financial. The latter include swaps, futures, OTC options and exchange traded options. Symphony pinpoints the value of a position, tracks the total risk of that position for any given set of variables and manages all the steps of a transaction within one system. This eliminates data entry and duplication.

TradeCapture, headquartered in Stamford, Conn., has offices in Houston, London, Rome and Singapore.

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