Though most traders might remember that energy trading firm Enron went belly-up in 2001 thanks to a massive accounting scandal, what most traders might not realize is that the energy trading market has existed in a semi-recognizable format since the early 1990s.
However, it wasn’t until the late ’90s and early 2000s that the energy trading market morphed from a hedging and power-management option to a speculative, profit-making activity.
That in itself isn’t a sin. The equity and future markets are ultimately designed to facilitate speculation and provide a liquid market that’s fair to all players of any size. The problem is, the stock market is highly regulated. The energy trading market is still highly unregulated, despite a handful of reforms that were put into place following Enron’s collapse.
But why was (and is) energy trading such a disappointing business? Because it never was designed to be securitized and turned into “buy low, sell high” game. Enron proved there’s just too much room for smoke and mirrors as the system is set up now, and given mankind’s inherent greed, that eventually will leave someone holding the bag.