Don’t Buy the Wrong Electricity

We talk sometimes around here about the risk of accidentally buying the wrong stock: You want to buy Zoom Video Communications because it is in the news, but instead you buy Zoom Technologies Inc. because its ticker is ZOOM and who has time to read the whole name. This is generally considered to be a problem for ill-informed retail traders and jumpy algorithms, but I suspect that professionals occasionally fall prey to it too.

But how much harder it must be in futures markets! You don’t just have to pick the right thing—oil or copper or wheat or electricity—but you also have to pick the right date, and location, and often other specifications for the contract. In electric power futures, for instance, there are various different regional electricity markets, each with its own futures contracts. There are different contracts for different expiration dates. There are different contracts for different times of day: There’s a contract for peak power, and another for off-peak power. (Peak power is obviously more expensive.) You have to pick all the right specifications, and you have to do it all quickly, many times a day, while constantly being distracted by a stream of other information. Of course people will mess up sometimes, and buy (say) the ERCOT North 345 KV Real-Time Off-Peak Daily Fixed Price Future when they want to buy the ERCOT North 345 KV Real-Time Peak Daily Future. So many of the words in those names are the same!