Over-the-counter Market (cont.)
The buyers and sellers in emissions trading are individuals, organizations,
or corporations that have a position in the market. Their motivations vary. Some trade
to achieve regulatory compliance, others to retire allowances, or still others simply to turn
a profit. Each buyer and seller has a publicly identified representative. This allows
the buyer or seller to do due diligence and ensure its trade is legitimate.
There are three ways to participate in the over-the-counter emissions trading market, including bilateral transactions, trades transacted through a broker, and allowances purchases in the annual allowance auction.
Bilateral Trades
The direct point of entry into over-the-counter emissions trading markets is
by contacting participants directly and arranging bilateral deals. There is
no intermediary exchange for the emissions trading market, therefore all transactions
are made on a direct, one-to-one basis. The ATS allowance account
information found on the Internet enables participants to find other participants with whom to
transact allowance trades.
This relationship-based approach, however, is usually employed by active market players who have extensive experience - and contacts - in the marketplace. Unless you possess this type of market presence, it is difficult to fully assess trading options without some assistance. One set of market participants that has this market presence are Traders. Traders are likely to be counterparties with the emissions trading practitioner in bilateral trades, but often their market profile differs from the practitioner.
Traders put their own money at risk in the market. Their motivation for participation in emissions markets is much like their motivation would be for entering stock markets or commodities markets: profit. Seldom do Traders make decisions based on the need for compliance.
Because Traders are willing to take positions in either direction of the market, they assist in generating liquidity. Their ability to generate a flow of deals makes some Traders "market makers", in which they play a role similar to that of a stock specialist on an equity exchange. Liquidity refers to a volume of trading in the market that allows buyers to find sellers at prices reasonable to both. Without sustained liquidity, the market would have improper pricing information discouraging any type of emissions trading practitioner from participating.