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Limits to arbitrage in electricity markets: A case study of MISO

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  • Birge, John R.
  • Hortaçsu, Ali
  • Mercadal, Ignacia
  • Pavlin, J. Michael

Abstract

We study the case of financial traders in the Midwest electricity market, where they are expected to arbitrage price differences that result in inefficiencies. Using exogenous variation in financial trading from the financial crisis and a period of high transaction costs, we show speculators had only a weak effect. Moreover, while arbitrage was restricted by transaction costs imposed by regulation, some financial players bet in exactly the opposite direction of the pricing gap, sustaining large losses while doing so. We show this is consistent with price manipulation intended to increase the value of a related instrument that bets on local price differences (FTRs).

Suggested Citation

  • Birge, John R. & Hortaçsu, Ali & Mercadal, Ignacia & Pavlin, J. Michael, 2018. "Limits to arbitrage in electricity markets: A case study of MISO," Energy Economics, Elsevier, vol. 75(C), pages 518-533.
    • Handle: RePEc:eee:eneeco:v:75:y:2018:i:c:p:518-533
    DOI: 10.1016/j.eneco.2018.08.024
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    References listed on IDEAS

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    Cited by:

    1. Hopkins, Caroline A., 2020. "Convergence bids and market manipulation in the California electricity market," Energy Economics, Elsevier, vol. 89(C).
    2. David BENATIA & Etienne BILLETTE de VILLEMEUR, 2019. "Strategic Reneging in Sequential Imperfect Markets," Working Papers 2019-19, Center for Research in Economics and Statistics.
    3. Leslie, Gordon W., 2021. "Who benefits from ratepayer-funded auctions of transmission congestion contracts? Evidence from New York," Energy Economics, Elsevier, vol. 93(C).
    4. Ren, Kezheng & Liu, Jun & Liu, Xinglei & Nie, Yongxin, 2023. "Reinforcement Learning-Based Bi-Level strategic bidding model of Gas-fired unit in integrated electricity and natural gas markets preventing market manipulation," Applied Energy, Elsevier, vol. 336(C).
    5. Joseph Collins & Andreas Amann & Kieran Mulchrone, 2025. "Speculators and Price Inertia in a Day-Ahead Electricity Market: An Irish Case Study," Energies, MDPI, vol. 18(17), pages 1-26, September.
    6. Zhou Fang, 2023. "Electricity Virtual Bidding Strategy Via Entropy-Regularized Stochastic Control Method," Papers 2303.02303, arXiv.org.
    7. Zhang, Anthony Lee, 2022. "Competition and manipulation in derivative contract markets," Journal of Financial Economics, Elsevier, vol. 144(2), pages 396-413.
    8. Agostino Capponi & Garud Iyengar & Bo Yang & Daniel Bienstock, 2025. "Virtual Trading in Multi-Settlement Electricity Markets," Papers 2508.11979, arXiv.org.
    9. Ehsan Samani & Mahdi Kohansal & Hamed Mohsenian-Rad, 2021. "A Data-Driven Convergence Bidding Strategy Based on Reverse Engineering of Market Participants' Performance: A Case of California ISO," Papers 2109.09238, arXiv.org.
    10. Van Moer, Geert, 2019. "Electricity market competition when forward contracts are pairwise efficient," MPRA Paper 96660, University Library of Munich, Germany.
    11. Anna Schwele & Christos Ordoudis & Pierre Pinson & Jalal Kazempour, 2021. "Coordination of power and natural gas markets via financial instruments," Computational Management Science, Springer, vol. 18(4), pages 505-538, October.
    12. Mayyas, Ahmad & Chadly, Assia & Amer, Saed Talib & Azar, Elie, 2022. "Economics of the Li-ion batteries and reversible fuel cells as energy storage systems when coupled with dynamic electricity pricing schemes," Energy, Elsevier, vol. 239(PA).
    13. Xiao, Dongliang & Peng, Zena & Lin, Zhenjia & Zhong, Xiaoqing & Wei, Chun & Dong, Zhaoyang & Wu, Qiuwei, 2025. "Incorporating financial entities into spot electricity market with renewable energy via holistic risk-aware bilevel optimization," Applied Energy, Elsevier, vol. 398(C).
    14. Melita Van Steenberghe & Marten Ovaere, 2025. "Market Inefficiencies in Renewable Support Policies: Evidence from Offshore Wind Contracts for Difference in Great Britain," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 25/1124, Ghent University, Faculty of Economics and Business Administration.
    15. Guo, Nongchao & Lo Prete, Chiara, 2019. "Cross-product manipulation with intertemporal constraints: An equilibrium model," Energy Policy, Elsevier, vol. 134(C).

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    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • G1 - Financial Economics - - General Financial Markets
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities

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