Price data collection

Operational risk managers are dependent on and often responsible to price data
collection and verification. Constructing good forward curves on a daily basis was
briefly discussed above, but one of the biggest difficulties is ensuring that accurate
price data is being used.
Particularly in power, it cannot be assumed that price quotes are reflective of where
people would be willing and able to transact. Liquidity is often extremely limited and
brokers may well estimate the market prices giving an appearance of liquidity that
does not exist. This is also true of NYMEX prices in power where estimates need to
be made for margining previous transactions but actual transactions may not have
occurred at these levels. In these circumstances, it is not unknown to see a significant
divergence between NYMEX and OTC prices for the same product for a limited period
of time.
It is thus necessary to check price data using a number of information sources,
notably trader’s marks, a range of broker quotes, spread prices (using actual or
historical spreads to relate closely traded markets), implied volatility from options
and derivative prices. Standard techniques for fitting average or strip prices should
be used and resultant errors monitored on an on-going basis.