EP14 - Ephemeral Markets

How quants trade electricity and compute spot markets. Learn about non-storable commodities, GPU spot instances, and geographic arbitrage in ephemeral markets.

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Come here, profits! Get in the net!

Have you caught electrons, or have you caught **mental illness**?

I'm getting into Commodities! Gold, Oil, Wheat... you buy low, store it in a warehouse, sell high.

So I'm doing the same with Electricity! I'm going to hoard it and sell it when everyone turns on their AC!

Then where would you store it? In your pockets?

I bought a lot of AA batteries. I can charge them up and sell them when the price is high.

Electricity is a **Non-Storable Commodity**.

It is the only market in the world where Supply must equal Demand at every single millisecond.

If Supply > Demand, the grid melts. If Demand > Supply, the lights go out.

You can't trade the *inventory*. You trade the **Instability**.

That is a **Price Spike**.

1:00 PM: Price is $30/MWh.

1:05 PM: A cloud moves over a solar farm. Supply drops.

1:06 PM: Price hits **$9,000/MWh**.

$9,000?! I want that! How do we predict the cloud?

We don't just look at clouds. We look at the **Stack**.

The price of electricity is set by the **Marginal Unit**. The last guy invited to the party sets the price for everyone.

So if we need just *one* watt from the Jet Engine...

Everyone gets paid the Jet Engine price.

So the goal is to predict exactly when the grid gets desperate?

Yes. We model **Grid Congestion**.

We use satellite thermal imaging to see if factories are heating up. We scrape wind speeds in the North Sea.

We are predicting the **Delta** between generation and consumption.

But what if it's really windy and nobody is using power? Like... right now?

Then we enter the **Negative Zone**.

Negative price?

You mean... they pay me to take the electricity?

It costs money to shut down a nuclear plant. It takes days to restart.

So they will pay you $50/MWh just to turn on your lights and burn the excess.

Free money! I'll plug in everything!

It lasts for minutes.

This market is **Mean Reverting**.

Unlike a stock that can go up forever, electricity *always* snaps back close to the cost of production.

So how do we trade it? We can't buy low and hold.

We trade the **Spark Spread**.

We don't bet on power. We bet on the *profit margin* of turning gas into power.

We buy Gas Futures and sell Power Futures.

We are essentially acting as a Virtual Power Plant. We profit from the *conversion* efficiency.

A major transmission line just went down. This is when algorithms need to act.

The algos just saw the frequency drop. They bought every available Megawatt in the neighboring node.

It happened in 3 seconds.

That's why humans can't trade this.

By the time you blinked, the arbitrage was gone.

So I don't need a warehouse. I need a low-latency connection to the **ISO** (Independent System Operator).

Correct. You are trading **Information**, not Electrons.

But Kurumi... if batteries get better? If we *can* store it?

Then the volatility dies. The curve flattens.

The arbitrage opportunity exists *because* the grid is fragile.

That was it? The millions were made in that blackout?

In ephemeral markets, you aren't trading the object. You're trading the **Moment**. Remember the AdTech episode?

I'm going to short the grid!

You can't short the grid. The grid shorts you.

Wait! Can we mine Bitcoin with the negative pricing?

...Actually, that's a valid use of flexible load.

I had a good idea?!

Too bad many Bitcoin miners already had the same idea in Iceland.

So the arb is gone...

I can't hold inventory. I can't react fast enough to the negative prices. The Bitcoin idea is dead.

The HFT firms are co-located at the substations. I'm just a girl with a copper net.

If only I had a battery. A giant battery. I could fill it up when the price is negative and drain it when it's $9,000.

Batteries are CapEx heavy. Lithium-ion degrades. The ROI is thin unless you have millions.

But... plenty of people are filling electricities in batteries. Just not with Lithium.

What do they use? Water? Gravity?

They use **Silicon**.

That's a GPU. That's not a battery. That consumes power. It doesn't store it.

It consumes power. *That is a battery.*

It's a battery that *soaks up* excess power and turns it into **intelligence**. Or at least, Tokens.

I understand! Hyperscalers like AWS and Google turn electricity into compute and use it to generate tokens!

But you can't store compute! It's still ephemeral. We are back to the same problem of needing a **battery for compute!**

Electricity generation is volatile. The wind doesn't always blow.

You already had the Bitcoin idea. It is a **battery for compute**. Training an AI is also another thing that GPU does.

Wait. AI training takes weeks. You can't just unplug the supercomputer when the wind stops. You'd lose the model!

The data scientists would kill you. The robot will get a dementia!

That is the engineering challenge. How do you make a fragile AI job behave like a rugged battery?

You use **Checkpointing**.

Imagine you are fighting a boss.

Suddenly, the power goes out.

NO! I didn't save!

Now imagine you save the game every 10 seconds.

If the power cuts, you just lose 10 seconds of progress.

We save the state of the neural network to the disk (Checkpoint). We shut down the GPU when prices gets high.

When GPU-hour prices drop. We resume.

Okay, I get the mechanics. But how do I profit from ephemeral markets? I can't sell AI models like an inventory!

With stocks, I buy Apple, I hold it, it goes up. My inventory appreciates.

Here, the GPU gets older and slower every day. My "Inventory" is rotting!

You are still thinking like an Asset Trader. You need to think like a Refinery.

A refinery?

This is a Golden Goose. But it's a Golden Goose with a terminal illness. It will die in 3 years (Obsolescence).

You can't hope to sell the Goose for more later. You have to Squeeze the eggs out of it every single second it's alive.

These companies are maximizing Yield, not Appreciation.

They perform **Geographic Arbitrage**.

They build the data center where the power is worthless (trapped in a dam) and run their H100s there.

They turn $0.04 electricity into compute at $3.00/hour by sending the *result* (the answer to your ChatGPT query) over the fiber optic cable to New York.

You don't need a battery yourself. Your customers (AI Companies) already had it.

The genius part that lets the **Geographic Arbitrage** work?

Moving electrons is expensive (transmission lines). Moving bits is cheap (fiber optics).

Region A has excess GPUs sitting idle. Region B is starving for compute.

Price in Region A: $2.00/hr. Price in Region B: $4.50/hr.

It's a spread! I buy in A, sell in B! But how do I trade this?

You move the **Workload**.

This is **Spot Instance Arbitrage**.

Cloud providers auction off their "Spare Seats" (Spot Instances) for cheap.

Once the plane (The Data Center) takes off (Time passes), empty seats are worthless.

AWS would rather sell that seat for $0.10 than let it go empty.

That's why different locations have different prices! I should buy all the cheap seats!

Yes. But there is a catch. The **Preemption Risk**.

If a full-price customer shows up, the cloud provider kills your instance.

You have 30 seconds to save your work and leave.

30 seconds?! My model takes 3 weeks to train!

That is where the **Quant Edge** comes in.

We build probabilistic models to predict *when* the Rich Guy will show up.

Region: Ohio (Night): 99% Survival.

Region: Tokyo (Day): 20% Survival.

We route the training job to Ohio while they sleep. We migrate it to Ireland when Ohio wakes up.

We surf the "Night" of the internet.

So these new Cloud companies... they aren't just landlords?

They are **Energy-to-Intelligence Converters**.

We used to trade the Electron. Now we trade the Token.

It's the same supply chain, just further refined.

I'm writing a script. It bids on Spot instances in Iceland, trains the model, checkpoints every 5 minutes, and sells the inference API in New York.

I'm not holding inventory. I'm holding **Intelligence Capacity Futures**.

That's clever. You are trading the *potential* for silicons to think.

It turns out we can catch the lightning in a bottle!

And the bottle is the *cloud.*