Posted by: commoditywise | December 17, 2007

India’s narrow commodities, evening trades spoil futures game

I

f India wants to take on the vast emerging opportunities in the Asian commodity futures arena, it is important that the government urgently address two of the biggest menacing aspects – one, trading in narrow commodities, two, evening trades that extend up to midnight. 

India opened up commodity futures markets (not options) in mid-2003 and since then the trading in commodity futures has attracted a interest from speculators, day-traders, neo-investors in commodity markets. Latest figures show that the commodity futures trade on all the 24 Indian commodity exchanges was Rs 22,68,826.98 crore (approx Rs 22.7 bn, or $560 billion) during April 2, 2007 to November 15, 2007 

The commodity futures trading figures show there is huge interest that has pumped up the volumes and value of trades on the three nationwide commodity exchanges (NMCEs) – National Commodity and Derivatives Exchange (NCDEX), Multi Commodity Exchange (MCX) of India and National Multi Commodity Exchange of India Ltd (NMCEIL).  

However, the commodity trading volumes swell during the evening trades that coincide with the opening up of the international commodity exchanges. These trades are facilitated maximum on just one commodity exchange – MCX which has the highest value of commodity trade in these trades. Traders, speculators rush during evening to push in their trades on MCX only in four commodities traded on international commodity exchanges like New York Commodity Exchange (Comex division), London Metal Exchange (LME) and couple of others. These are crude oil, gold, sliver, copper. And these are known to be pure speculation and only arbitrage between domestic and international commodity exchanges, and are illegal too. 

It is no secret that the trades done in evening trading session on MCX or sometimes even on NCDEX, if ever, are done only by select speculator-invertors in these four international commodities. And because the trade timing extends up to 11.30-11.45 pm serious players find it cumbersome to trade up to midnight. This evening section of trading has thus got a bit of tarnished image on the Indian commodity futures arena.  

Two related posts would be interesting https://commoditywise.wordpress.com/2007/12/10/rising-monopoly-in-india%e2%80%99s-commodity-futures-trading/ 

https://commoditywise.wordpress.com/2007/11/26/evening-commodity-trade-%e2%80%93-healthier-with-restrictions/  

Narrow commodities – largely from the agro sector – have very small eco-system and also a small value-chain, which may extend even up to foreign countries using the value added products of these narrow commodities. However, price manipulation in these narrow commodities is much easier because of their small eco-system – i.e. small produce, small market where a handful of sellers and buyers usually control over 95 per cent of these commodities and their fate and prices too. Thus, hedgers are afraid to enter the commodity exchanges to hedge their position and risks in the four international commodities and also in the narrow commodities as the prices on the commodity exchanges are known to have been rigged up by the punters and speculators.  

Thus, India’s commodity futures game is largely spoilt by these two aspects – evening trades the narrow agro commodities. Along with the punters, speculators, day traders and neo-investors in commodity markets and the Forward Market Commission (FMC) are collectively responsible for this muddled game in commodity futures. 

If the government seriously wants to improve the tangled situation in India’s nascent commodities markets, it is important that the government address these two menacing aspects at the earliest.

The Forward Market Commission (FMC) had in early 2003 decided to completely open up the Indian commodity market for futures trading. In its zeal to catch up the lost time of four decades of suspension of trading in commodity derivatives, the FMC preferred to avoid looking into the veracity / importance of futures trading in few or some of the commodities, like the narrow commodities.

“Instead of FMC not allowing trading in futures in any commodity, It would be better that anyone objecting FMC’s views to allow trading in futures of any commodities should come up with their own reasons for not allowing futures trading in that/those commodity/ies”, was the view of one of the members of the FMC. Section 17 of Chapter IV of The Forward Contract Regulation Act gives FMC the requisite powers to prohibit forward contracts in certain cases. 

It would be interesting to see what the narrow commodities are and how they fare on the Indian commodity exchanges.

But about this,a day later.

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