Financial Express: Speculation contributes to liquidity of bourse

The Indian Express

Return to Story Page
To print: Select File and then Print from your browser's menu

Speculation contributes to liquidity of bourse

Kushal Thaker

At the Indian Commodity Exchanges, where futures trading is currently ongoing, half of the trade is estimated to be speculative, half of which is conducted by daytraders or what the international trading community calls as the "scalpers" (daytraders buy and sell during the same day, trying not to keep any positions overnight). These scalpers earn through their daily trading transactions and contribute significantly to the liquidity of the exchange. The remaining half of the trade is by way of hedging, with traders being the most active.

The various categories of users of these commodity exchanges in India is discussed below :

Farmers in India rarely use futures markets directly. Indian farmers benefit indirectly from using co-operatives or other intermediaries, or simply from better deals with traders using futures markets. The conditions exist for the indirect participation of Indian farmers on futures markets, since in most states, farmers sell their commodities through the regulated markets. In At the Indian Commodity Exchanges, where futures trading is currently ongoing, half of the trade is estimated to be speculative, half of which is conducted by daytraders or what the international trading community calls as the "scalpers" (daytraders buy and sell during the same day, trying not to keep any positions overnight). These scalpers earn through their daily trading transactions and contribute significantly to the liquidity of the exchange. The remaining half of the trade is by way of hedging, with traders being the most active.

The various categories of users of these commodity exchanges in India is discussed below :

Farmers in India rarely use futures markets directly. Indian farmers benefit indirectly from using co-operatives or other intermediaries, or simply from better deals with traders using futures markets. The conditions exist for the indirect participation of Indian farmers on futures markets, since in most states, farmers sell their commodities through the regulated markets. Inthese regulated markets, key commodities are auctioned off, and the price information is displayed. The commission agents operating in regulated markets play a useful role in providing information and intermediating risk management transactions. Farmers' co-operatives could also intermediate risk management transactions for their members.

Traders, both large and small are the main users of futures contracts in India. For oilseeds, pepper and gur, there is an active participation of town dealers. Castorseeds and pepper, exporters are active in the exchanges. Large exporters are confronted at times with low liquidity on the commodity exchanges while small traders, because of poor access to credit facilities, cannot afford to tie their funds in futures markets for long periods.

Virtually, all speculators in these exchanges are relatively small - either they are day-traders as explained above or are individuals placing their deals through the brokers. large institutional investors such as theinsurance funds and the mutual funds are absent. Their participation in commodity exchanges is not allowed under the Reserve Bank of India regulations which stipulates prudential norms for banks and non-banking financial institutions.

Processors and manufacturers use the exchanges to a limited extent for two reasons. First, some manufacturers, especially in the oils sector, are so large that they are unable to lay off a significant part of their risks on domestic exchanges, which suffer from chronic illiquidity. Secondly, the range of the commodity futures contract offered is too small resulting in incomplete risk management. For example, many firms do not find castorseeds contract useful, as few manufacturers use castor oil and it is an imperfect risk management instrument for other oils.

Foreign trading firms participated in some of the commodity exchanges until their participation was banned. Currently, they would need to seek permission from the Forward Market Commission and amend theirbye-laws if they wish to change the situation.

Still the commodity futures exchanges have a long history in India. From the rapid multiplication of the exchanges in the 1920s, the changing economic policy and regulatory environment has drastically reduced the number of active exchanges.

Three types of futures contract can be traded :

NTSD contracts - Non-transferable specific delivery contracts in cotton, raw jute and jute goods(sacking);

TSD contracts - Transferable specific delivery contracts in raw jute, jute goods and hessian; and

Hedge contracts - in castorseeds, gur, hessian, black pepper, potatoes and turmeric. I am pretty certain that the changing composition of the agricultural production and the evolving policy and regulatory framework will significantly influence the pattern of development of these commodity exchanges.

(The author is a commodity trader and operates through his firm Prophecy Investments in Mumbai)

Net Express

------------------------------------------------------------

This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.

------------------------------------------------------------