Commodity trading may soon have the system of ‘market making’ just like equity. This will likely benefit trading in illiquid commodities such as aviation turbine fuel (ATF), gasoline, heating oil, imported thermal coal, platinum, soyameal, rubber, RBD palmolein, gur (Jaggery), pplymers, besides others.
“As part of liquidity enhancement measures, there is a proposal to introduce ‘market making’ for those contracts where volume is very low. Market making will provide two way quotes. This will help in buying or selling,” Forward Market Commission Chairman Ramesh Abhishek, told Business Line.
Market making is followed by exchanges worldwide, when they introduce new contracts. The same model is followed by COMEX, Nasdaq, CME, SHFE, LME, etc to generate volumes. The move is set to help new and small exchanges to generate business volume in commodity derivatives.
Assistant Vice-President (Commodity) with SMC Global Securities Vandana Bharti, said: “There are around 115 commodities listed in all national level exchanges but even we don’t know the name of those important commodities since there is almost no trade in those commodities. More than two-thirds see close to no trade.” Handful of commodities – gold, silver, copper and crude contributes around 80 per cent of the total turnover of the exchanges, she added.
These illiquid commodities are not covered by the price discovery mechanism and do not provide a hedging platform. The smaller volume results in wide gap between the bids and asks which is suicidal for any type of participants.
According to industry estimates, India consumes about 30-32 lakh tonnes of RBD palm oil every year. India imports half of its edible oil requirements, but the hedging platform is missing, though it is a listed commodity. Same is the case with ATF, gasoline and heating oil. The surging figure of soyameal exports, till the month of July, demonstrates the market potential of the commodity, Vandana explained.