Commodity exchanges are here to stay. However, issues such as governance and regulation in commodity trading have led to difference in opinion among stakeholders.

Some stakeholders claim that speculators, acting in concert, deliberately move markets towards a particular direction in commodities whose production/ supply is limited to a particular geographical area.

Since the supply of a commodity is limited in a particular region, it is easy for a few to create artificial scarcity and create a new demand supply equation.

This results in prices being deliberately moved either up or down.

Market participants say that futures trading in such commodities should not be allowed.

Though it is not rational to give in to such demands, there is a need to identify commodities which need special regulation to curb speculation in the market. There have been several instances where market participants have attacked the commodity futures market, claiming that speculation causes both excessive and unwarranted price fluctuations. Analyses indicate the futures market does not distort the spot price, rather stabilises it (Basab Dasgupta, 2014).

Subsequent to liberalisation of the economy in 1991, a series of steps was taken to set free forward markets in commodities. Since the introduction of futures trading in commodity exchanges, volatility in the commodity market has been reduced (Agnihotri & Sharma, 2011). The commodity futures market effectively serves the function of price discovery in the spot market, implying that there is a flow of information from the futures to spot commodity markets.

However in agricultural commodities, volatility in the spot market may spark a similar trend in the futures market (Chauhan et. Al. 2013).

Overall, research done by various authors indicate that the futures market has a positive impact on price discovery, market stabilisation, risk management etc.

A detailed study was carried out to examine the difference in price volatility of commodities traded on exchanges.

The commodities were grouped into two categories, first, those being supplied from vast geographical area/ region and the second, ones supplied ones supplied from a limited geographical area/regions.

Results showed that commodities supplied from a limited geographical area are more prone to speculation through unfair means and show high price volatility.

Implications of the study

For commodities of this category, the average coefficient of variation in prices is higher compared with commodities supplied from vast geographical region.

The Forward Markets Commission (FMC) and commodity exchanges should promote transparency in data regarding production, available stock with different stakeholders and number of traders dealing in each commodities with participants.

The availability of such information will reduce uncertainty in the market and increase its efficiency.

The regulator should make it mandatory for all commodity exchanges to get their delivery centres accredited by the Warehousing Development and Regulatory Authority.

While circuit filter (intra-day fluctuation limit) and additional margin may limit the level of speculation in the market, circuit filter, theoretically, is stronger in curbing speculation.

Additional margin imposed on commodities futures may not curb speculation.

The present circuit filter is plus or minus 3 per cent with one additional percentage that is fixed for all the commodities.

In case of commodities which have limited production and that, too, in specific geographical region, the circuit filter can be reduced.

The extent to which circuit filter should be reduced needs to be identified.

[The writer is associated with National Institute of Agricultural Marketing, Jaipur. Views are personal].

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