Brokers are now restricting clients from trading in crude oil futures after prices crashed to historic lows last week. On Sunday, many brokers, including Mumbai-based Angel Broking, said they had temporarily suspended trading in crude oil futures as the price slipped into the negative territory recently.

Last week, a few brokers suffered losses of more than ₹442 crore as they were holding open positions on the Multi Commodity Exchange (MCX) in the crude oil contracts when the price of the commodity in the US turned negative. The loss could be higher if one considers 80 per cent crash in crude oil from the top, and the figure for retail and high net worth investors may run into few thousands of crore, brokers say.

Motilal Oswal, a large retail broker, declared loss of ₹80 crore from crude oil trading and said all of it belonged to clients. Angel Broking said its 145 clients lost around ₹13.5 crore.

Lured by commodity market

The MCX has 95 per cent market share in crude oil trading and volumes are dominated by a handful of brokers. Experts say the ‘low capital requirement’ has pushed many retail investors towards the commodity market. SEBI took several measures to discourage retail traders from equity derivative markets, but in the crude oil market, ₹3,500-4,000 was enough to buy one lot (single lot of crude is equal to 100 barrels). But to buy one lot of Nifty, the margin is more than ₹50,000 for carry-forward trades; for intra-day, it is more than ₹16,000. The same for Bank Nifty is more than ₹60,000 for carry-forward trades and ₹20,000 for intra-day.

When volatility rises, equity derivative margins go up further. Experts say margin funding and high frequency (HFT) tools are luring retail investors to the commodity market. Under margin funding, brokers provide up to 95 per cent of trading capital and online firms offer HFT tools for as low as ₹5,000 a month.

In a blog post, IIM Ahmedabad professor JR Varma said, “Everybody involved in Indian crude futures market behaved recklessly. Since around mid-March, WTI crude in the US was experiencing extreme dislocation and that highly perverse outcomes were likely, though nobody could have predicted the precise outcome. Prudent traders should have stopped trading MCX crude in late March and a prudent derivative exchange should have suspended trading in the contract in early April. SEBI is currently overburdened, but otherwise, they should have forced MCX to suspend the contract.”

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