Bul­lion Trad­ing

Ma­jor push for com­modi­ties trad­ing:

Banking Frontiers - - News - me­[email protected]­ingfron­tiers.com

In­dia now has a uni­fied ex­change regime wherein stock ex­changes are al­lowed to of­fer trad­ing in com­modi­ties de­riv­a­tives. BSE’s newly-in­tro­duced com­modi­ties de­riv­a­tives trad­ing plat­form has be­gun on a suc­cess­ful note with fu­tures trad­ing in gold and sil­ver con­tracts hit­ting all­time peak with the traded value log­ging `5.78 bil­lion on 23 Oc­to­ber 2018. The gold con­tracts recorded a traded value of `5.21 bil­lion. BSE has reg­is­tered 170 trad­ing mem­bers and 27 clear­ing mem­bers in the com­mod­ity de­riv­a­tives seg­ment. BSE en­vis­ages launch­ing many com­modi­ties out of the 90+ com­modi­ties ap­proved by SEBI.

Two ex­perts - Aurobinda Prasad Gyan, vice pres­i­dent, Ko­tak Com­modi­ties, and Pri­tam Pat­naik, head, Com­mod­ity, Re­liance Com­modi­ties – give their views on bul­lion trad­ing in the fu­ture.

Me­hul Dani: What will be the im­pact of de­riv­a­tives trad­ing on bul­lion mar­ket?

Pri­tam Pat­naik: The com­mence­ment of bul­lion trad­ing in NSE and BSE will help de­velop the com­mod­ity mar­ket uni­verse in gen­eral. While bul­lion as an as­set class was one of the most ac­tively traded seg­ments in the cur­rent com­mod­ity de­riv­a­tive space, the scope to de­velop is im­mense. Ex­ist­ing ex­changes have so far done well to de­velop the mar­kets, but they have merely scratched the sur­face. Given the ex­change’s ex­ist­ing eq­uity/cur­rency base, net­work, prod­uct ca­pa­bil­i­ties and in­fras­truc­ture, it is ex­pected that the over­all com­mod­ity mar­ket vol­umes will de­velop in due course. Ad­di­tion­ally, higher com­pe­ti­tion gen­er­ally leads to prod­uct in­no­va­tion, com­pet­i­tive pric­ing, im­proved ser­vic­ing, etc; all-in­all a bet­ter client ex­pe­ri­ence. Con­sid­er­ing that fact that de­spite be­ing in the top two im­porters in the world, we are price tak­ers and not dis­cov­erer. Thus, with en­try of more ex­changes, apart from im­proved price dis­cov­ery and trad­ing vol­umes, there will be not sig­nif­i­cant dif­fer­ence in the spot mar­kets. In­dia im­ports roughly 800 tons of gold an­nu­ally, and to add to this it has a size­able scrap mar­ket, de­spite this only a very mi­nus­cule sec­tion of the trader/ jew­eler com­mu­nity uses the ex­change plat­form to hedge their ex­po­sures. With more ex­changes cater­ing to this mar­ket, we could see in­creased par­tic­i­pa­tion from the phys­i­cal mar­ket par­tic­i­pants.

Aurobinda Prasad Gyan: BSE and NSE are renowned names in eq­uity trad­ing and have now ven­tured in com­mod­ity mar­kets. It should have a pos­i­tive im­pact on over­all com­mod­ity mar­ket in ways of at­tract­ing new mar­ket play­ers and cre­at­ing more depth in form of trade vol­umes. Bul­lion prices will con­tinue to re­flect de­mand sup­ply dy­nam­ics and will not be af­fected by mul­ti­ple trad­ing av­enues how­ever more av­enues will in­crease trans­parency. Hedg­ing ac­tiv­ity will in­crease if new mar­ket play­ers en­ter the com­mod­ity space.

How are the trans­ac­tion vol­ume & value of gold-sil­ver at all the par­tic­i­pat­ing ex­changes likely to be im­pacted by the end of the cur­rent FY?

Pri­tam Pat­naik: One needs to be re­al­is­tic as far as trad­ing vol­umes growth from new ex­changes goes. These ex­changes will take some ges­ta­tion time to make in­roads into the bul­lion mar­kets. The ex­change’s ex­ist­ing bro­kers will take some time to seam­lessly in­te­grate com­mod­ity back­end op­er­a­tion and tech­nol­ogy into their cur­rent eq­uity plat­forms/op­er­a­tions, thus, one will have to set rea­son­able ex­pec­ta­tions. We can ex­pect vol­umes to pick-up closer to the fi­nan­cial year end­ing.

Aurobinda Prasad Gyan: The idea of hav­ing mul­ti­ple trad­ing av­enues is to in­crease in­vestor base and this will likely re­sult in higher trade vol­umes. We have al­ready seen a pick-up in gold and sil­ver vol­umes with on­set of op­tions trad­ing. Di­wali is high de­mand pe­riod for gold and sil­ver and spot ac­tiv­ity usu­ally picks up and this will re­flect in de­riv­a­tive trad­ing as well. With launch of var­i­ous pa­per prod­ucts, In­dian govern­ment is try­ing to make a shift from phys­i­cal gold. Bul­lion de­riv­a­tives can be used as the ideal tool to switch from phys­i­cal trad­ing.

Will there be a new class of in­vestors traders added on the ex­changes in goldsil­ver? Is a like­li­hood of flight of clients from one ex­change to an­other?

Pri­tam Pat­naik: With num­ber of ex­changes in­creas­ing, we ex­pect to see the mar­ket depth and prod­uct in­no­va­tion im­prov­ing. Fur­ther, these ex­changes col­lec­tively will be in a bet­ter po­si­tion to rep­re­sent their rec­om­men­da­tions in front of the reg­u­la­tors, thereby paving the way for prod­uct in­no­va­tion. The reg­u­la­tors have been al­ready very sup­port­ive by fa­cil­i­tat­ing a fil­lip to the com­mod­ity mar­kets, in a short span of time we wit­nessed the in­tro­duc­tion of op­tions, AIF (al­ter­na­tive in­vest­ment fund) & PMS (port­fo­lio man­age­ment ser­vices). With time, we ex­pect this trend of in­no­va­tion to only grow. The fo­cus of the ex­changes hope­fully is to grow the mar­ket

by adding new mar­ket par­tic­i­pants and not by can­ni­bal­iz­ing ex­ist­ing par­tic­i­pants. The po­ten­tial of the mar­ket is im­mense, and the ex­changes will fo­cus on un­lock­ing this very po­ten­tial by reach­ing out to each par­tic­i­pant in the value chain.

Aurobinda Prasad Gyan: In­dia has a huge in­vestor base but they are yet to try com­mod­ity trad­ing. With renowned names like NSE and BSE com­ing into the com­mod­ity mar­ket, we are hope­ful that new in­vestors will come in. Flight from one ex­change to an­other is not healthy for de­vel­op­ment of com­mod­ity mar­ket and should not hap­pen if new par­tic­i­pants and new prod­ucts are tar­geted.

As a com­mod­ity bro­ker, what kind of move­ment, pref­er­ences in as­set classes have you ob­served since the launch of these new com­mod­ity de­riv­a­tives?

Pri­tam Pat­naik: The bul­lion, base metal and en­ergy fu­tures to­gether con­sti­tute al­most 80% of the ex­change vol­umes. Since these com­mod­ity seg­ment’s con­tracts are mir­ror con­tracts of in­ter­na­tion­ally traded com­modi­ties, it has at­tracted higher par­tic­i­pa­tions and vol­umes.

Aurobinda Prasad Gyan: There is def­i­nitely more aware­ness about com­mod­ity mar­ket with new prod­ucts and new ex­changes com­ing in and we are set to see more queries from peo­ple who have so far re­frained from in­vest­ing in com­modi­ties. Com­mod­ity is still a small mar­ket in In­dia com­pared to eq­uity, cur­rency or debt mar­ket how­ever its share is likely to in­crease. We may not see a switch from one as­set class to an­other, but we may see more mar­ket play­ers ven­tur­ing in com­mod­ity as an ad­di­tional in­vest­ment av­enue.

How are gold ETFs likely to be af­fected?

Pri­tam Pat­naik: There is no im­pact en­vi­sioned in ETF’s due to the growth in com­mod­ity mar­kets. They cater to a dif­fer­ent class of in­vestor/trader.

Aurobinda Prasad Gyan: Gold ETFs have not seen much suc­cess in In­dia due to a well-de­vel­oped spot and de­riv­a­tive mar­ket. We may not see much ef­fect of launch of gold and sil­ver fu­tures on ETFs.

How do In­dian ex­changes now com­pete with the ma­jor uni­ver­sal ex­changes in lead­ing coun­tries? Have In­dian ex­changes been able to em­ploy global best prac­tices?

Pri­tam Pat­naik: In­dian ex­changes have a lot of catch­ing up to do with their global bench­marks, as far as vol­umes goes. Till very late, the com­mod­ity mar­kets were re­stricted to fu­tures only. In the last few years we have wit­nessed sig­nif­i­cant open­ing-up of the mar­kets by the reg­u­la­tor. With the en­try of op­tions and in­sti­tu­tions, we can ex­pect the do­mes­tic ex­change vol­umes to grow sig­nif­i­cantly. As for op­er­a­tion, tech­nol­ogy and risk man­age­ment, In­dian ex­changes are at par with the in­ter­na­tional stan­dards. If OTC, in­ter­na­tional par­tic­i­pa­tion, in­sti­tu­tional ac­tiv­ity, etc, is al­lowed, the vol­ume and op­er­a­tional/tech­no­log­i­cal gap be­tween do­mes­tic and in­ter­na­tional ex­changes will nar­row sig­nif­i­cantly.

Our cur­rent com­mod­ity plat­forms have been cus­tom­ized to best ad­dress the needs of all the par­tic­i­pants in the com­mod­ity space, which were not a part of the ba­sic of­fer­ing. It is in­creas­ingly be­ing wit­nessed that on­line trad­ing has been the pre­ferred plat­form for clients, es­pe­cially in the re­tail seg­ment. Within on­line base, mo­bile/app based trad­ing has wit­nessed sig­nif­i­cant growth off late.

Aurobinda Prasad Gyan: In­dian ex­changes are still be­hind in­ter­na­tional ex­changes in vol­umes. How­ever, this is more due to nascent par­tic­i­pa­tion in do­mes­tic mar­ket. Ex­changes are em­ploy­ing start of art tech­nolo­gies, com­pet­i­tive trad­ing costs and ad­e­quate risk man­age­ment poli­cies and have wide range of prod­ucts. We have an ef­fi­cient plat­form which will de­velop fur­ther once it is chal­lenged by higher par­tic­i­pa­tion.

How will dif­fer­ent stake­hold­ers - In­dian farm­ers, ex­changes, traders, in­vestors, bro­kers, econ­omy, spot mar­ket, govern­ment, etc - stand to ben­e­fit af­ter de­riv­a­tive is ex­tended to the en­tire spec­trum of agri & non- agri com­modi­ties?

Pri­tam Pat­naik: The is­sue is not of cov­er­age, as ex­ist­ing ex­changes cover the broad spec­trum of agri and non-agri; the is­sue is of in­clu­sion of mar­ket par­tic­i­pants. A se­ri­ous ef­fort needs to be made to en­sure in­crease in par­tic­i­pa­tion by ac­tual value chain par­tic­i­pants, be it farm­ers/min­ers, traders, pro­ces­sors, in­dus­try users, etc. This can pri­mar­ily be achieved with the help of com­pre­hen­sive ed­u­ca­tional plan for all the par­tic­i­pants.

Aurobinda Prasad Gyan: Traders, hedgers and spec­u­la­tors are the three im­por­tant parts of com­mod­ity mar­ket. Farm­ers, pro­duc­ers and con­sumers will in­crease hedg­ing ac­tiv­ity if they find ap­pro­pri­ate prod­ucts to match their prod­uct risk as well as good depth in form of trade vol­umes. Ex­changes and bro­kers will ben­e­fit in form of higher prof­itabil­ity if there are more prod­ucts and more par­tic­i­pants.

Most de­riv­a­tive prod­ucts are linked to spot mar­ket. Once we see more par­tic­i­pa­tion on de­riv­a­tive front, it will lead to more de­liv­er­ies and ac­tiv­ity in spot mar­ket as well. This will cre­ate fur­ther stronger link be­tween spot and fu­tures price and will also help curb price volatil­ity in phys­i­cal mar­kets.

Govern­ment has been pro­mot­ing hedg­ing ac­tiv­ity as it re­duces im­pact of price fluc­tu­a­tions. It has launched var­i­ous gold schemes to re­duce ex­po­sure to phys­i­cal gold and thereby de­mand for im­ports. If de­riv­a­tive prod­ucts be­come more pop­u­lar, govern­ment may be able to achieve its tar­get.

Pri­tam Pat­naik in­di­cates that the ex­changes will fo­cus on un­lock­ing the im­mense po­ten­tial of the mar­ket by reach­ing out to each par­tic­i­pant in the value chain

Aurobinda Prasad Gyan sees stronger link be­tween spot and fu­tures price. He be­lieves more par­tic­i­pa­tion in de­riv­a­tives will help curb volatil­ity in phys­i­cal mar­kets

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