MARKET DEVELOPMENT
29-03-2005
Too much play in commodities isn't a good thing
3/28/05 - Here’s a word of caution on the fiercely-growing commodityfutures trading, which often reflects unbridled speculation. According toLamon Rutten, chief, finance risk management and information - commoditiesbranch, UNCTAD, the trend of high trading volumes and low open interest isnot healthy.Fears are that excessive speculation in the domestic commodities futuresmarket may have some impact on the underlying spot market. Over the pastcouple of months, the market has seen high trading volumes coupled withremarkably low open interests, which have reportedly been attributed topunters and circular trading. Low open interest signals the entry and exitof a trader from a futures trade before the close of trading hours on anexchange.Participation in the commodities futures market by large corporates andother institutional players could help check this trend, Rutten told ET.Although it is early days, there are traders and industry watchers whorecall how futures trading was banned over three decades by the governmentdue to excessive speculation. Another neighbour, China, had also moved ina similar fashion a decade ago.The developments in the commodities market which have created a sense ofdisquiet are reflected in a few commodity futures. First, it was guarseedwhich recorded a daily volume of Rs 50 crore in the first week of July ’04. Volumes then soared to Rs 1,700 crore daily during the first week ofSeptember, a hefty growth of 3,300%.However, during the same period, the open interest in guarseed increasedfrom 27,500 tonne to 133,500 tonne, a growth of only 385%. Recently, thedaily trading volume in jeera zoomed from Rs 13.7 crore on February 18 toRs 279.5 crore on February 24, ’05, - a whopping 1,934% growth. Incontrast, during the same period, open interest in jeera increased from4,344 tonnes to only 8,979 tonnes - a moderate 106.7% rise.The spot-to-futures trading ratio is also abnormally high. The annual spotmarket for jeera is worth around Rs 1,000 crore and the average daily spottrading is estimated to be less than Rs 5 crore. The volume of Rs 300crore traded on national exchanges on February 24 was more than 60 timesthe daily volume in the spot market.S Sundareshan, chairman of the market regulator for commodities - ForwardMarkets Commission (FMC) - declined comment on the issue.Some trade experts term low open interests and high volume as "marketmaking" by the exchanges. The September ’05 mild steel contract on NCDEXhas zero open interests since March 11 to 22, though Rs 3,500 crore ofsteel has been traded. The exchanges, however, have been silent on the"market making" issue.According NCDEX’s chief economist Madan Sabnabis, it would take some timebefore any comparison with the benchmark global exchanges could be carriedout.Globally, trading volume and open interests go hand-in-hand on benchmarkexchanges like, Nymex, IPE, CBOT and NYBOT. Spot to futures multipliersare usually within 50. Only in the case of gold and silver, it hasexceeded the threshold.Jignesh Shah, managing director, MCX, said that participation of onlyspeculators could distort the price discovery process through futurestrading. Kailash Gupta, managing director, NMCE, said, instead of volumes,national exchanges like, NCDEX and MCX should focus on quality of tradingin the initial years.Globally, trading volume and open interests go hand-in-hand on benchmarkexchanges like, Nymex, IPE, CBOT and NYBOT. Spot to futures multipliersare usually within 50. Only in the case of gold and silver, it hasexceeded the threshold.
