Why do traders love commodity trading?

Because it’s based on demand and supply and there is no noise in terms of management quality, such as cash flow

MUMBAI: Trading in commodities has achieved critical mass in India, and one of the best indicators has been the growing interest of large equity traders towards commodity trading.

It is true that commodity trading avenue can be used for investment as well as to serve a real business requirement, i.e., risk management.

But it is equally true that, as of today, a large part of the volume comes from traders willing to take directional calls on markets.

In fact, this is the way that all trading market — equity, commodity, currency, interest rate derivatives — usually operate. Derivative markets with any underlying are used with either of two aims — profit or protection of profit.

Commodity futures in India have quickly become a haven for traders in all sectors — bullion (gold and silver), metals (copper, zinc, lead, aluminium and nickel), energy (crude oil and natural gas) and agri-commodities like chana, jeera, guar and several more.

One of the major reasons for trading in commodities is that it’s based on demand and supply and there is no noise in terms of management quality, such as cash flow issues.

Commodities that have international linkages are far more liquid than others, and traders prefer these because they have a global tinge. Consequently, international markets volatility is well captured in our commodity exchanges, i.e., Multi Commodity Exchange (MCX) and National Commodity and Derivative Exchange (NCDEX).

Information flow in such commodities is high with any number of websites giving real-time news, which affect the price movement of traded commodities.

Since futures lot sizes are not large, it makes trading easier for all types of traders to take positions suited to them. For eg, there is a gold mini contract of 100 gms, which has a gross value today of about Rs 95,000.

At an exchange specified margin of approximately 5%, the trader can enter the markets with as low as Rs 5,000 and scale up his position thereafter as convenient.

Besides, our markets follow international commodity markets, such as LME and COMEX, hence there is confidence of manipulative movement of prices and even the settlement is done on the prices based on international commodity markets.

Our commodity exchanges are open for about 14 hours a day with the specific aim of covering the trading timings of international commodity exchanges, so that the volatility is also well captured in our exchanges giving ample opportunities to traders.

The long trading hours also ensure that traders can trade after their office hours. Most brokers also accept FDs and equity shares as margins in addition to cheques, thereby necessitating cash-flow only for daily mark-to-market (daily loss/profit) requirements.

The next trigger expected is government nod for banks, mutual funds and FIIs to invest in commodity futures markets in India, which will take it to the next growth orbit.

Similarly, the arrival of spot markets, options trading and portfolio management schemes will help in rising the popularity of commodity markets.

Realising the changing ground realities and economic needs, it is expected that trading in weather derivatives, freight futures and similar products will also be allowed soon.

The author is the country head - commodities, Religare. (Jayant.manglik@religare.in)