FMC yet to take a view on such techniques
After stocks, algorithmic trading, also called programme trading, is making inroads into India’s commodity markets.
At present, most algorithmic trading is taking place on the Multi Commodity Exchange (MCX), in futures contracts of internationally-traded commodities like crude oil, gold and silver, traders say. The National Commodity and Derivatives Exchange (NCDEX) also allows algorithmic trading, they say.
Arbitrage traders are the main users of algorithmic trading in commodity futures for strategies like calendar spread, established by simultaneously entering a long and short position on the same underlying asset but with different delivery months.
For example, going long on a crude oil futures contract with delivery in the next month and going short on a crude oil futures contract whose delivery is in three months.
Even in case of equities, algorithmic trading has been gaining popularity among arbitrageurs, who attempt to benefit from price inefficiencies in the market by making simultaneous trades that offset each other and generate risk-free profit. Algorithmic trading accounts for 15-20 per cent of daily volumes in the stock market, according to industry estimates.
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“We received approval for algorithmic trading in commodities futures from the MCX about 10 days ago,” said Sanjay Kalwar, chairman and CEO of Mumbai-based Brisk Investments.
“MCX has been offering automated trading since May 2008 to its members,” said an MCX spokesperson. For this, the exchange charges Rs 1.5 lakh as a one-time fee for CTCL (computer-to-computer link) connectivity and Rs 50,000 as annual recurring fee for in-house software development, he says.
As in the stock market, each algorithmic trading strategy needs approval from the commodity exchange.
“Algorithmic trading in commodities is still at a nascent stage in India. Only sophisticated traders are doing it at present,” said Viral Shah, head of institutional business at Geojit Comtrade. “Lack of segments like options, a ban on foreign institutional investors (doing this) and position limits are restricting the growth of algorithmic trading in commodities.”
Algorithmic trading has come under the regulatory scanner in the US after the stock market collapse on May 6, when the Dow Jones Industrial Average plunged as much as 998.50 points. The Commodity Futures Trading Commission (CFTC), the US commodity regulator, is planning to review whether there is anything inherently disruptive about algorithmic trading.
The Dodd-Frank financial regulation law has given the CFTC broad authority to punish and deter manipulation and other market abuses.
In India, the commodity markets regulator, the Forward Markets Commission, has not formed any view on algorithmic trading in commodity futures so far.