Commodity futures volumes overtake equity peers in Aug

Trading volume in commodity futures surpassed that of capital market futures in August for the first time in the history of domestic derivatives markets.

During the month, while commodity futures witnessed business worth Rs 1,66,000 crore, that of capital market futures stood at Rs 1,63,000 crore. This is an indication that the commodity futures market will overtake the combined business of the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in a few months' time, according to experts.

They said the average volume of business has increased beyond the level of Rs 10,000 crore on a daily basis. It took 119 years for the stock market to reach a daily turnover of Rs 400 crore in 1994.

Interestingly, for the commodity futures market to achieve the milestone of Rs 12,000 crore daily business, it just took three years, Giby Mathew, managing director, JRG wealth Management Ltd, said.

He also said there is every possibility that once the laws governing options trading in commodities futures is put in place, the volume might increase to the level of Rs 30,000 crore daily. "It will be hit the Rs 100,000 crore mark by the end of 2008," he said.

Total turnover in all major futures exchanges such as Ncdex, NMCE and MCX was Rs 4,61,484 in 2004-05, but it crossed 50 per cent of last year's total business within the first quarter this fiscal year.

Total turnover in all the three exchanges had increased to Rs 2,63,316 crore during the quarter. If the momentum stays, the figure see a four-fold rise the end of March 2006, traders say. It is noteworthy that during July 2005 alone, the volume of business had increased to Rs 1,26,886 crore.

The cumulative turnover during the April-August period had shown an increase of more than 11 times to Rs 3,86,192 crore while this was just Rs 34,337 crore during the same period in 2004.

In August alone, Ncdex's total business stood at Rs 76,929 crore (Rs 9,744 in August 04) and MCX's turnover was at Rs 44,292 crore (Rs 8,397 crore in August 04).

Inclusion of more agri-commodities in the futures segment, increasing interest among growers and traders, accessibility to trading terminals even in remote villages and the awareness campaigns by the exchanges and broking firms are the main factors behind this exponential growth.

Gold, silver, coffee, wheat, rice and crude oil have been added to the list of commodity futures, making the total number to items in the segment 50. Most of these are actively traded too.

According to C J George, managing director, Geojit Financial Services, almost 90 per cent of the total business is being controlled by traders and speculators. Growers participation is below 10 per cent. In order to make use of the price discovery mechanism, growers should have more actively participate in the market, he said.

"That futures trading has become a traders' platform is a major problem. Small growers have actually no role. This may eventually destroy the market," he said.

Though the volumes are picking up, delivery is just below 1 per cent, which shows the speculative nature of the business.

However, experts say this rate is on a par with international standards. The absence of logistic facilities and a better delivery mechanism are some factors that result in lower level of delivery. Improving the warehousing infrastructure is one of the preconditions for developing an advanced system of commodities futures trading, George said.