The Forward Markets Commission, regulator of the commodity futures market, is to soon allow market making in illiquid commodities. An in-principle decision in this regard was taken at a meeting yesterday of CEOs of all the commodity exchanges with the FMC.
A market maker is a company or an individual that is continually ready through the trading day with a firm buy and a firm sell price. That is, a market maker will buy from you even if there is no seller in sight; hence, literally ‘making a market’ for the trade.
There are 115 commodities listed for trading on all five exchanges; of these, 70 per cent are illiquid. Such commodities affect the market’s growth; a little over 80 per cent of the volumes from most exchanges were from the top five traded commodities only and genuine hedging has remained limited.
The decision was taken unanimously. The meeting defined an illiquid commodity as being so in all the exchanges or not trading on any of the exchanges. FMC will decide the average daily volume limit of the commodity and if the volume is below that limit in all the exchanges, then it can be treated as illiquid and market making allowed with FMC’s prior approval. FMC may also decide on incentives that could be provided for market makers.
FMC’s capital market contemporary, the Securities and Exchange Board of India, has allowed market making and providing incentives to market makers. The Bombay Stock Exchange has such a scheme for its derivatives segment, which was almost dormant; the National Stock Exchange got approval for market making in futures trading in foreign indices like the Dow Jones on its platform in the recent past.
The market making scheme for the BSE proved successful, as Sensex derivatives have secured 22 per cent market share in a short span.
FMC is also finalising norms for algorithmic trading and high frequency trading and these are likely to be issued in a week. The algo trading norms would include several technical and programming logic parameters, said the source.
In addition, FMC has asked exchanges to open services centres in places where they have a large number of clients, to address grievances and provide guidance. According to a source in FMC, the exchanges have also been asked to appoint mediators to sort grievances between member-brokers and investors/traders.
The regulator has asked exchanges to suggest what else could be done to develop the market, including ways to use money from the Investors Protection Fund. Exchanges have all formed trusts for the use of this fund.
In another measure to improve transparency, all exchanges will have to disclose details regarding their members, their networks, etc, so that those wanting to enter the market can take an informed decision and select the member through whom to trade.
