Trading in spreads in financial market derivatives is gaining ground in India. Spread trading has been successful in currency futures and has since been introduced in commodities’ futures.
Spread trading is the difference between period contracts in the same commodity or currency and trading takes place in this spread. These are derivative contracts, generating huge volumes on exchanges across asset derivatives globally and are considered low-risk products.
When a trader thinks the spread between two contracts would go up, he will buy a spread. Meaning, he will sell a near-month contract and buy a far-month one. He does the opposite when he sells a spread. The spreads in gold (buy side) December and February maturity contracts on the Multi Commodity Exchange (MCX) have given decent returns in recent days. The spreads went up from Rs 275 last Thursday to Rs 294 on Tuesday in the day session.
An exchange functionary, requesting anonymity, said algorithm software provided for such trades. Ajay Kedia, director, Kedia Commodities, says: “At present, the exchange provides only the facility to trade in spreads. Spreads are low-risk products and help traders to take safe bets, with possibilities of good returns.”
MCX launched this facility last week, in gold and crude oil. Exchanges are introducing these contracts since they bring liquidity and volumes. The trade is considered safe, as the trader buys one and sells another contract. The margin requirement falls to half, while a broker gets the brokerage for two contracts – a win-win for all.
Globally, there are several kinds of spread contracts. There is calendar spread, which are same commodity contracts traded in different month maturities. There are ‘crack’ spreads, traded on related commodities such as guar seed and gum or sugar and ethanol or crude oil and heating oil or aviation turbine fuel. Such contracts are normally in products and byproducts where the normal ratios are known and a trade opportunity arises when the ratio moves outside the normal range. The regulator in India has not permitted such crack spreads.
The spread contracts launched by MCX are just a facility and are shown on the trading screen as spreads, the way they are shown on currency exchange screens. In currency trades, the spreads are not shown separately and so, the volume is not measurable.
