FMC to allow market makers soon

Currently, on commodity exchanges, quote-driven system is prevalent in which traders provide one-way quote

After streamlining algo trading through strict guidelines, the commodity derivatives market regulator the Forward Markets Commission (FMC) is planning to allow market making in commodities futures trade now.

Responding to a question on Wednesday at Annual Global Investor Conference organised by Kotak Institutional Equities in Mumbai on volumes being restricted to over a dozen of commodities despite over 100 commodities allowed for trade, Ramesh Abhishek, chairman, FMC, said, “We would allow market making in coming months to widen the scope for trading.”

Market makers commonly offer two-way quotes, for both buying and selling, giving thereby an opportunity to traders to square off in case sellers are active in a particular contract or book afresh if buyers are ruling the trade. They are indirectly funded by individual exchanges to generate volume in certain segments.

The equity markets regulator, the Securities and Exchange Board of India (Sebi), had allowed market making in June 2011 for facilitating exchanges to generate volumes in illiquid securities.

A committee headed by the then FMC member D S Kolamkar, after consultation with exchanges, concluded in June 2011 to recommend allowing market makers in two types of contracts.

One lot is the existing contracts that are not liquid on any exchange platform and then a new set of contracts yet to be launched. The move is set to help new and small exchanges to generate business volume in commodity derivatives.

Meanwhile, the new exchanges have urged the FMC to allow market making in all – liquid and illiquid – contracts for the fresh entrants to get a level playing field. A senior executive of an exchange said that the regulator should not debar new exchanges like the Sebi which did not distinguish between the new and old securities and exchanges.

In developed markets like the US, market makers have predominantly generated huge volume in active contracts on the COMEX, Nasdeq and CME. The same model was followed by the London Metal Exchange and the Shanghai Futures Exchange in China. Contracts on these platforms are predominantly dominated by market makers, to generate volume for exchanges.

Currently, Indian exchanges follow a market-driven system, in which share prices are determined by the sentiment. On a commodity exchange, however, a quote-driven system is prevalent in which traders only provide a one-way quote, either for the buy or sell side.

Generally, around half a dozen of the active and most powerful traders are identified as market makers to generate volume in illiquid contracts.

While the commodity futures market regulator suspended automated execution logic popularly known as algorithmic (algo) trading from micro and mini contracts effective January 1, it put regulations in place for the use of this technologically-advanced trading in major commodities. Effective April 1, commodity exchanges would be able to process only 20 orders per second from one client (user ID) irrespective of the size of orders. This means, even if the order size goes upto 500 or even 1000 and more, the system will execute only 20 orders per second.

All these efforts are meant for widening participation in commodity futures market, said Abhishek.