Sebi may allow colocation in commodity bourses to boost efficiency

Commodity derivatives advisory panel at Sebi is reviewing a proposal to allow colocation, which could improve price discovery, liquidity, and market participation

Markets regulator Securities and Exchange Board of India’s (Sebi’s) Commodity Derivatives Advisory Committee (Cdac) is actively discussing allowing colocation facilities for commodity derivatives markets, a move expected to boost efficiency and liquidity, and aligning the sector with global and equity markets, sources said.

 

Colocation, widely used in the equities markets, enables trading members to place their systems near exchange servers for ultra-low latency. Industry players believe the transparent equity market colocation model -- including the latency data publication -- can be effectively replicated for commodities.

 

Sources familiar with the matter said the Multi-Commodity Exchange (MCX), following its technology transition to a TCS-backed trading platform in the last quarter of 2023, was now in favour of offering colocation services. Other bourses in the commodities derivatives space are also likely to be in favour.

 

The proposal to extend the colocation facility in the commodities segment is underway. It can also be taken up at the next Cdac meeting, which is expected in a few months.

 

Queries sent to MCX and Sebi remained unanswered at the time of publication.

 

Experts suggest colocation can tighten price discovery, stabilise prices, and potentially support inflation management and rural incomes. A robust Sebi’s checks and balances can help address concerns of any unfair advantages from high-speed trading, they added.

 

At present, Sebi regulations prohibit colocation in the commodity segment.

 

 “This restriction hampers price discovery, liquidity, and market efficiency, especially in the agriculture, energy, and metals sectors, where timely risk management is critical. Colocation can enhance participation, hedging, and market depth, aligning India with the global standards,” said Narinder Wadhwa, managing director (MD) and chief executive officer (CEO), SKI Capital Services.

 

Experts highlighted that the absence of colocation creates regulatory asymmetry, potentially deterring the global players. However, Sebi’s caution may stem from past instances of speculation and price manipulation in commodities, coupled with the segment’s ties to physical delivery and real-sector hedging.