Rising commex turnover doesn’t mean better price discovery

In recent times the equity re-structuring and equity participants of commodity exchange have grabbed more attention than genuine market participation on the exchanges. Commodity exchange as SRO (Self Regulatory Organisation) is more than valuation and turnovers. Sometimes it is assumed that rising turnovers on exchanges means better price discovery, however this myth needs to be relooked from the “broad base” participation in each of the contacts. There are 200 plus contracts’ that are listed on the existing exchanges and hardly any participation is observed beyond the near month in the most of the product lines.

In absence of participation profile data in public domain, we can at least assume that the regulator has access to participation data and analyses it too. Liquidity on futures market can be created through market makers but the local exchanges have remained in denial mode on this count. However, sustained depth on the exchanges can be measured by a very basic analysis of contract-wise ADMP & ADCP. (Average Daily Member Participation & Average Daily Client Participation). While a rising exchange turnover may give a feeling of growth, the market sustenance can only be ensured through participation depth.

It is being stated that up to eight national commodity exchanges shall be allowed. If the economics is the basis of investment in any industry…. can we expect the market to grow to such a level where Rs 800 Cr of investment can generate at least Rs 160 Cr (@ 25%) as Return on Investment. At current level, the total exchange revenue from exchange based transactions is believed to be less than Rs 350 Cr annually. Is it all a game of valuation rather than market participation?

Around a month back, media was full of stories like "New products like options will be allowed in the commodity market”.  Most participants feel like sitting in a poker game where one doesn’t know who the patsy is, then….. It is very likely that one who doesn’t know would become the patsy. The trouble is that many people get duped because nobody likes to hang that label on him. Commodity options in India are like this….but perhaps not for everyone….

Then why options have not taken off…the answer lies in non existence of broad based market participation and participant’s profile. Everyone likes to think of his own capital (proprietary trading) as “smart money” and other people’s as “sucker money (funds).” Market comprises more of whom... “Smarties” or “Suckers”? This will determine whether options would take off.  

We need to look at the growth story from participation point of view rather than turnovers, equity restructuring and new exchanges. With prayers and hopes, market is coming to the terms “to believe” that regulator is taking note of the relevant data so that exchanges do not remain “clubs” and graduates to be the platform of serious market participants.

“Yes, how many times can a man turn his head

Pretending he just doesn't see ?

The answer my friend is blowin' in the wind

The answer is blowin' in the wind.    (Bob Dylan)

Published in The Economic Times