Allege manipulation as pepper witnesses high volatility

G.K. Nair

Negative impact

In the

pepper futures the entire year's crop's equivalent quantity was traded on a single day.

This trend

has impacted the genuine investors who have invested in pepper.

Kochi, Oct. 11

Though there has been a boom in commodity futures market with significant increase in turnover in almost all commodities, a good section of traders and growers of certain commodities such as cardamom, pepper and rubber have started expressing their unhappiness over the way the market is being allegedly manipulated.

For instance, it was noted recently in the pepper futures that on a single day 79,000 tonnes of pepper was traded, which meant the entire year's crop's equivalent quantity was the turnover on September 26, 2006.

Market Manipulation

An analysis of the trading pattern with such huge volume of pepper in one day would reveal that it leads to high volatility in the market bringing in wide and wild fluctuations without any fundamental backing. As a result, prices move up for the future delivery in the national exchanges, wherein pepper futures are being traded quiet actively.

According to market observers, emergence of market manipulators who allegedly formed cartels in several major business centres in India in different States such as Madhya Pradesh, Rajasthan, Maharashtra and Delhi seems to have taken the market for a ride with their financial power.

This might have been the reason for the pepper prices, without any rhyme or reason, shooting up and falling sharply on a day-to-day basis, they said.

Genuine Investors

This trend has a negative impact on the genuine investors who have invested in pepper and paid the margins to the exchange besides paying on a day-to-day the mark-to-market margin, market observers said. According to them, since prices moved up from Rs 6,500 a quintal to Rs 13,500 a quintal, many small investors had to buy back their sales since unscientific margins were levied on both sides (buyer and seller) without any consideration of sellers holding stocks, normally on an uptrend market such additional margins are being levied on the side at which the stakeholder is benefited.

Harsh Steps

There are mechanisms of even holding back payouts when unreasonable hikes are being manipulated. Instead of taking such harsh steps, the exchanges should have been directed by the regulator to take appropriate steps so that movements of the market manipulators are curbed and regulated in time, they said.Many genuine investors got attracted towards the pepper trade since they can earn very high returns for their investment by buying spot pepper and selling future deliveries in the exchange. However, many of them, small and medium investors who are in large numbers spread all over India might be finding it difficult to catch up.Exporters are also prevented from taking positions in the International market, because of the fluctuations that take place in the futures market, without any fundamentals thus a close monitoring is needed by the regulator to ensure that no cartels are taking undue advantage of the futures market even without paying required margin, they said. "It is an open secret that intra trade are being permitted without collecting any margin and therefore when the cut-off time is flashed on the screen, the market is behaving rather in very unrealistic manner and prices either move up or fall sharply," they said.Besides, apprehensions are also there as to whether such quantities are being traded with the upfront payment of the margins as were being collected at the regional exchanges. Meanwhile, Mr N. Radhakrishnan, President, Cochin Rubber Merchants Association (CRMA), said wide variation in prices of natural rubber (NR) was due to the influence of Indian futures, which in turn is following the international futures market and as a result, the demand and supply theory does not reflect on Indian prices.

Hedge Funds

Attributing the wide fluctuation in prices to the influence of the futures market, he said: "Hedge funds play a large part in the price variations of commodities throughout the world and their movement from one commodity to other in order to reap profits, influence the international futures market." Some of the cardamom traders in Bodinayakannur told

Business Line

that certain major players in the cardamom futures market allegedly manipulate the prices. They push up the prices to sell their stocks bought at lower prices earlier and once that is fully liquidated they pull down the prices so as to buy again at low prices, the traders said. "It is a kind of gambling," they claimed.

Plugging Loopholes

Significant difference in price of same quality commodity in different national exchanges is a matter of concern, they said. Apart from this, the delivery dates, margins, quality parameters, delivery margins, exemption with genuine stocks for margins as well as proper collection of margin even for intra-day trading needs to be made equal to all exchanges including regional exchanges, they urged. If these parameters are not looked into seriously, the regional exchanges will have to close down since they are already suffering because of such difference in regulations to be followed, they said.Hence, the Ministry and the regulator, they said, needs to look into the matter seriously and do the needful and plug the loopholes for a healthy and straightforward futures trading, they added.

(This article was published in the Business Line print edition dated October 12, 2006)
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