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Derivatives trading in gold is turning out to be the new battle ground between the BSE and the Multi Commodity Exchange (MCX). In the commodity trading, the MCX has a monopoly in crude oil, bullion and base metal futures contracts.
In July, the BSE cornered 22.57 per cent market share in gold derivatives trading while 77.43 per cent of the entire volumes happened on MCX. The total turnover on both exchanges combined in the gold derivatives segment was ₹13,914 crore on an average daily basis.
MCX draws huge trading interest in gold ‘futures’ but to counter that the BSE launched a new product called as ‘options in goods’ contract. The BSE contracts are the first of its kind options contract, that allow the traders to take delivery of the underlying ‘goods’ on expiry. Even on MCX, traders can seek delivery of the gold futures at the expiry. Since the gold contracts on both the exchanges are physically settled on expiry, they are comparable, the experts say.
In the gold mini contracts, which is 100 grams, the BSE beat MCX with a 58.88 percent market share in July. The combined average daily turnover was ₹5,334 crore.
“Gold contracts based on options in goods are emerging as an alternative to gold futures. On the price parameters, both the contracts are comparable. But the advantage of options in goods contracts is that a trader can hold them till very close to the expiry date, which is not possible with futures contracts. If you don’t roll over futures at least 10 days prior to expiry, they result in delivery. Options in goods have a long way to go,” said Kishore Narne, Head - Commodity & Currency at Motilal Oswal Financial Services. Narne was part of the SEBI working group on new commodity derivative products.
The BSE was allowed to launch ‘options on goods’ contracts only in June after an amendment was made to the ‘Securities Contract and Regulations Act.’ Unlike gold futures trading, which requires around 5-10 per cent upfront margin, the BSE options require only premium money to be paid upfront which comes to around 1 per cent. Such a premium amount is far less than futures margin. As of now, the BSE is running a market-making scheme, wherein the exchange is paying brokers to provide "two way quotes."
But analysts say even other exchanges are running a market making scheme and not the entire market share can be based on such incentives.
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