Trading volumes on the commodity exchanges are rapidly dropping due to the emergence of the unofficial dabba market and the levy of stiff upfront margin on trades on exchanges.

The trading volume on NCDEX plunged 55 per cent in the year ended March to ₹2.07 lakh crore against ₹4.57 lakh crore logged in the same period last year, while that on BSE dipped 99 per cent to ₹8,365 crore (₹7.69 lakh crore). NSE trading volumes dropped 10 per cent to ₹178 crore (₹197 crore), according to data sourced from the exchange website.

While volume on MCX was up 68 per cent last fiscal to ₹14.78 lakh crore (₹8.78 lakh crore), largely due to a sharp run-up in volatile gold and other metal prices, the average daily turnover dipped, indicating a drop in investor participation.

The average daily turnover on MCX futures was down 10 per cent at ₹23,514 crore (₹26,178 crore) in the year-ended March, while that of options was up three times to ₹33,998 crore (₹7,860 crore). The cost of trading in options is much cheaper than that of futures.

In the last few months, all four exchanges have been alerting investors regularly about indulging in unofficial dabba trading as they are not registered with market regulator SEBI and do not provide a safety net.

Dabba trading

Dabba trading is a proxy market where all transactions happen outside of market guidelines. It is risky but profitable since there are no big costs such as trading fees, margin, and other costs. All trades in the Dabba system are settled in cash. The operators in the system take orders personally and book the transactions outside the commodity market.

Dabba trading is more rampant in Gujarat, Rajasthan, Punjab, Haryana, and Uttar Pradesh, mostly in agriculture commodities. With futures trading in seven commodities, including wheat, paddy (non-basmati), moong, chana, soyabean, mustard seed, and palm oil, traders banned using the spot prices to settle babba trading.

SEBI has recently mandated that brokers collect the entire trade value as upfront margin even before the order is punched in on the computer. Subsequently, an investor who wants to buy a lot of gold has to set aside ₹5 lakh in advance as against the earlier option of investing just ₹50,000 with the broking firm giving 10 times leverage to make up for the margin.

‘Traders under pressure’

Narinder Wadhwa, President, Commodity Market Participants Association, said investors and traders are definitely under pressure after the implementation of new margin regulation, and many of them are shifting to unregulated trading territory, though there is no empirical data on the shift in trade as everything in dabba trading is unofficial.

He added that futures trading in the seven agriculture commodities should be lifted to reinstall investor confidence.

Ajay Kumar, Director, Kedia Commodities, said many of the traders have also shifted to trading in equity index futures, where the liquidity is much higher and the profit margins are better.

Moreover, the mini version of the key benchmark index allows investors to take trading positions with less money, he added.

Though commodity exchanges have launched mini futures contracts on energy, gold, and other metals, their success would depend on price volatility in these commodities and liquidity in the system, he said.

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