Finally, they may be in: the market makers in India commodity exchanges. FMC may allow exchanges to introduce market makers in the near future bringing an end to illiquidity in contracts traded.
On 23rd of June, Commodity Online carried a report titled “Bringing illiquid contracts to life: Have Commexes moved forward?” The report pointed out that the exchanges and the regulator have made little progress in bringing liquidity to illiquid contracts.
Now, Business Standard has reported on Wednesday that FMC may allow market makers in commodities.
The D.S.Kolamkar Committee is reportedly contemplating introducing market makers into the commodity market system. While the FMC is yet to take a final call (the FMC chairman, B.C.Khatua is awaiting the final draft of the report), the markets are eagerly awaiting the market makers.
The proposed measure would allow market makers to help small and new exchanges by bringing in much needed liquidity to various commodity contracts. Market makers may also be able to beef up illiquid contracts in major exchanges and can even bring fresh liquidity to new contracts.
Market makers are high net worth market players who buy or sell contracts traded on the commodity exchanges helping smaller players to square-off positions. This necessarily brings in liquidity to markets and helps maintain the market momentum. With safe regulatory measures in place and by ensuring that only credible entities play this role, the market makers make the market what it is.
The SEBI (Securities and Exchange Board of India), equity market regulator, has allowed for market makers in equity derivatives lately. In this case, exchanges appoint and incentivize market makers for bringing liquidity to markets. The market makers can operate only for a period of six months and are subjected to various transparency-ensuring-measures.
For instance, the equity exchange should announce 15 days in advance regarding who the market maker is and give monthly report of their performance.
It is not clear if the same system would be implemented in commexes as well. The FMC Chairman was not immediately available for a comment.
In case of commodity exchanges, the market making mechanism will not work in a full-fledged manner until the Forward Contracts (Regulation) Act is amended by the Parliament. Until then, the market making mechanism will be carried out on a pilot basis with selected exchanges allowed to appoint market makers.
In the commexes, a one-way quote-driven mechanism propels the market. A player can either take a sell position or a buy position. This is expected to change as a market maker may have the option to take both positions and play the markets accordingly.
As published in: http://www.commodityonline.com/news/Market-makers-may-bring-life-to-illiquid-contracts-create-market-depth-40381-3-1.html
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