Sunday, March 23, 2008

The Indian Commodity Scene


The end of JOBBERS in commodities begins….. or is it the slowdown in COMMODITY EXCHANGES …

With the fears of the Commodity Transaction Tax (CTT) looming large, which would increase the brokerages multifold, coupled with the ultra high volatility in the international metal markets is it soon going to be D-Day for all jobbers of the commodity markets which in turn could be the downslide of the various commodity exchanges which are as it is facing low volumes because of a major portion of the volume already going to BUCKETEERS/DIBBA people because of the jobber favorable services they offer.

The Great Indian Jobber

First of all how do we define a jobber here(In India) ? Most of the jobbers here are people whose main source of income is derived through jobbing / trading INTRADAY / INTRAHOUR or even INTRAMINUTE in the commodity exchanges .They do very small trades and increase the per trade quantity with increase in the instant profits they make. These are the people who provide a very major portion of the volume for the various commodity exchanges as the volume they generate is phenomenal considering the fact that they use very little margins (maybe for a lot or two of a given commodity). This is because of the fact that they never stop trading (since the time the exchanges open till the time they close) and that too on very low profits or losses. They entry and exit every minute and all all possible prices. Some of them use their own money as margins whereas there are also some who are given terminals with a fixed margin or loss limit to trade on behalf of others for a commission only on the profits.

Bucketting / DIBBA

As it is, the major portion of the trades of the high volume jobbers is going to the bucketeers because of the nominal brokerage, zero margins and instant execution of any volume of trades at a particular price, irrespective of the bid/ask size. Some of them also give facility of putting overnite limits or stop losses which are cleared on the next days opening. This gives them another edge over the commodity exchanges which at present do not offer this facility. The other major reason is easy access to them as no formalities are required to open an account here. Even a nobody could start trading with a very low amount of money in his/her pocket (which would not be enough even for margin for the regular broker with the commodity exchange). Even people into arbitrage/hedging business are also finding it easy to deal with them. Some of the bigger bucketeers also offer security money to the original Sub Brokers for trading with them. They even have got the online trading softwares developed to show to their clients that they are legal.

It is not only rosy cosy with these DIBBA wallahs. Most of these people are here to make a fast buck and leave with the common mans hard earned money. They are mostly people who are in a do or die situation wherein they stand to loose nothing because if they start loosing money the moment they start their venture they go bankrupt or disappear. Even if they start making money at the cost of their clients there is no certainty that their clients would get their due profits from them. So all in all it is even worse(to trade with these people) and more insecure than gambling at a local den.

Wealth Erosion in India

We could also say in a way that ever since the various commodity exchanges opened up in India a tremendous amount of investor wealth has been eroded particularly in rural India (which is ACTUAL INDIA) and in many cases to the extent of bankruptcy and poverty. We cannot fully blame the exchanges for the losses of the investors as a certain portion of the investors are themselves to blame as they start trading without any knowledge whatsoever about what they are in for as the prices in all the commodities are governed by international economic and geo-political factors which they have no clue about. What we can say here is that the medium(platform) was provided by the exchanges for the common man to trade without any formal know how as in commodities trading there is nothing physical, purely FUTURES/PAPER trading. Another important factor is that almost since the exchanges opened in 2003 there has been very high international financial uncertainty leading to a BULL run. This has caused massive surges and swings in commodity prices which has been the death knell for the common trader/jobber who was and still is the backbone of these exchanges.


What we can suggest here is that the various governing bodies (Ex.Forward Market Commision) should heavily crackdown on these so called bucketeers/DIBBA people. They should also ensure that the retail investor (in rural India) has proper knowledge about the commodity markets before he starts trading. They should also ensure that the common man is not cheated because of lack of knowledge.

We would also suggest scrapping CTT or levying it in fixed rupee terms ( Ex Rs.20/- per trade) instead of in turnover. In this way the cost per trade does not increase substantially for the jobbers/small-time traders and thus is good for the exchanges as well.

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