Is Trading In Commodity Futures Losing Its Sheen?

MUMBAI: In October, key employees of the commodity division of IL&FS Investsmart left to join equity arm of another financial services company. Earlier this year, some of the members of Tower Capital’s commodity desk left, forcing the management to shut down the division. Reliance Capital had also slowed down its proprietary trading in commodity derivatives this year.

According to sources, the commodity division of JM Financial has also been suffering from employee attrition and low profitability, while Noble grain, a multinational commodity trading company is believed to have pruned its commodities team after it suffered losses in the futures market.

Is commodity futures trading which grew fiercely in the initial years, losing its sheen? Among other things that may have impacted business, traders and investors may have been lured away by the stunning boom in the stock market. And Sensex rose, trading in agri commodities had to grapple with policy interventions like high margins followed by a total clampdown in certain futures contracts.

“Position limits, declining participation and regulatory clamps — all have resulted in employees losing faith in the commodity market,” said Sandeep Presswala, executive director of IL&FS Investsmart. He added that the absence of developed spot markets and restriction on portfolio advisory services have also affected business.

Mr Presswala feels that the losses suffered by retail investors together with the uncertainty over Abhijit Sen committee report have come as a setback. The committee is yet to give its report on whether futures trading has contributed to rise in inflation.

Employee attrition, regulatory constraints and low profitability have led the broking or commodity companies to take a harsh decision of either shutting down the operations or reducing their scale of operations.

An exchange official, who refused to be quoted, agreed that around a predominant number of employees in various brokerages have moved from commodities to equities — either within the same organisation or to another firm. “The 10 to 5 working hours in stock brokerages, five-day week and better pay have attracted traders and backoffice employees,” said the official.

Given policy interventions by the government, there is a question mark whether the commodities market will see the growth it witnessed between 2004-2006. “Several contracts which generated good volumes have been de-listed and there is no progress on the FCRA bill and allowing banks and mutual funds to enter the futures market,” said a trader.

Consider the dip in volumes clocked in by the exchanges. In the last six months, NCDEX volumes have fallen by around 39% to Rs 46,055 crore in November. However the volumes of MCX, the largest exchange, has grown by 35% to Rs 292,075 crore. Major volumes in MCX can be attributed to active trading in bullion, energy and base metals — commodities that are linked to international prices.

Sudip Bandyopadhyay of Reliance Money feels that brokers started losing money following a ban on trading in certain major commodities and restriction on member limits. R Suresh from the HR consultancy Stanton Chase said that there have been instances where executives, leveraging their domain knowledge, have moved from day-to-day trading business to commodity-based corporates.

Despite the setbacks, industry officials like Presswala have a lot of expectations from the sector. Presswala feels the future has to be bright for the commodity business in a commodity-driven economy like India. Awareness and education of investors is pertinent to gain the confidence of the markets.

“At Investsmart, we are focusing on SMEs and corporates for growing our commodity business,” he said. Chances are that sooner than later the long-awaited legislations will come into force. When it happen is a matter of conjecture. For now, it looks like those with deep pockets and patience will hold on to the game while smaller players may call it quits.