The commodity derivatives market regulator, Forward Markets Commission (FMC), has banned algorithmic trading in micro and mini contracts effective December 1.
Micro and mini contracts are active on leading commodity exchanges in small trading lots, with the objective of availing benefits of futures trading for small and marginal traders, who cannot order large-size contracts. Such contracts, however, failed to attract small and marginal traders due to lack of awareness and other necessary technology equipment.
“We were convinced at the launch of micro and mini contracts that small traders would be able to avail the benefits of future exchanges due to the small trading lot and tick size. But, so far, only large traders have availed the benefit of algo trading in such contracts. Hence, we have suspended algo trading in these counters,” said a senior FMC official.
FMC has informed national level commodity exchanges to avoid algo trading in small and mini contracts from December 1. Algo trading or automated trading is based on a technology-driven pre-programmed mathematical model, which does not require human intervention for a rapid decision on passing orders. Hence, through algo trading, the system executes orders on its own.
Before the common traders come to know about the market development and think of taking positions, the system already executes the trade, thereby benefiting the trader.
FMC has neither allowed nor banned algo trading in commodities, so far. Hence, registering members under algo trading remains the prerogative of commodity exchanges currently. At present, all exchanges offer algo trading in small and mini contracts.
According to Ramesh Abhishek, chairman, FMC, the formal guidelines on algo trading would be ready in the first fortnight of December. The guidelines, however, would also set eligibility criteria for traders to obtain registration under algo trading. Commodity exchanges offer algo trading in almost all micro and mini contracts in both agri and non-agri commodities.