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After streamlining algorithmic trading through strict guidelines, the Forward Markets Commission (FMC) is planning to allow market making in commodities futures trade. At the Annual Global Investor Conference organised by Kotak Institutional Equities here today, FMC Chairman Ramesh Abhishek said, "We would allow market making in coming months to widen the scope for trading."
Market makers usually offer two-way quotes - for buying and selling. This gives traders the opportunity to square off in case sellers are active in a particular contract and book afresh if buyers are ruling the trade. Market makers are indirectly funded by individual exchanges to generate volumes in certain segments.
In June 2011, the Securities and Exchange Board of India had allowed market making to facilitate exchanges to generate volumes in illiquid securities. In the same month, a committee headed by the then FMC member D S Kolamkar had recommended allowing market makers in two types of contracts - in existing contracts that were not liquid on any exchange platform, as well as a new set that was yet to be launched.
Meanwhile, new exchanges have urged FMC to allow market making in all contracts - liquid and illiquid - to help secure a level playing field for fresh entrants. A senior executive of an exchange said the regulator should not debar new exchanges, as Sebi had done. He added Sebi hadn't distinguished between new and old securities and exchanges.
In developed markets such as the US, market makers have predominantly generated huge volumes in active contracts on the COMEX, Nasdaq and the Chicago Mercantile Exchange. This model was also followed by the London Metal Exchange and the Shanghai Futures Exchange. To generate volumes, contracts on these platforms are predominantly dominated by market makers.
Currently, Indian exchanges follow a market-driven system, in which share prices are determined by sentiment. On a commodity exchange, however, the quote-driven system is prevalent. Here, traders only provide a one-way quote - for the buy' or sell' sides.
Usually, about half a dozen active and powerful traders are identified as market makers.
While FMC had suspended automated execution logic, popularly known as algorithmic trading, from micro and mini contracts effective January 1, it had allowed this trading to be used in major commodities. Effective April 1, commodity exchanges would be able to process only 20 orders a second from a client (user ID), irrespective of the size of orders. This means even if the order size exceeds 1,000, the system would execute only 20 orders a second.
Abhishek said all these efforts were meant to widen participation in the commodity futures market.