A Study on Perception of Indian Brokers about Commodity Derivatives

This study, authored by Ruchi Gupta and published in the Journal of Technology Management for Growing Economies, explores the perceptions of Indian brokers about commodity derivatives. The study is based on a survey conducted among brokers who are active participants in the derivative segment of the Multi Commodity Exchange (MCX). The study found that high net worth individuals and proprietary trading contribute to a significant proportion of trading volume in commodity futures. Interestingly, retail investors also have a strong representation in the commodity derivative market, despite the complexity of the market and the relatively high initial investment required. The survey results support the need for some important policy changes for the derivative market. For instance, there is a need to bring in more institutional participation by removing the ban on trading activities of Foreign Institutional Investors (FII) and investment banks in the Indian commodity market. This could help bring more liquidity and best practices to the commodity derivative market. The survey also revealed that derivative securities have penetrated the Indian capital market and investors are using these securities for different purposes, namely, profit enhancement, speculation, hedging, and arbitrage. The survey findings support the need to initiate option trading in the commodity segment, which may prove to be a useful medium for enhancing retail participation. The survey results show that price discovery and hedging effectiveness functions are well performed by all commodity futures except energy commodities futures. Being the most volatile commodity, it is perceived as less effective in the hedging function. Brokers agree on the high to moderate impact of open interest, volume, and time to maturity on the volatility of the commodity futures derivatives. The study concludes that the utility of derivative securities needs to be signaled to every corner of the market. The regulator, Forward Markets Commission (FMC), and the commodity exchanges need to take due cognizance of this fact and initiate policy measures to improve the functioning of the market. The study has some limitations, including the fact that the respondents of the survey were from the Delhi-NCR region, and the sample size was limited to 95 brokers.