Market Structure of Commodity Exchanges & Brokerage Houses

In our previous articles we had covered various important aspects on commodity trading, price discovery of agricultural commodities, understanding the commodity basis, spot and futures markets and so on. Now let us briefly discuss few important concepts of commodity exchanges, online trading, apart from the essentials of online trading and its advantages. 

A national multi-commodity exchange is an electronic, online, demutualised exchange providing accessibility to buyers and sellers across the country to trade in various commodities. In a financial services industry like the commodities there are futures exchanges and broking houses or investment service providing organizations. These organizations can be divided further into few major departments like the front office, back office and sometimes a mid-office.  

A mid-office is generally involved in back office related activities, specially linked with the risk management. Front office normally carries out marketing functions while back office has to undertake different activities such as transaction processing, trade or payment confirmations, payment settlement, accounting etc. A typical structure of an financial services institution is given below:  

The front office is the immediate link with the market and co-ordinates or handles all sorts of client requirements. This department also takes care of sales, trading and research services. The back office on the other hand carries out functions such as settlements, clearances, record maintenance, regulatory compliance and accounting. Wherever involvement of mid-office department is essential, duties pertaining to risk management, compliance, financial control and corporate strategies are carried out by this department. The brokerage market was valued at INR 135.0 billion in FY 2016. In FY 2020, it reached INR 210 billion from INR 195 billion in FY 2019, expanding at an annual growth rate close to 7.69%. The financial brokers offer financial advice to the firm or the individual. India's broking industry is transitioning from a transaction-based to a fee-based model, offering services such as investment advisory and wealth management.  

Online Trading/E-Trading 

Online Trading is by and large an internet based investment activity and does not requirement much involvement of a broker. For a person to start online trading essential requirement will be a computer, margin money for trading and some financial or trading background. Online trading in commodities has been popularity since past few years because of the convenience provided by these trading platforms. Trading commodities online is beneficial in facilitating instant trading without engaging a commodity broker to place the orders.   

There are many online trading companies who are members of stock exchanges like the National stock exchange, the Bombay Stock Exchange, and commodity exchanges like NCDEX and MCX. The person who wants to trade is required to get into an agreement with the company to trade in different kinds of securities after acceptance of the terms and conditions. The companies provide all types of technical support for enhancing online trade participation. Trading charts, commodity news, and technical analysis programs are provided on a regular basis by the research/advisory desk of a particular broking firm.  

The online trading portals are beneficial for the trader in checking live online stock prices hence they need to access relevant details from mails or phone. These portals are connected to the stock exchanges and the assigned banks. The online trading companies have platforms which facilitate the traders or investors to trade in diversified products like equities, mutual funds, life insurance, loans, share trading, commodities trading, institutional trading, general insurance and financial planning. Electronic trading has been found to affect areas like bid-ask spreads, transaction costs and speed of information dissemination. As gauged through trade contacts it can be concluded one can observe better performance on parameters like liquidity, trading costs and price efficiency, if the shift towards online trading continues and this would also be advantageous for increase in participation in futures trading as well as improve the overall efficiency of the commodity markets. Faster information dissemination due to easier access to the markets will be other benefit of using online trading.   

Mobile Trading & Its Advantages

Mobile trading is also a part of online trading and has gained importance in the recent years. The usage of sage of mobile for trading in stock as well as commodity markets has been swiftly gaining recognition following the growing participation of retail, as well as institutional clients. The shift from desktop computers and other trading terminals to mobile trading applications have been largely driven by the ease of placing orders. Another advantage is that the mobile trading applications facilitate live market data including stock indices, shares, currencies, commodities, derivatives, etc. One can easily acquire a brief idea about the performance of the portfolio and the underlying assets and the existing portfolio can be reviewed on the mobile itself in no time. It becomes so convenient to trade through mobile applications as one can execute the orders even during traveling, sitting in a hotel etc.  

Mobile trading applications do have the notification and alerts facility which works independently from the SMS alerts sent by the exchanges, brokerages and custodians. The notification facility keeps a user updated with the latest developments in the portfolio and recommendations given by the brokerages. The mobile trading applications also provide quick and easy access to the research reports which are generated by the respective brokerage houses or firms. In fact several mobile trading applications with premium charges also provide the facilities of historical stock prices, indices data and analytical tools on the mobile trading applications. Last but not the least, the trade participants of commodity futures such as FPO’s, individual farmers and processors are now able to place their hedges much comfortably, thanks to the shift towards electronic trading.