Market structure of commodity exchanges and brokerage houses


Vegetable market

In our previous articles, we had covered various important aspects about commodity trading, discovering agricultural commodity prices, understanding commodity base, spot and futures markets, etc. Now, let’s briefly discuss some important concepts of commodity exchanges, online trading apart from the basics of online trading and its benefits.

A national multi-commodity exchange is an electronic, online, demutualized exchange that allows buyers and sellers across the country to trade a variety of commodities. In a financial services industry like commodities, there are futures exchanges and brokerage houses or organizations providing investment services. These organizations can be divided into a few major departments like front office, back office and sometimes a mid-office.

A mid-office is generally involved in activities related to the back office, in particular related to risk management. The front office normally performs marketing functions while the back office has to undertake different activities such as transaction processing, transaction or payment confirmations, payment settlement, accounting, etc. A typical structure of a financial services institution is shown below:

The front office is the immediate link with the market and coordinates or processes all kinds of customer requests. This department also deals with sales, trading and research services. The back office, on the other hand, performs functions such as settlements, audits, record keeping, regulatory compliance and accounting. Wherever the involvement of the mid-office department is essential, tasks relating 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 fiscal year 2016. In fiscal year 2020, it reached INR 210 billion against INR 195 billion in fiscal year 2019, with a rate of annual growth close to 7.69%. Financial brokers provide financial advice to the business or individual. India’s brokerage industry is shifting from a transaction-based model to a fee-based model, offering services such as investment advice and wealth management.

E-commerce / E-commerce

Online trading is generally an internet based investment activity and does not require much involvement from a broker. In order for a person to start trading online, the essential requirements will be a computer, margin money for trading, and financial or trading knowledge. Online commodity trading has been popular for some years now due to the convenience offered by these trading platforms. Online commodity trading is beneficial in facilitating instant trading without hiring a commodity broker to place orders.

There are many online trading companies that are members of exchanges like the National Stock Exchange, Bombay Stock Exchange, and commodity exchanges like NCDEX and MCX. The person who wishes to trade is required to enter into an agreement with the company to trade different types of securities after accepting the terms and conditions. Companies provide all types of technical support to improve online business participation. Trading charts, commodity news and technical analysis programs are provided on a regular basis by the research / advisory office of a particular brokerage firm.

Online trading portals are beneficial for the trader in checking live online stock prices, so they need to access the relevant details by mail or phone. These portals are connected to the affected stock exchanges and banks. Online trading companies have platforms that allow traders or investors to trade diversified commodities such as stocks, mutual funds, life insurance, loans, stock trading, trading. commodity trading, institutional trading, general insurance and financial planning. E-commerce has been found to affect areas such as bid-ask spreads, transaction costs, and the speed of information dissemination. As assessed by business contacts, it can be concluded that one can observe better performance on parameters such as liquidity, trading costs and price efficiency, if the transition to e-commerce continues and that this would also be beneficial for increasing participation in futures trading as well as improving the overall efficiency of commodity markets. Faster dissemination of information due to easier access to markets will be another benefit of using e-commerce.

Mobile trading and its advantages

Mobile trading is also part of online trading and has grown in importance in recent years. The use of sage of mobile for trading in equities as well as in the commodities markets has quickly gained recognition following the increasing participation of retail clients, as well as institutional clients. The move from desktops and other trading terminals to mobile trading applications has been driven largely by the ease of placing orders. Another plus is that mobile trading apps facilitate live market data including stock indices, stocks, currencies, commodities, derivatives, etc. One can easily gain a brief idea of ​​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 apps as one can execute orders even while traveling, sitting in a hotel, etc.

Mobile trading apps have the notification and alerts feature which works independently from SMS alerts sent by stock exchanges, brokerage houses and custodians. The notification function keeps the user up to date with the latest portfolio developments and recommendations given by brokerage houses. Mobile trading apps also provide quick and easy access to research reports generated by the respective brokerage houses or companies. In fact, several mobile trading apps with additional fees also provide functionality of stock price history, index data and analytical tools on mobile trading apps. Last but not the least, participants in commodity futures trading such as FPOs, individual farmers and processors are now able to place their hedges very comfortably, thanks to the move to e-commerce.

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