Earlier research has indicated a negative relationship between transaction cost and trading volume and a positive one between transaction cost and volatility
Neha Malik & Saon Ray
The commodity futures market was mainly set up to serve the functions of price discovery and risk management. The main participants in this market are the hedgers, speculators and arbitrageurs. The value of trade in Indian commodity markets has risen by more than 30 times in the period between 2004-05 and 2011-12 with MCX and NCDEX comprising of the highest percentage of the total value. Bullion (comprising gold, silver and platinum) and other metals have dominated the market in terms of the percentage of value of total trade, accounting for 72% of value of total trade in 2011-12 as against 31% in 2004-05. The other major groups traded are agriculture and energy.
A commodity transaction tax (CTT) of 0.017% on sale and purchase of a commodity derivative contract (futures in case of India) was proposed by the government of India (GoI) in the 2008-09 budget with a view to mobilise additional revenue and check speculation. It had been felt that the market had been dominated by speculators who were responsible for causing inflation in some commodities. The proposed CTT, however, was not notified and subsequently withdrawn in the following budget. Though most countries, including India, have introduced the Securities Transaction Tax (STT), the only country to impose CTT till date is Taiwan. Apart from this, Brazil also imposed a uniform tax of 2% in 2010 on all exchange traded instruments traded in foreign currency. The tax, however, was rolled back in the next year.
The impact of CTT, if it is reintroduced has to be seen in terms of likely quantity and price effect of CTT along with its impact on speculation. It is possible that CTT will lead to a decline in the overall volume of trade by way of an increase in transaction cost for market participants. The decline might also happen due to migration of volumes to other international exchanges, which involve futures trading in the same grade of the underlying