The commodity business run by some brokerages has got a fillip in the past one year as daily commodity turnover on exchanges has risen about 60% over the said period.
?There has been a 20-25% growth in the commodity business of some brokerages in the past year,? said Prasanth Prabhakaran, president ? retail broking, IIFL. Average daily commodity turnover on exchanges has increased to R55,000 crore from about R35,000 crore a year ago.
With the equity markets choppy and most asset classes including real estate performing dismally, diversification into commodities as part of an asset allocation strategy has gained traction with high net worth individuals (HNIs). ?With gold and silver consistently hitting new highs over the past year, a lot of HNI clients have turned to the commodity space,? said Amar Singh, head ? business & research, commodities & currency, Aditya Birla Money. Apart from gold and silver, commodities such as copper and nickel, and agri commodities such as guar seed, mentha and cotton have rallied significantly in the past year.
For brokerages, the commodity business is essentially a volumes game as the margins are low because of stiff competition. However, HNIs typically use high leverage to trade in this market, which makes up for the dismal margins. And while brokerages are still not investing heavily into this space, they are using it to diversify their revenue stream, said Naveen Mathur, Associate Director – Commodities & Currencies, Angel Broking.
Some big players in the commodity space include Religare, Karvy, IIFL and Angel Broking.
Market observers believe trading in commodities gives better arbitrage opportunities than equities. For instance, one can make anywhere between 10-15% by arbitraging in certain commodities on the National Spot Exchange. Equity markets, on the other hand, have been trading in a narrow band in the past few months and opening with a gap-up or gap-down, leaving little room for arbitrage.
Globally, the equity market is one-tenth that of the commodities market. In India, though, the commodities market is at a nascent stage.
The market is yet to be opened up as banks, financial institutions and foreign institutional investors are not allowed to trade and Options trading is prohibited.