Integration of the spot and futures exchanges is a crucial factor for the growth of commodity futures in India. It is difficult to develop a good derivatives market without adequate spot price discovery.

The role of spot exchanges becomes all the more important in the context of physical settlement of commodities. The spot market in commodities is controlled to a large extent by the state governments. There are restrictions on holding of stocks, turnover and movement of goods and there are variations in the duties levied by the different state governments.

This fragments the commodity spot markets and impedes the Futures markets from reaching the market players outside state boundaries in which the exchanges are located.

Before we come to the role of commodity broking houses in the spot markets, let us analyse who are the players in the commodity markets. Typically in any commodity market we have hedgers, arbitrageurs and speculators. All these three categories are absolutely essential to have a vibrant and thriving commodity derivatives market.

In India, there is lack of professional arbitrageurs in the commodity Futures markets. Lack of well developed spot markets and price discovery mechanism is a major obstacle to arbitraging. The other key constituent is the hedger. Because of illiquidity in many commodities, small and retail level participation has not been attracted to hedging.

Moreover, the concept of hedging will not be totally successful unless a strong spot market exists to facilitate delivery of the commodity.

It is in these two key areas that commodity broking houses will have to focus on. They must provide access to futures contracts as well as the spot markets to the customers by creating supporting infrastructure like requisite technology, back office, client reporting software, and research inputs for enabling customers to take well informed decisions.

Retail clients may not have the necessary infrastructure to indulge in cash and carry arbitrage. Large broking houses that have a well established network will be able to service such clients.

Moreover, broking houses will have to scale up operations to ensure customers who are interested in delivery are able to do so. For this, the broking houses should have a strong presence in spot markets as well.

Ashok Mittal is VP & Country Head, Karvy Comtrade Ltd