Abstract:
Commodity Trading System functions on a real time basis through online route. Farmers, exporters, importers and traders are the main participants of this market. This article would help the reader to gain overall knowledge on the topic.
Introduction
Commodity Trading System operates through the online channel. Trading takes place on a real time basis and is either routed through satellite communication system or internet.
Commodity Trading System - Order Matching Mechanism
Traders place their order through a registered commodity broker of a commodity exchange.
Order of the trader is punched by the authorized dealer into the online terminal.
- This order then finds its match automatically through the online route.
- If it doesn't find a match at that very moment then it gets stored in the online order book until and unless a similar ands opposite order matches it.
- When two similar and opposite order (that is, one buy and the other sell order) match, then a trade is said to be complete.
Commodity Trading System - Trade Clearing Mechanism
In a commodity market, trade clearing takes place through a registered clearing house of an exchange. Clearing house helps the system to function smoothly and properly by guaranteeing: -
- timely settlement
- registration of a trade and its consequent follow up
- delivery of the commodity to the concerned buyer and simultaneous payment to the seller
- settlement of fund in non-delivery cases
Commodity Trading System - Clearing and Settlement
Clearing and settlement of commodities in commodity trading system commences only after the end of trading hours on the expiry date of the contract. Process of delivery matching considers the following: -
- Location of the order
- Available warehouse capacity
- Total quantity of commodities that are already deposited and given to dematerialize.
After the completion of the delivery matching process, the following steps are followed:-
- Information on the final outcome of the matching process (amount of commodities to be delivered or received and amount of unmatched position) is given to the clearing members of the exchange.
- Unmatched positions (either gain or loss) are cash settled.
- Commodity delivery takes place through the following steps: -
- The concerned buyer asks its depository participant to give delivery of the commodity
- Depository participant, in turn, forwards this request to the designated depository.
- Depository forwards this message to the registrar and then to the transfer agent.
- Transfer agent, in turn, verifies authenticity of the request.
- In case of genuine request, transfer agent passes on the details of delivery to the warehouse.
- Warehouse then arranges for the concerned commodity for delivering it to the designated buyer (only after thorough identification check).
Conclusion
Commodity Trading System is a self-proof system which functions through a standardized exchange. Possibility of default by the participating players is minimized through proper monitoring of the market, strong surveillance system and implementation of strong risk management procedures. Commodity Trading System helps the farmers, exporters/importers and traders to construct their future strategies by giving proper price signals of the commodities.