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Understanding the Concept of Online Commodity Trading
The history of trading in commodities and the Commodity market in India is as old as the Indian Civilisation itself. The desire of humans for various forms of commodities developed international trade in India with traders from all over the world would travel to India for trade attracted by its spices, tea, textiles, etc.
The Commodity market in India has undergone numerous stages of transformation throughout the course of history, i.e., from the centuries-old barter trade system to the present day electronic marketplace for commodities. Trade, commerce, and employment flourish whenever any form of institutional support is provided to the market.
For instance, various Agriculture Committees which regulate the market or provide minimum support prices for commodities can lead to the steady growth of within the primary sector.
With the increased development in technology and innovations in the financial sector, the commodities market has witnessed a revolution as well which has wholly transformed commodity trade with traditional commodity marketing practices been replaced with trade processes.
Commodity exchanges are aiding cost effective and economic transactions, improving the efficiency within the value chain, enabling integration of geographically disperse and diverse markets, and introducing advanced transaction practices.
For instance, in an electronic spot commodity exchange, can provide a higher degree of transparency for spot transactions, which can lead to effective pricing, the establishment of quality standards, and the formalization of trade and commerce through an organized market-place.
Electronic Market Place for Commodities
In spite of various challenges including various regulations of the State and the Central Government about the regulation of spot commodities platforms, most of the electronic commodities marketplace has been more interconnected with the financial services industry and the financial markets towards delivering the benefits of financialization of the commodity market.
Commodities need to be standardized as per prevailing market practices, and these standards require the support of an appropriate governing or regulatory body towards certification of quality. The Electronic marketplace can aid in eliminating the multiple standards of involved in the storage and trading of commodities in different regions into a single standard nationwide, which can be set as per best prevailing international standards.
Also, the electronic receipts issued by recognized warehouses under the e-NWRs and the commodity repository mechanism has already established legal recognition for commodities involving agricultural goods, and these receipts can aid in the development of a secondary market for these receipts, which can be offered in lieu of delivery on the spot commodity exchanges.
Also, the Electronic marketplace for commodities offers an enhanced trading experience along with the potential of financing which can further lead to enhance transparency in commodity trading having assured markets, an enhancement inflow of finance into the commodity markets, institutionalisation of various standards related to the production, process, storage and trading of a particular commodity etc.
A large amount of existing commodity such as gold, oil, etc. can be financialised with the aid of electronification and conducting trade on spot exchanges, at this moment unleashing the value of an idle asset besides formalizing the same.
Similarly, extending the WDRA guidelines for warehousing of commodities of non-agriculture in nature can aid in establishment of standards, financialisation of idle or stored metals which can further help to ease the working capital needs of various players within a value chain, and also develop a forward curve, thereby providing a boost to the metal markets and its existing ecosystem.
Catalyst for Change
To bring about such a revolutionary change, developing and deploying supporting technology is essential. The technology needs to ensure a seamless connection between a various institution which includes the banking system, spot trading platforms, repositories, warehouses, etc. while being cost-effective.
Revolutionary technologies such as the blockchain can aid in providing information access, making seamless transactions of recordkeeping of the same, providing an enhancement towards connecting the stakeholders to the trading platforms, at this moment making the process of price discovery information-based and robust.
Advanced technologies in the electronic commodities marketplace also aid in gathering, processing, and distribution of real-time data and information from various sources.
This makes information readily and timely available and the price discovery process more robust. Previously, one of the biggest roadblocks in commodities trading was the lack of adequate and relevant information in a timely fashion, which often made decision making a difficult task.
The electronic marketplace for commodities offers a solution to the said issue of relevant and timely information.
Electronic commodities marketplace also aids to enable a fiscal regime. With the aid of favorable tax policies which incentivize the movement towards electronic commodities marketplace from an unregulated commodities market, can aid the players in the commodity sector to raise finances from financial institutions in a cost-effective manner, which is very difficult in the prevailing unregulated commodity markets.
The GST has already paved the way for an integration of these disjointed market, eliminate the economic borders between states and create a unified single national market.
Along with the linking of electronic commodities marketplace like the e-NAM along with logistics, warehousing, quality test, and control need to be strengthened for ensuring a mass migration from the traditional commodity marketplace to the mass-adoption of the electronic marketplace.