Monday, Apr 1, 2013, 6:01 IST | Agency: DNA
Vijay Bhambwani
CTT can change trend in volume growth as impact costs rise.
Today will see the advent of turnover tax (0.01% or Rs1,000 for every Rs1 crore of trade initiated) for the first time on all non-agricultural commodities.
Prima facie, the amount may seem negligible for a retail investor as his / her turnover intra-day is not sizable. But for high frequency traders, algo traders and arbitrageurs, the levy would cut into profits because of their modus operandi – which is to initiate trades in large to very large quantities and reverse positions on small profits or losses.
Their profit depends on the economies of large-scale exposure. Typically, the USP (unique selling proposition) of this type of trading is keeping costs down to the barest minimum. Brokers offer such traders deeply discounted rates of brokerage, while statutory charges are the only level playing field.
Ramping up volumes helps brokers too, since they command a higher component of the total exchange traded volumes, which, in turn, has its own perks.
For the markets and participants alike, there are tangible benefits as well – higher volumes invariably bring efficient price discovery mechanisms and wafer-thin impact costs.
Impact cost is one of the first things large players look for before deploying funds. It’s extremely critical as it is the difference in price between the best seller (or buyer) at a particular price point and the next best seller (or buyer).
If the impact cost is efficient, there will be ample buyers and sellers at every tick, thereby making large-sized trades an easy and inexpensive proposition. The market is then said to “have depth.”
On the other hand, if buyers (or sellers) are few and far between, accumulating large positions becomes a very expensive and undesirable exercise. It hits the take-home profit significantly.
Big players usually avoid markets with high impact costs. The commendable growth in the turnover of Indian commodity exchanges has been partly due to their cost efficiencies and partly due to the novelty factor.
With the imposition of the CTT, the cost efficiency may just take a hit as high frequency traders will face a hurdle in terms of a hit in their take home profits.
There is also another aspect to the timing of imposition of the CTT: in a trending market (bull or bear), price moves are relatively large and the percentage returns on a trade are higher compared with a non trending (sideways) market.
A trader can tweak the exit price to factor in such additional costs as the CTT.
Unfortunately, the CTT has been imposed in a market where price moves are constrained due to global fears and the markets are more unrelenting in yielding profits to the high frequency traders.
Now behavioural finance principles say markets tend to come to terms with shocks over a period of time, and the CTT will be no exception. However, the future rate of growth in turnover will be a worrying point.
There is also the factor of the parallel market trading system (called ‘dabba’ trading) wherein trades are routed through illegal and off-the-books and therefore non-exchange platforms. The parallel trading system is one of the most persistent one anywhere in the world, especially in Tier II and Tier III cities in India.
There are legitimate fears that the parallel systems may just get a boost from the imposition of the CTT, since such levies are unheard of in the illegal betting system.
If empirical evidence is anything to go by, we have seen the Nifty trading volumes shift to the Singapore markets (SGX) due to a more friendly margining system and pliable trading hours.
The revenue loss to the exchequer cannot be wished away. More importantly, the prospect of loss of future business – the most critical aspect close to the heart of any capitalist endeavour.
With the future of commodity market turnover being closely linked to the permission to institutions, NRIs and FIIs (Indian commodity exchanges are currently fairly closed trading markets), the CTT may prove to be a stumbling block since price discovery mechanism and impact cost analysis may lose efficiency.
As mentioned earlier, large players will want very high degree of efficiency in terms of impact costs before they deploy money in our commodity markets.
Bhambwani is the author of ‘A Traders Guide to Indian Commodity Markets’ – India’s first commodity trading guide and invites feedback on vijay@bsplindia.com
Free life time commodity Tips
http://www.dnaindia.com/money/1817666/report-the-math-gets-skewed-for-large-commodity-traders
Prima facie, the amount may seem negligible for a retail investor as his / her turnover intra-day is not sizable. But for high frequency traders, algo traders and arbitrageurs, the levy would cut into profits because of their modus operandi – which is to initiate trades in large to very large quantities and reverse positions on small profits or losses.
Their profit depends on the economies of large-scale exposure. Typically, the USP (unique selling proposition) of this type of trading is keeping costs down to the barest minimum. Brokers offer such traders deeply discounted rates of brokerage, while statutory charges are the only level playing field.
Ramping up volumes helps brokers too, since they command a higher component of the total exchange traded volumes, which, in turn, has its own perks.
For the markets and participants alike, there are tangible benefits as well – higher volumes invariably bring efficient price discovery mechanisms and wafer-thin impact costs.
Impact cost is one of the first things large players look for before deploying funds. It’s extremely critical as it is the difference in price between the best seller (or buyer) at a particular price point and the next best seller (or buyer).
If the impact cost is efficient, there will be ample buyers and sellers at every tick, thereby making large-sized trades an easy and inexpensive proposition. The market is then said to “have depth.”
On the other hand, if buyers (or sellers) are few and far between, accumulating large positions becomes a very expensive and undesirable exercise. It hits the take-home profit significantly.
Big players usually avoid markets with high impact costs. The commendable growth in the turnover of Indian commodity exchanges has been partly due to their cost efficiencies and partly due to the novelty factor.
With the imposition of the CTT, the cost efficiency may just take a hit as high frequency traders will face a hurdle in terms of a hit in their take home profits.
There is also another aspect to the timing of imposition of the CTT: in a trending market (bull or bear), price moves are relatively large and the percentage returns on a trade are higher compared with a non trending (sideways) market.
A trader can tweak the exit price to factor in such additional costs as the CTT.
Unfortunately, the CTT has been imposed in a market where price moves are constrained due to global fears and the markets are more unrelenting in yielding profits to the high frequency traders.
Now behavioural finance principles say markets tend to come to terms with shocks over a period of time, and the CTT will be no exception. However, the future rate of growth in turnover will be a worrying point.
There is also the factor of the parallel market trading system (called ‘dabba’ trading) wherein trades are routed through illegal and off-the-books and therefore non-exchange platforms. The parallel trading system is one of the most persistent one anywhere in the world, especially in Tier II and Tier III cities in India.
There are legitimate fears that the parallel systems may just get a boost from the imposition of the CTT, since such levies are unheard of in the illegal betting system.
If empirical evidence is anything to go by, we have seen the Nifty trading volumes shift to the Singapore markets (SGX) due to a more friendly margining system and pliable trading hours.
The revenue loss to the exchequer cannot be wished away. More importantly, the prospect of loss of future business – the most critical aspect close to the heart of any capitalist endeavour.
With the future of commodity market turnover being closely linked to the permission to institutions, NRIs and FIIs (Indian commodity exchanges are currently fairly closed trading markets), the CTT may prove to be a stumbling block since price discovery mechanism and impact cost analysis may lose efficiency.
As mentioned earlier, large players will want very high degree of efficiency in terms of impact costs before they deploy money in our commodity markets.
Bhambwani is the author of ‘A Traders Guide to Indian Commodity Markets’ – India’s first commodity trading guide and invites feedback on vijay@bsplindia.com
Free life time commodity Tips
http://www.dnaindia.com/money/1817666/report-the-math-gets-skewed-for-large-commodity-traders
No comments:
Post a Comment