Commodity Trading System

The commodity trading system functions on a real time basis through online means. Farmers, exporters, importers, and traders are the main participants in this market. This article will help the reader to gain overall knowledge on the topic.

The commodity trading system operates through online channels. Trading takes place on a real time basis and is either routed through satellite communication system or the internet.
Commodity Trading System – Order Matching Mechanism
Traders place their order through a registered commodity broker of a commodity exchange.

The trader’s order is entered by the authorized dealer into the online terminal.
The order finds its match automatically through the online channel.
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 and opposite order matches it.
When two similar and opposite orders (that is, one buy and one 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 funds in non-delivery cases

Commodity Trading System – Clearing and Settlement
Clearing and settlement of commodities in the commodity trading system commences only after the end of trading hours on the expiration date of the contract. Processing of delivery matching considers the following:
Location of the order
Available warehouse capacity
Total quantity of commodities that have already been 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 (gains or losses) are cash settled.
Commodity delivery takes place through the following steps:
The concerned buyer asks its depository participant to deliver the commodity.
The 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 delivery of the concerned commodity to the designated buyer (only after thorough identification check).
The commodity trading system is a self-testing system which functions through a standardized exchange. Possibility of default by the participating players is minimized through proper monitoring of the market, strong surveillance systems and implementation of strong risk management procedures. The commodity trading system helps the farmers, exporters/importers, and traders construct their future strategies by giving proper price signals of commodities.

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Last Updated on : 27th June 2013

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