Dabba trading in stocks and commodities seizes up - 10 Nov 2016

Commodity Intraday Tips

Dabba trading in commodities and equities has come to a standstill after the government withdrew Rs 500 and Rs 1,000 currency notes from the system. This illegal market channel was thriving on black (unaccounted) money and trades were getting settled at official market rates, but there were no tax payments involved. Only some computer printouts were used for maintaining records of positions and outstanding.

Now, part of this unofficial trade, which was estimated to be two-three times the size of official trade, is expected to shift to official platforms. Samir Shah, managing director and chief executive of National Commodity and  Derivatives Exchange, said: “The strike on black money will help organised markets, while dabba trading will be affected. It will encourage NCDEX to bring dabba trading to the official platform. Volatility might be there for the short term because dabba has been destabilised.”

On Multi Commodity Exchange (MCX) and NCDEX, some volatility was because dabba traders, who hedge their excess positions on official platforms, were squared off late night and in initial morning trade.

Even big dabba traders are not sure how to collect and make payments when positions are settled this Friday, the usual weekly settlement day. Their system was to collect outstanding or mark-to-market differences for carried-forward positions every Monday and make payment every Thursday followed by settlement on Friday.

In equities, two types of dabba trading were happening. Pure dabba was done throughout the day taking rates from exchanges and later giving their own quotes based on expected movements of the next day. The other kind of trade was done during market hours, where trades were made at the rates at which deals were happening on official platforms. On the official platform, even one share or one lot is traded at a particular time; in dabba, that trade becomes the benchmark at that moment for any number of lots. However, when position increases beyond what a trader can take on himself, he hedges that on the official platform. “Such official platform positions were squared off in the morning on BSE-NSE today (Wednesday) and commodity dabba did so yesterday (Tuesday) night,” said one dabba broker. Part of the market volatility in equities and commodities can be attributed to such squaring-off.

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