National Spot Exchange ltd (NSEl) has been the talk of the town ever since it announced to stop trading of its commodity products. The company has fifteen days to pay a sum of Rs 5,500 crore to the brokers in order to settle the delivery and payouts of its contracts and avoid going default.
As the entire issue unfolds, all the available data is pointing out to just one thing that behind this commodity trading, there was a lot of pair trading happening without the physical stock actually changing hands.
Many examples were revealed after The Pioneer carefully examined the ‘bhav-copies’ of individual commodities for the entire month of July. One of the most traded commodities on NSEl is paddy. The contracts of paddy with NSEl include -PP1121KH1, which basically is required to be settled on ‘Trade +1’ (T+1) basis which means that the deliveries and payout are required to be completed within one day of the trade. And another paddy contract PP1121KH34 needs to be settled in 34 days.
Now on July 26, the T+1 contract of paddy, saw a trade of 1,39,600 bags at a price of Rs 3,046.48 per bag and very conveniently the exact same quantity was again traded on the very same day in the T+34 contract, which closed at Rs 3,071.7 per bag. So basically, traders were using a simple pair trading strategy, which enabled them to bet on paddy without actually holding the physical quantity still making money through the price differential.
The similar case was seen with cotton, which has two contracts on NSEl. CTBlEGNT2 contract is of T+2 nature while the other one, CTBlEGNT25 is of T+25. Traders on July 31, traded 850 bales on the T+2 contract at the price of Rs 17,464 per bale and simultaneous selling the quantity bought on the T+25 contract at the price of Rs 17,590 per bale.
The same strategy is seen many more commodities like castor seed, chana, chilly, castor oil, cotton oil and paddy. So basically, there were a few players, who were using the National Spot Exchange for pair trading and enjoying profits they made due to the price difference without actually made to hold the physical stock against it.