Heckyl Alpha Pulse

Revolution in Commodities Trading Begins with Heckyl Platform

Posted on October 10, 2016 Updated on November 17, 2016

Commodities trading in India has a very rich history. In fact the first organized futures market that was set up in India was for a commodity – Bombay Cotton Trade Association. Since then, trading in commodities has always been the preserve of big traders, commodity powerhouses and institutional investors.

The advent of electronic trading in commodities in India in December 2003 has opened the field for more participation into the markets. However, the commodities segment in India still lags the equities segment in terms of adoption of technology for building advanced and informative trading platforms. Most of the prevalent commodities trading platforms in India still offer only basic features such as buying – selling, watchlist and charts.

Additionally, commodities markets are global in nature. Events and happenings across the world impact prices of commodities in the local Indian markets. In addition, movements in currencies and equities can also cause fluctuation in commodity prices. Failure to track global trends leads to serious risk for commodity traders. Furthermore, all this information is not available in a single place.

Understanding these needs, Heckyl has launched next generation commodity trading platform. Our feature rich advanced commodities trading platform not only provides better understanding about dynamics of commodity market, but also helps in spotting opportunities quickly.

Let us explore some of new features that we offer in our commodity trading platform.

RELATED INSTRUMENTS:
India is a price taker in the global commodity market. Hence, it is important for a trader to track updates on related instruments and other key factors, which can affect price of a particular commodity. Our related instruments screen provides updates on both related instruments and other key factors (See image 1 below). Each related instrument was selected after thorough analysis of its relevance to a particular commodity.

In case of MCX Gold, it is important to keep a track of how prices of gold and silver are behaving in the international markets. At the same time, it is necessary to keep a watch on movement of other commodities, currencies and equities for measuring overall mood for different asset classes and understand its implication for price of gold. While in case of agri-commodities, arrival of new stock in the market town and mandi prices are key drivers to watch out for. Similarly, this screen displays updates on all relevant instruments for other commodities.

Related Instruments Screen for MCX Gold
[Image 1]

CORRELATION:
Correlation is a statistical measure. It helps in understanding how assets move in relation to each other. It is measured on a scale of -1 to +1. A reading of +1 signals perfect positive correlation, whereas a reading of -1 indicates perfect negative correlation. At times when relationships between two assets breaks down, correlation could act as a warning signal or a trading opportunity. Hence, keeping a track of correlation is crucial for timing the trade.

MCX Gold – Comex Gold Correlation

[Image 2]

As India is a price taker for most of the commodities, domestic prices are highly correlated with international market. For instance, MCX Gold has almost perfect correlation with Comex Gold (See image 2 above). Hence, it becomes necessary to monitor correlation between domestic and international prices.

In our platform, one can not only compare correlation within commodities, but also with other asset classes such as currencies and equities (See image 3).

MCX Gold – Cross Asset Correlation

[Image 3]

Our correlation matrix screen helps in identifying the best correlation combination that one can monitor on a regular basis for a particular commodity. At the same time, one can also spot a commodity where correlation with existing asset classes in one’s portfolio is low for the purpose of diversification (See image 4).

MCX Gold – Cross Asset Correlation Matrix

[Image 4]

SEASONALITY AND CYCLICAL TRENDS:
Commodities are driven by demand and supply, which provides a basis for determining price directions. As commodities don’t have to deal with subjective issues like financial performance, management quality etc., they move with their respective business cycles. Commodities are broadly classified into agricultural commodities, metals and energy, but even within these broad classifications, each commodity can exhibit its own trend.

For instance, NCDEX Wheat contract prices remained weak during the period of February to April (See image 5). Harvest season for wheat starts in April, which last till May. Small quantities of new wheat stock starts flowing into market as early as February. Later, new wheat stock arrival in the market increased substantially and hits peak level in April. Similarly, we found that MCX Cotton contract prices dropped every year during the period of September to November.

New stock arrival during harvest season and its impact on NCDEX Wheat Contract prices
[Image 5]

Impact of new stock arrival during harvest season on agri-commodity prices is logical and known. By analysing commodities on our seasonality screen, one can also unearth certain hidden pattern. For instance, we found that prices of MCX Copper, Aluminium and Zinc fell every year during October in the last 5-years, while Lead and Nickel prices for October declined on four out of five occasions in the past 5-years (See image 6).

Seasonality Grid for MCX Copper

[Image 6]

CALENDAR SPREADS:
This screen can help traders to spot opportunities by analyzing spreads between two futures contracts. Generally, difference between spread for one contract should be in line with another contract. If spread for one contract is not in line with another contract, then such cases offer opportunity to trade.

For instance, MCX Silver Mini calendar spreads screen for September 13 highlighted trading opportunity. Spread for Nov’16 – Feb’17 was Rs 978 on September 13, implying that February 2017 expiry contract was priced Rs 978 higher than the November 2016 expiry contract. On the contrary, spread for Feb’17 – Apr’17 stood at Rs 403, which was less than half of Nov’16 – Feb’17 spread (See image 7 and 8).

Ideally in such cases, spread for Feb’17 – Apr’17 should move up in subsequent sessions to match the level of Nov’16 – Feb’17 spread. In this case, buying MCX Silver Mini April 2017 futures contract and selling February 2017 contract was suggested on expectations of increase in spread for Feb’17 – Apr’17 subsequently. As anticipated, Feb’17 – Apr’17 spread rose to Rs 652 on September 14 providing opportunity to exit the trade profitably. A trader can spot plenty of such opportunities on a daily basis by tracking our calendar spread screen.

MCX Silver Mini Calendar Spread on 13-Sep-2016

[Image 7]

MCX Silver Mini Calendar Spread on 14-Sep-2016

[Image 8]

NEWS:
Commodities prices react to a large number of factors, which could be related to current or expected future demand, supply, transportation in/efficiencies, or a combination of all of them and more. Given the global nature of commodities trade, events and news from across the globe contribute to the dynamics of these factors – even seemingly unrelated events have a huge impact on commodity prices. Heckyl captures information from thousands of publicly available sources, which feeds into the system where Heckyl’s proprietary in-house developed News and Sentiment Analysis engine. This engine separates out noise from available information and then accurately computes a sentiment score for companies, commodities, and currencies – in real time to give you the edge.

THE BOTTOM-LINE:
Presenting limited features is no longer sufficient to help traders navigate the world of commodities as we are moving into a time of smart analysis and actionable data. At the same time, interpretation and presentation of the underlying data for better understanding about market dynamics is crucial for both brokers and their clients. By educating the end users in how to be a better trader, brokers can develop and grow their own business.