Brokers Urge Sebi to Harmonize Market-Making Rules Across Equity and Commodity Segments
Top brokers in India are pushing the capital markets regulator to align market-making regulations between equity and commodity derivatives. This move could potentially disrupt the near-monopoly held by the Multi Commodity Exchange (MCX) in the country's commodity derivatives market.
The Association of National Exchanges Members of India (ANMI) made this request to the Securities and Exchange Board of India (Sebi) through a formal communication on Friday. ANMI's national president, K. Suresh, emphasized the need to extend equity-style market-making incentives to the commodity derivatives segment (CDS).
What is Market-Making and How Does It Work?
Market-making allows exchanges to incentivize large brokers or financial firms, in compliance with Sebi regulations, to provide competitive buy and sell quotes. This practice attracts more traders to the market, thereby increasing liquidity and competition while reducing the dominance of any single exchange.
Currently, exchanges can offer market-making—formally known as a liquidity enhancement scheme (LES)—to launch or revive equity cash segments, even for stocks that are already liquid on other major exchanges. However, they cannot offer LES in commodity contracts that are liquid on another existing bourse, unless that exchange also provides LES on the same contract.
This regulatory gap means that while exchanges like NSE or BSE can offer LES in liquid stocks, they cannot do so for energy or metals derivative contracts that are liquid on MCX, unless MCX itself runs LES on those commodity contracts.
The Current Market Landscape
Data for FY26 through November shows that total CDS turnover in India's commodity derivatives market stood at ₹95.58 trillion. In comparison, the equity cash market recorded a turnover of ₹180.73 trillion during the same period.
MCX currently commands 99% of the CDS market share, while NCDEX, NSE, and BSE collectively account for the remaining 1%. In the equities cash segment, NSE dominates with a 92.99% market share, followed by BSE at 7%, and MSEI at a negligible level.
Recent Developments and Industry Perspectives
The Metropolitan Stock Exchange of India (MSEI) recently announced its intention to introduce market-making for 130 stocks, including major companies like HDFC Bank, Reliance Industries, and Infosys. This move aims to drive liquidity in its equities segment up to 30 June.
K. Suresh of ANMI praised Sebi's rule facilitating MSEI's market-making initiative, stating that it recognizes liquidity as essential for any exchange's survival and growth. He argued that in a unified exchange licence framework—where brokers can offer both commodities and equities trading under a single entity—it is only fair to extend equity-style LES to CDS to foster genuine competition and promote dual-venue markets.
ANMI's membership includes prominent brokers such as Zerodha, Groww, ICICI Securities, Motilal Oswal Financial Services, and Angel One, who trade on exchanges like NSE, BSE, and MCX.
Potential Impact and Expert Opinions
If Sebi agrees to the proposal, exchanges like NSE and BSE could incentivize brokers to offer market-making in CDS, even for contracts already liquid on MCX. This would create additional liquidity in these contracts and attract more traders.
Rajesh Palviya, head of derivatives and technical research at Axis Securities, explained the potential benefits. He noted that if market-making is permitted in CDS, market participants could choose exchanges offering the tightest bid-ask spreads, reducing their impact cost and optimizing returns. This could either help another player gain market share from the incumbent or grow the overall market pie for the benefit of all constituents.
The bid-ask spread determines the cost for clients executing trades on specific stocks or commodity contracts. Tighter spreads make it easier for clients to enter and exit positions, while wider spreads reduce liquidity.
Regulatory Context and Historical Background
The unified licence framework became effective in 2017 following the merger of the Forward Markets Commission with Sebi in September 2015. This merger occurred after a payment crisis hit the commodity spot exchange NSEL in July 2013. Before this integration, brokers offering equities and equity derivatives had to create separate subsidiaries for commodity derivatives trading.
Sebi chairman Tuhin Kanta Pandey recently mentioned at an event that a regulatory panel would work on deepening the non-farm based commodity derivatives segment to increase institutional participation.
To protect market integrity in CDS, Suresh suggested that caps and time limits could be imposed for market-making. Outcomes should be measured not just by volume growth but also through focus on bid-ask spreads and market depth.
Market Reactions and Stock Performance
MCX stock surged to a fresh record high of ₹2,499 per share on Friday before paring gains to close up 1% at ₹2,446. Meanwhile, BSE fell 1% to ₹2,808.7. Both MCX and BSE are listed capital market entities.
Queries sent to Sebi regarding this proposal remained unanswered at the time of reporting.
