MCX Negative Price Trading – Trading doesn’t halt even @ Zero
In the month of April, Crude Oil Futures Prices fell to Zero and eventually entered the negative trading zone dipping down to the all-time low of – $ 37.63 per barrel.
Despite the MCX software not permitting Negative Price Trading, it had to settle the crude oil prices at a – ₹ 2,884. Because of which a large number of traders lost their money as they could not close their buy positions.
After the whole incident, the Securities and Exchange Board of India (SEBI) received a lot of complaints from the Traders.
SEBI then instructed the MCX to enable Zero price trading and also accept Negative bid & ask prices. MCX took up the instructions from SEBI and has successfully conducted mock trading sessions on July 11 and July 18 to help the traders and members get familiar with the new changes in the trading software.
Based on the requests of the traders, MCX will conduct one more Mock Trading Session on July 25th. The new software shall go live on 27th July 2020 that will allow Zero and Negative Price Trading for all the commodity contracts.
This software update will bring MCX at par with the Global Exchanges like CME Group (World’s Largest Derivatives Marketplace).
Why futures contracts hit Zero and slip into Negative Trading Zone?
Futures contracts hit Zero and slip into the Negative Trading Zone, mostly when the below factors occur:
- Demand for the underlying asset falls
- Supply exceeds the demand
- Storage space runs out
A similar situation occurred for Crude Oil when all the above factors were met on 20 April 2020. This caused May 2020 Crude Oil futures which were to expire on 21 April 2020 to hit zero and eventually slipped into the negative zone.
The traders holding May 2020 contracts would have to take delivery of the physical oil barrels after 21 April 2020. Usually, traders do not take delivery but roll over the contracts to the next month.
Roll over of contracts means: Let’s say a trader is long on crude oil futures at ₹ 100 with May 2020 Futures. When he wants to roll over, he closes the order before expiry and buys a new crude oil futures contract at the current market price that expires the next or later month.
In this situation, the traders did not have a choice to take the delivery of oil barrels as the storage was running out and they could not roll over the contract as the increase in demand in the future was unprecedented.
Hence the traders who were holding the May 2020 Crude Oil futures sold the contracts by paying the buyers to buy the contracts which eventually led to the dip in prices of futures contracts to Zero gradually entering the negative zone.
Why Change in MCX Trading Software?
The change in software is to meet such unprecedented situations in the future. You can further get a better understanding of the topic by witnessing the Mock Trading on 25th July.