India’s financial markets have seen remarkable progress in recent years, yet a critical inefficiency persists—the absence of co-location in the commodity derivatives segment. While the equity derivatives market has leveraged co-location for over a decade to enhance efficiency, price discovery, and liquidity, commodity derivatives remain constrained by regulatory restrictions. This disparity limits their potential and puts commodity traders at a disadvantage.
Regulatory inconsistency: A hurdle to market efficiency
The Securities and Exchange Board of India (SEBI), in its Master Circular for the Commodity Derivatives Segment dated August 4, 2023, explicitly prohibits co-location or any arrangement that provides preferential access. However, a similar setup has been successfully operating in the equity derivatives space for years. This regulatory inconsistency calls for urgent reassessment to foster a fair, efficient, and competitive trading ecosystem.
The power of co-location in market development
Co-location allows market participants to place their trading systems in close physical proximity to an exchange’s servers, ensuring ultra-low latency and faster trade execution. In high frequency markets, even microsecond delays can impact trade outcomes. The equity derivatives segment has leveraged co-location to:
• Improve liquidity
• Reduce bid-ask spreads
• Enhance overall market efficiency
Despite its proven benefits, commodity derivatives remain excluded from this critical infrastructure upgrade. As a result, these markets face slower price discovery, lower participation, and reduced market depth—hindering their ability to serve traders, hedgers, and the broader economy.
Commodity derivatives play a vital role in risk management for sectors such as agriculture, energy, and metals. Efficient price discovery and deep liquidity are crucial for these markets to function optimally. Allowing co-location in the commodity segment would encourage greater participation, improve hedging mechanisms, and strengthen India’s commodity trading ecosystem.
Fairness and regulatory parity
SEBI’s primary objective is to ensure fairness in market access. However, fairness should not mean holding back one segment while enabling another to advance. With the right monitoring and compliance mechanisms, co-location can be introduced in commodities without creating an uneven playing field. In fact, restricting it in commodities while permitting it in equities constitutes a regulatory imbalance.
A well-structured co-location policy for commodity markets would benefit all stakeholders— exchanges, market participants, hedgers, and the broader economy. It would:
• Align India’s financial infrastructure with global best practices
• Enhance market liquidity and depth
• Foster a more efficient, transparent, and competitive commodity derivatives market
Given the proven success of co-location in equity derivatives, it is time for SEBI to reconsider its stance and extend the same benefits to commodity markets. Doing so would unlock efficiency, improve price discovery, and position India’s financial markets for sustained growth.
The author is Member of CDAC, SEBI; Co-Chair, SEBI-ISF; Chairman, SKI Capital
