The Securities and Exchange Board of India (Sebi) is in the final stages of discussions to allow co-location services in the commodities market, a move that will give traders access to exchange infrastructure and enable swift deployment of sophisticated trading strategies, three people aware of the development told Mint. A rollout is likely in the first half of 2027, they said.
With the greenlight for co-location, market participants can place their computer servers and other IT equipment in the specialized data centres of the stock exchanges or their service providers, which will facilitate swifter trading outcomes, with every millisecond making a difference.
“Foreign portfolio investors (FPIs) want co-location so that they can participate in the Indian markets in an aggressive manner. This is being discussed at every CDAC (commodity derivatives advisory committee) meeting,” said one of the three people, who spoke on the condition of anonymity.
For financial market participants, proximity to an exchange’s trading infrastructure can reduce the time taken for orders to reach the market. The facility is particularly important for sophisticated trading strategies where speed and technological infrastructure are critical.
Under existing Sebi rules, co-location is not permitted in the commodities segment. The proposed change would bring the segment closer to the equity market, where the exchanges offer such facilities. Co-location was allowed for equities over two decades ago.
“Co-location services would not only help domestic traders but also FPIs, who want to expand their operations in the country and take more sophisticated bets in the Indian markets. There is no reason for the commodities market to not be allowed co-location,” said the second person, also requesting anonymity.
Queries sent to Sebi on 26 August remained unanswered until press time.
A faster market
The development comes amid the market regulator's moves to widen FPI participation in India’s commodity derivatives market.
Currently, FPIs are allowed to trade only in non-agricultural commodity derivatives that are cash-settled, including contracts for crude oil and natural gas. Sebi opened this segment to foreign investors in June 2022. Bullion, base metals and agricultural derivatives, however, are compulsorily deliverable upon expiry.
In a consultation paper issued on 11 August, Sebi proposed further easing FPI participation in exchange-traded commodity derivatives. The regulator suggested allowing FPIs to trade in non-agricultural index derivatives, as such contracts are always cash-settled, irrespective of the nature of their underlying commodities.
Sebi also recommended allowing FPIs to trade in physically settled non-agricultural commodity derivatives. Under the proposal, FPIs would have to square off or roll over their positions before the beginning of the tender or staggered delivery period, which starts three days before contract expiry.
If they fail to do so voluntarily, their open positions would be automatically transferred to a designated trading member or trading-cum-clearing member onto their proprietary account.
Taken together, the proposed expansion of FPI access and possible introduction of co-location would mark a broader opening of India’s commodity derivatives market to institutional participation.
“For traders, that means faster execution, tighter bid-ask spreads, and more accurate reflection of real-time information in prices. It could also draw more high-frequency and institutional players into commodities, deepening liquidity the way it did for equities,” said Gaurav Arora, head of research at SAHI, a stockbroking and financial technology platform.
Non-farm push
The timing of the rollout will, however, depend on Sebi’s regulatory process and its assessment of individual commodity segments, said a third person in the know.
Sebi may initially restrict co-location to non-agricultural commodities, given that the agricultural commodities market remains relatively shallow, said the first official. Several agricultural commodities have been categorized as “shallow”, and the market may not yet be ready for colocation for such trades, this person added. Shallow commodities refers to farm goods commodity contracts with low trading volumes and relatively poor liquidity.
India’s commodity trading is dominated by the Multi Commodity Exchange of India Ltd (MCX). MCX recorded total futures turnover of ₹13 trillion in June, while options premium turnover was ₹2.05 trillion, with a total of 361.8 million contracts.
However, access to co-location facilities in commodities does not come without risk.
“Faster access could give an edge to big players with advanced technology, while smaller traders, hedgers, and many more who are a big part of commodity markets, could be left behind. There's also a manipulation risk in commodities where actual delivery is involved,” said Arora of SAHI.