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Making electronic trading of commodities a reality in Ethiopia

September 06, 2016

Damte Tariku trades coffee at the Ethiopia Commodities Exchange
Damte Tariku trades coffee at the Ethiopia Commodities Exchange.

Damte Tariku has been trading coffee at the Ethiopia Commodities Exchange since 2012. He works for S. Sara Coffee Export Enterprise, a family-ran business, which exports more than 40 containers of coffee each month to Asia, Europe and America. Although S. Sara owns four coffee farms, it still needs to buy coffee from other suppliers to supplement its export volumes.

Damte buys coffee through the Ethiopia Commodities Exchange (ECX). Coffee, along with sesame and white pea beans, is a major foreign currency earner for Ethiopia and the Government has mandated that all buying and selling of these commodities must be done through the EXC.

Prior to July 2015, Damte and his fellow 1,000 traders had to do their buying and selling on the ECX trading floor or pit. The pit uses an open outcry system where traders cry out their prices and when a buyer’s and seller’s price match, they touch their hands in a high-five gesture to indicate acceptance of the price offered. “In the pit you need to be very loud to be heard and for your bid to get picked,” said Damte. “The noise is stressful and makes it difficult to focus.”

The trading capacity of the pit is extremely limited. Only 50 traders can use the pit at a time. There are currently six different commodities being traded with some having several sub-types, and grades. This meant that only a limited number of trading sessions could be done per day which limited the number of commodities that could be traded at the Exchange.

Overcrowding in the old ECX trading pit made trading difficult.
Overcrowding in the old ECX trading pit made trading difficult..

All this is changing, thanks to the establishment of an electronic trading platform which allows traders to buy and sell commodities electronically, removing many of the limitations of the open outcry system. Funded by the Government of Ethiopia and ICF, the platform is part of efforts to modernize the ECX in order to expand its services and provide stakeholders with better access to commodity trading in Ethiopia.

The introduction of electronic trading has increased ECX’s capacity to process trade transactions by 4,000 times. A newly established eTrading Centre with 80 computers is already enabling traders to sell and buy all local coffee and two sub-types of export coffee through the platform. With this increased capacity, not only can ECX migrate all the six commodities currently being traded in the pit to electronic trading, but it can introduce new commodities, creating greater benefits to farmers. ECX is already working on establishing seven remote trading centres across the country which will be connected to the electronic trading platform and bring farmers closer to their ‘market’.

The new platform provides the ability for Ethiopia to move to true online trading where sellers and buyers can trade commodities from their own premises. It also lays the foundation for futures trading which will provide not only traders but also farmers with greater efficiency, better price discovery and greater control on their planning.

At the moment though, traders are simply enjoying the improved trading environment that is brought by the new platform as it increases opportunities for better price discovery for both sellers and buyers. “In the pit you have to be strong to high-five each other as a lot of people push,” said Mohamed Nurhussein, a trader who buys and sells sesame, white pea beans and coffee at ECX. “Sometimes it is difficult to know who high-fived you first and you have to check the camera to see who you have traded with. At times the noise is so much that people do not hear the time-out bell and they get disqualified.” In comparison, trading in the eTrading Centre is done in absolute quiet. The lack of noise enables traders to focus on what they are doing. They can see on the system how many buyers and sellers there are for a particular commodity and what the bidding prices are. They can out bid if they want or can ask for a lower price.

The new Trading Centres offers traders a comfortable and quiet environment in which to trade
The new Trading Centres offers traders a comfortable and quiet environment in which to trade

Electronic trading is helping different ECX stakeholders to save time. In the open outcry system, only one commodity sub-type (e.g. unwashed local coffee) or grade can be traded in a single session which lasts 15 minutes, after which traders have to sit around waiting for ECX staff to determine the success or failure of each bid during that session. To trade the six different grades of the two coffees that Ethiopia exports, traders have to sit through 12 trading sessions. With the new system, different sub-types and grades of the same commodity can be traded within the same session, so now only two sessions are needed to trade the two types of coffee that Ethiopia exports. Trade transactions are processed by the system within seconds. This translates to a considerable time savings for the traders.

Damte is very happy with the new electronic trading platform. “It is very time effective,” he said. “You can spend 3 minutes to do a trade and leave. In the pit, you have to stay from the beginning to the end of the session. You could end up spending the whole day there if you have a lot of transactions to do.”

A trader selling coffee on the new electronic trading platform
A trader selling coffee on the new electronic trading platform

The electronic trading platform has helped ECX to increase transparency, improve surveillance of trade transactions and reduce trading fraud. When trading in the pit, traders engage face to face and it is easy for them to collude and fix prices. ECX surveillance staff have to be extra diligent to monitor the gestures of each participant in the pit. The electronic system, however, hides the identity of the traders and only displays the buying and selling prices. “In the pit, people could agree prices beforehand,” said Mohamed Nurhussein. “The platform brings greater transparency and reduces opportunities for collusion.” Data for all trade transactions are stored in the system, greatly increasing transparency and making it easier for surveillance staff to monitor trade activities.

The new trading platform has also made it easier for the ECX Authority to perform its duty of monitoring and regulating the activities of the ECX and its members. The Authority has been linked to the electronic platform, allowing its staff to monitor trade transactions from their own offices. This has eliminated the need to physically be present at ECX when trading takes place. “The platform brings greater transparency to the trading process,” said Endris Negus, the former Director of Exchange Actors Oversight Division at the ECX Authority. “This increases the efficiency of trading, thereby increasing trust in the system.” Additionally, ECX Authority staff have benefited from capacity building from the London Stock Exchange as well as exposure to Exchanges in different parts of the world to learn how others monitor electronic trading systems.

“The electronic platform provides clearer information,” said Hamid Hussein, an ECX founding-member and owner of a brokerage firm that trades commodities at EXC on behalf of its 250 clients. “You can see the demand and supply of a particular commodity. You can see who has bought what. Buyers know how much money they have at any particular moment as the system is linked to 11 banks. This means sellers do not come up short when buyers bid more money than they actually have. Traders are more confident now.” With the increased trading capacity at ECX, Hamid is expecting his business to grow as more clients seek his services.

Ermias Eshetu, EXC CEO, explains the potential of the electronic trading platform and what it means to the Ethiopian economy.
Ermias Eshetu, EXC CEO, explains the potential of the electronic trading platform and what it means to the Ethiopian economy.

According to Ermias Eshetu, CEO of EXC, the introduction of electronic trading will have an unprecedented impact on Ethiopia’s farmers. Currently, commodities from about 3.3 million farmers are sold at the ECX. The 4,000 fold increase in ECX’s trading capacity has suddenly made it possible for ECX to trade a lot more commodities.

“For many years we have been looking for a solution to address market access to Ethiopia’s 80 million farmers,” Ermias Eshetu said. “This platform provides that solution. Currently brokers have to come to the Trading Centre to trade but the system allows mobile application so eventually farmers will be able to trade their commodities through mobile phones.”  The electronic platform has been created by local Ethiopian programmers, making it easier for ECX to modify it as needed. “Eventually, electronic trading will move beyond agriculture to equity markets and so on,” he added.

Other African countries have been looking at ECX and using it as a benchmark for modernization. Countries like Ghana, Malawi, Mozambique, Tanzania and Zimbabwe have either expressed interest or been to ECX to learn how to establish and regulate an electronic commodity trading system.

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