Rolling on Open Interest

[AFJ Garner]

I had hitherto made an assumption about how a systems assist broker handles rolls on Open Interest.

I had assumed that when a broker rolled, he waited for a signal from CSI and looked at CSI UA to see which contract he should roll into. Certainly, the Order Generation facility of TB will follow CSI - it will tell you to roll as CSI does. And importantly that is the method you will have used for backtesting. Trade what you test.

I suspect that some brokers may do something different: I suspect that if some brokers have it in mind that a contract is to be traded HMUZ (or whatever) they will go through H then M then U then Z regardless of how the data rolls in CSI/TB.

Even using "standard" CSI active months, when you look at the output of a CSI UA file which is set to roll on "open interest", you often find that a month or even many months are skipped.

By sharp contrast, even though the "active months " may be HMUZ for a particular contract, when rolling on OI, CSI will often skip from M straight to Z or from Z straight to M or even U.

Where CSI rolls on OI using non-standard months, the discrepancy becomes even greater. HMUZ are not the active standard months for the energies for instance - every calendar month is active. If you construct a contract in CSI UA using HMUZ for Crude and roll on OI alone, you will find the current contract is December 2007.

If a broker methodically rolls through the months rather than look at what CSI comes up with on the basis of where the OI is, this will cause very strange distortions. Your signals, stops and order generation will be based on one data set while you are in fact trading a very different set of contracts. Not a happy situation.

That is certainly one advantage of rolling on fixed dates - that way both the broker and CSI will roll methodically through the chosen months rather than skip any.

I’m not venturing any opinion on whether it is better to roll on OI, OI and V or fixed dates. That we can all decide for ourselves through backtesting. I am just wondering what most brokers do in practice where the client has chosen to roll on the basis of OI.

Because clearly you can’t have signals and stops based on rolling into certain months and then have your broker taking different contract months than those indicated by your software.

Comments? Thoughts?

[RedRock]

Broker shmoker

(as my parents constantly told me...) If you want a job done right... You have to do it yourself. Roll up those sleves, pick up a laptop with cellular wireless anywhere internet, and stop worrying about your broker making your life a living hell. (or something like that)

[walker]

Some brokers that autotrade the "Aberration" system, do the following

1. Use CSI's "Roll On Open Interest" feature to build continuous contracts
2. Trade the month (and year) contract that CSI has selected
3. Wait for CSI to roll over
4. For illustration purposes, assume CSI rolls over into November06 HairTonic, on Tuesday's close
5. Broker notices that CSI has in fact rolled over, into Nov06 HairTonic
6. Broker rolls over customer's position on Wednesday, the next day (i.e. "late")
7. Broker rolls into whatever contract CSI has rolled into
8. Broker warns Aberration customer in advance, that's what he is going to do (the "no surprises" principle of customer service)
9. The fact that Aberration is a longer term system, smooths out any little hiccups that occur around rollover days

[AFJ Garner]

Walker's way is what I assumed would be done. Walker's way is the way I tested and I was indeed aware that every roll would therefore be done one day "late". I absolutley agree with Walker.

The difference is probably one of analyst and broker. An analyst spends many hours working with the software and testing. He will be aware that OI will not roll smoothly from "active month" to "active month". He will assume it "right" to roll into whatever contract month CSI tells him to roll into. This is what he has based his testing on. This is the way his signals and stops will be generated. He will asume that this is also the way his broker thinks.

It is impossible at the outset to discuss every little point with the broker. Some points, like this one, you won't even think to discuss. To you its obvious. The broker can't be blamed if to him it is not obvious.

Hmm, thanks for the thoughts Walker and Red Rock.