Kerosene: Tocom or C-Com

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AFJ Garner
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Kerosene: Tocom or C-Com

Post by AFJ Garner » Tue Nov 18, 2008 1:03 pm

I have been thinking about adding kerosene to my portfolio and was looking at the differences between the contracts at the above two exchanges. The Tocom contract at 50 Kilolitres is five times the size of the C-Com contract at 10 Kilolitres. The latter looked more attractive to me since I want maximum granularity for profit taking purposes. Average daily volume in number of contracts traded is equivalent (although of course this represents 5 times more of the underlying product being traded at Tocom) but the chart for C-Com looks decidedly strange – so many locked limit days apparently, or at least days where there appears to be reasonable volume but little price movement.

Part of the reason appears to be the difference in trading methods at each exchange. C-Com has 6 trading sessions per day for each contract month but operates a session trading or auction method whereby a single price for each month for each session will be determined: the price will be juggled prior to each session until buy and sell orders match.

By contrast Tocom has two trading sessions per day and operates a continuous trading method throughout each trading session: the method we westerners are more familiar with. Hence on most days you get the more familiar pattern of OHLC all at different levels.

I still can not help wondering whether the strange price patterns and abnormally high number of days on C-Com where a single price is set for the entire day may not represent a high element of put throughs but await a reply from the exchange on this point.
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sluggo
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Post by sluggo » Tue Nov 18, 2008 1:40 pm

For what it's worth, somewhere between 100 and 200 global futures markets have earned a "pass" from the (proprietary) liquidity screens I run. CCOM Kerosene failed, TOCOM Kerosene passed - barely. Among those markets that passed, TOCOM Kerosene was eighth from the bottom. The eighth-least-liquid, liquid market :)

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Post by AFJ Garner » Tue Nov 18, 2008 2:08 pm

Out of interest where did Oats, Lumber and Rough Rice rank?

And I wonder if you included some of the more exotic and (perhaps) untouchable futures markets such as China, India and Brazil?

I am assuming that your criteria covers more than simple volume or that at least you make an exception for a market such as (maybe) lumber which seems to add genuine diversification?

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Post by sluggo » Tue Nov 18, 2008 3:16 pm

Rather than delve into the minutae of my own (procedures + data + results), which may well be a piece of a systematic advantage aka "edge", I will instead encourage you and others to develop procedures of your own, and apply them to datasets of your own choosing, generating results that you can trust because they derived from policies and preferences laid down by YOU.

For example, if you decide that you absolutely hate charts that "look like" the CCOM Kerosene chart AFJ shows, then you can figure out a way to measure the undesirable property, and screen out those markets having a lot of it. Maybe if you calculated "Percent of all bars, that have O=H=L=C", you could use this as a gauge. If you discarded those markets which have more than (say) 20% of their bars O=H=L=C, it certainly would toss out CCOM Kerosene. And voila, you've now developed one of your personal screens.

You could develop other screens, looking at things like Volume, Open Interest, and so forth. Anything that YOU think affects "liquidity", however you choose to define it. The folks at Stocks & Commodities magazine have their own kinda loopy way of defining liquidity, which includes margin (!!), "maximum conceivable price movement", and other oddments. Take a look, it may offer inspiration: http://www.traders.com/Documentation/FE ... utLiq.html

S&C only looks at well-known markets. But AFJ points out, there are other lesser-known markets that may offer good liquidity, if only we bothered to look. In my position as a person who trades White Maize in Johannesburg, a very pleasantly liquid futures market on an exchange that the mighty "eSignal" company doesn't even quote, I agree completely. You could get started with Transtrend's list of ~300 markets, and once you've worked your way through that first batch, go scouting for more. Don't forget Dubai and Budapest!

I think an excellent way to implement liquidity screens is within a "system" in Blox. That way you can have variable parameters (How many O=H=L=C bars is too many? 5%? 25%? 75%?), you can turn screens on and off via Selectors, and you can vary the start date & end date of the screening run. { You can find out which markets would have passed your screens back in 1983, right before the Turtles began trading with real money. } You get access to all the lovely built-in functions of Blox (such as, perhaps, correlation), allowing you to use those in your screening if you wish. Blox is a handy and flexible tool, why not take advantage of it if you can?

I do agree, of course, that liquidity and diversification are two different things. If you want to accept an illiquid market because it offers tremendous diversification, please feel free & go ahead; but also please remember that it did in fact "fail" your liquidity tests. If you get big slippage or "unable" (the worst possible slippage), try to remember not to act surprised.

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Post by AFJ Garner » Fri Nov 21, 2008 5:16 am

Yes, it is of course important that each person decides and sets his own criteria for sufficient liquidity. This example is a good one in that it shows that volume alone is not a sufficient measure.

Although each product trades an equivalent number of contracts each day (or at least has done so recently) the Tocom product is 5 times larger than the C-Com product and thus, in terms of the exposure to Kerosene, it could be said that the Tocom product is 5 times more liquid than the C-Com version.

Again, your position size and the width of your stops need to be taken into account. Insufficient liquidity for a trader who trades ½% position size using a 2 ATR stop might be perfectly reasonable volume for the trader who trades on a ½% position size but uses 10 ATR stops.

But overall screening can be misleading in the case of marginal situations and, being a nerd and anorak, I tend to like to dig much deeper before dismissing a candidate.

The chart I set out above is a perfect example of why it often pays to dig deeper. TB would refuse trades on these apparently locked limit days and indeed the prospective speculator may assume that all such days represents EPFs or other types of put through and thus offer no opportunity for the speculator.

Discussions with the exchange at C-Com confirm my initial thoughts on the “Itayose, Single Price Session Tradingâ€

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Post by sluggo » Fri Nov 21, 2008 8:21 am

Sure, use fully mechanical means to do the first pass cull, and human investigation to do the second pass. Make a ranking, draw a provisional cutoff line, then investigate the marginal cases on either side of the line. I found it helpful to call my FCM's "Asia Desk" for example, and say "Hey I'm thinking of trading this CNX Nifty Index contract in Singapore, what do you guys think of it? Do you trade lots of it? Is it liquid? Do customers complain about it? Is it a pain in your ass to trade/clear/give-up/etc? Would YOU trade it with your own money?" Their experiences and opinions can be valuable input, helping you make a better informed decision.

Another potential source of useful "intel" is industry conferences like FIA Expo, MFA Forum, and so forth, where huge cocktail receptions offer the opportunity to chat one-on-one with money managers, ranging from the Emerging to the Behemoth. After a few rounds of appetizers and drinks, these folks are sometimes only too glad to talk about the contracts they trade and why, the contracts they don't trade and why not, and the new contracts they're keeping a sharp eye upon. They won't tell you the exact details of how they trade, but in this sort of setting they often will tell you precisely what they trade, and why. Besides learning about individual markets, you can sometimes get a new idea for a new screen. (Or, discover that you need to quit using one of your current screens!)

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Post by AFJ Garner » Fri Nov 21, 2008 8:36 am

Industry conferences, what an excellent idea. I have become too much of a hermit, a recluse living up a dead end valley in the back end of beyond. My only contact is with cows and marmots and steinbock.

I intend to return to live in London next year for all sorts of reasons and that will certainly encourage me to get out and about a bit more.

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