Accuracy of the Live Open Interest data

The Live Open Interest (OI) data being provided by exchanges is a matter of debate as the open interest streamed by the exchanges at 3.29 pm to the end of data released at 4.30 pm has a huge variance (sometimes over 40%). One wonders if it make sense to track the live OI and use it as part of the trading strategy.

Yes, the live open interest (OI) data streamed by exchanges is correct, but I don’t think it is a smart move to use the intraday OI data as part of the trading strategy. This is because of how institutional trades are settled.

Institutional clients use trading members to execute their orders and use the services of a clearing member (CM) to clear and settle the trades. So it means Broker executes the order and the Clearing member of the client has to confirm the order to take the order into their books. This confirmation is based on the instructions given by the client to the CM. If the CM rejects the order, the broker takes the responsibility to settle the trade. The time given for this confirmation process is till 1615 hrs post which the positions actually crystallize.

Assume I am a hedge fund X using Y for Clearing and broker Z for trading. All the hedge fund’s positions / funds are now managed by Y. Every morning Y sends Z a position and funds file for this hedge fund which is then updated on the trading platform. All trades that are executed intraday are held in the name of trading member Z and the Clearing Member Y accepts such trades. It’s an understanding b/w the client and the CM as when the positions / new trades should be accepted, either intra day or EOD.

Here is what can happen to the OI because of this. Assume X has 1000 lots of Nifty from the previous day. During the day it sold these 1000 lots using trading member Z. Assume that X has instructed CM to accept trades at end of the day. At this point, the hedge fund X has 1000 lots long with CM and 1000 lots short with the trading member when technically his open position should have been 0. After the market closing, the CM accepts the trade sent by trading member, and hence making the open position 0 for the hedge fund. But until the CM has accepted this trade, as you might have guessed, an inflated number for OI would be showing up. This is also the reason OI at 3.29 pm could hugely vary compared to the end of day OI on bhav copy given by the exchange.These can be accentuated during the expiry week when rolling over positions.

If you are using intraday OI data as part of your strategy, you should be cognizant of the fact that such institutional trades could change the OI number at the end of the day. So best to use only end of day OI data.

The original question was posted here.

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