Monday, June 30, 2014

The Other Side Of A Futures Trade

In a futures trade, there is a buyer for every seller, or vice versa. If buyers and sellers are matched, then what is this issue about open interest ? Yes, buyers and sellers match, but the important factor to know for price discovery is which side is initiating the trade.

           In recent weeks it was the buy side: Funds buying. The longs and shorts matched, but the impetus for the trades was buying. Thus, prices rise. At other times, if the impetus is from heavy selling, the sellers initiate the trade.
         
          Open Interest (OI) is then related to the price of the security. if OI went up while the price went down, it is assumed that fresh trades were initiated by the sellers. If OI went up when prices went up too, fresh trades were initiated by buyers.

           Further to this, when prices are coming down with fall in OI, its mean buyers have booked profit and when prices are going up with fall in OI, its mean sellers cut there short position.

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