CFD pricing and the XJO/SPI

Punta · 1 December 2011

Hi all, please forgive yet another inane question.

I am working on a strategy based on intraday changes in the XJO/SPI index that backtests well as far as the index changes themselves are concerned. Now how monetize it??!

I figure the way to try and implement this would be through SPI CFDs (I am with IB and they offer DMA SPI CFDs). [For some reason the strategy doesn't work as well with STW, so I don't want to go that route.]

I don't get the pricing of the CFD. I would think the bid/ask would straddle the index. If you think the index will fall, you sell at the bid, which is slightly below the index, assuming that you can buy back when the ask falls even lower than this later on.

However, the bid and ask are often on the same side of the index (both IB's and the native index). Does this mean that some of the future index movement is already factored in to the CFD price? So predicting the intraday index movement is not sufficient for a profitable CFD strategy??

If so, the question still remains as to why the index would lag the current market price? Has the CFD market taken a general direction before the SPI futures market?

I could sort this out myself if historical data were available for the CFD prices, to compare with the SPI index, but IB does not provide this.

Any enlightenment is massively appreciated...

skyQuake · 1 December 2011

Re: CDF pricing re. the underlying

Punta said:
Hi all, please forgive yet another inane question.

I am working on a strategy based on intraday changes in the XJO/SPI index that backtests well as far as the index changes themselves are concerned. Now how monetize it??!

I figure the way to try and implement this would be through SPI CFDs (I am with IB and they offer DMA SPI CFDs). [For some reason the strategy doesn't work as well with STW, so I don't want to go that route.]

I don't get the pricing of the CFD. I would think the bid/ask would straddle the index. If you think the index will fall, you sell at the bid, which is slightly below the index, assuming that you can buy back when the ask falls even lower than this later on.

However, the bid and ask are often on the same side of the index (both IB's and the native index). Does this mean that some of the future index movement is already factored in to the CFD price? So predicting the intraday index movement is not sufficient for a profitable CFD strategy??

If so, the question still remains as to why the index would lag the current market price? Has the CFD market taken a general direction before the SPI futures market?

I could sort this out myself if historical data were available for the CFD prices, to compare with the SPI index, but IB does not provide this.

Any enlightenment is massively appreciated...

Which provider are you with?

nomore4s · 1 December 2011

Re: CDF pricing re. the underlying

Are you with IB - Interactive brokers or IG - IG Markets?

Punta · 1 December 2011

Re: CFD pricing re: the underlying

Punta said:
I am with IB

I'm with IB.

I've backtested my strategy against their "calculated" SPI index, and it looks worth pursuing. Frustratingly, IB do not provide historical SPI CFD prices, so it's impossible to properly backtest.

In forward testing, the difference between the index and the CFD value is throwing me for a loop...

??

skc · 1 December 2011

Re: CFD pricing re: the underlying

Punta said:
I'm with IB.

I've backtested my strategy against their "calculated" SPI index, and it looks worth pursuing. Frustratingly, IB do not provide historical SPI CFD prices, so it's impossible to properly backtest.

In forward testing, the difference between the index and the CFD value is throwing me for a loop...

??

You sound a bit confused (at least with regards to the terminology). What is the SPI CFD you refer to?

IB's SPI is the SPI, i.e. the real futures market.

Where are you getting your "XJO" price from?

Punta · 2 December 2011

Re: CFD pricing re: the underlying

skc said:
You sound a bit confused (at least with regards to the terminology). What is the SPI CFD you refer to?

IB's SPI is the SPI, i.e. the real futures market.

Where are you getting your "XJO" price from?

I am confused!

On IB there is 1) the SPI index, which is calculated by IB and can't be traded; 2) SPI CFD; 3) SPI futures; and 4) SPI futures options.

I am thinking that what IB call the "SPI index" is their version of the XJO? The historical values of the two indexes (SPI from IB and XJO from EODdata) match fairly well.

I thought that the SPI CFD was a CFD on the index price (IB's SPI index, not the XJO proper).

http://www.interactivebrokers.com/en/trading/exchanges.php?exch=snfe

But in that case I'd expect the bid/ask to straddle the index values.

Clearly I'm confused.

elbee · 2 December 2011

IB's "SPI index" (or AP index) is the ASX S&P200, or XJO.

The SPI CFD is the ASX listed CFD over the XJO. It is an ASX product and therefore does not have the third party risk of CFDs from many other providers but it does have poor liquidity.

The SPI itself is the futures contact over the XJO index.

All these TLAs (3 letter acronyms) might seem confusing but you really do need to do your research and understand exactly what the product is you are trading.

skc · 2 December 2011

Very confusing indeed. Not sure why IB calls XJO the "SPI"...

So your question really is why IQ (the ASX traded CFDs) doesn't trade in the same numerical value as the IB SPI (or XJO)?

The answer is IQ is a CFD and they can make it whatever numerical value it want. Any discrepency between that value and the XJO/IB SPI does not mean one is leading the other or pre-empting a move. By way of example, IG markets (a OTC CFD provider) is quoting the Australia 200 @ 4227/4228 which is closer to the numerical value of the IB SPI. CMC markets (another OTC CFD) might quote a different number under their proprietry Aussie200 product. But by and large these prices move tick by tick together with the SPI (the real SPI, i.e. Futures, i.e. APZ1 in IB).

The ASX CFD has a 2-3 point spread and isn't really great for intraday, short term scalping. It also barely trades so you see a last price of 4237 now while the bid-ask is 4228/4231.

Punta · 2 December 2011

elbee said:
IB's "SPI index" (or AP index) is the ASX S&P200, or XJO.

The SPI CFD is the ASX listed CFD over the XJO. It is an ASX product and therefore does not have the third party risk of CFDs from many other providers but it does have poor liquidity.

The SPI itself is the futures contact over the XJO index.

All these TLAs (3 letter acronyms) might seem confusing but you really do need to do your research and understand exactly what the product is you are trading.

Thanks for the reply - that is how I had it in my head, but was confused over the fact that

1) The "SPI index" on IB does not exactly match the XJO - they are close, but not the same. IB describes it's SPI index as "calculated", not "native" to the ASX. I guess, as mentioned in other threads, this calculated index is preferable over the native index because IB can "calculate" it outside of XJO trading hours.

2) The CFD prices don't straddle the index - but SKC's reply goes a long way to explaining this...

Punta · 2 December 2011

skc said:
Very confusing indeed. Not sure why IB calls XJO the "SPI"...

So your question really is why IQ (the ASX traded CFDs) doesn't trade in the same numerical value as the IB SPI (or XJO)?

The answer is IQ is a CFD and they can make it whatever numerical value it want. Any discrepency between that value and the XJO/IB SPI does not mean one is leading the other or pre-empting a move. By way of example, IG markets (a OTC CFD provider) is quoting the Australia 200 @ 4227/4228 which is closer to the numerical value of the IB SPI. CMC markets (another OTC CFD) might quote a different number under their proprietry Aussie200 product. But by and large these prices move tick by tick together with the SPI (the real SPI, i.e. Futures, i.e. APZ1 in IB).

Thanks SKC, that goes a long way to alleviating some confusion.

skc said:
The ASX CFD has a 2-3 point spread and isn't really great for intraday, short term scalping. It also barely trades so you see a last price of 4237 now while the bid-ask is 4228/4231.

The spread doesn't seem like the worst thing in the world - similar in percentage terms as e.g. a 2c spread on BHP. The liquidity seems like a real problem though - obviously there's no scalping to be had if you can't enter/exit on your triggers.

So a better way to day trade the XJO is

1) Use STW, although others here have said this has liquidity issues, and e.g. today it's only traded 50k contracts in the first hour.

2) Go with an OTC CFD provider, with the associated hazard that the provider is really rooting for you to loose...

nomore4s · 2 December 2011

Punta said:
The spread doesn't seem like the worst thing in the world - similar in percentage terms as e.g. a 2c spread on BHP. The liquidity seems like a real problem though - obviously there's no scalping to be had if you can't enter/exit on your triggers.

So a better way to day trade the XJO is

1) Use STW, although others here have said this has liquidity issues, and e.g. today it's only traded 50k contracts in the first hour.

2) Go with an OTC CFD provider, with the associated hazard that the provider is really rooting for you to loose...

3) Trade the AP futures contract with IB. EG - December contract APZ1

I'm not sure what you are trying to achieve but the best instrument to trade is the SPI futures contract, but you then need to make sure that your testing relates to these contracts.

API futures are really the only decent option you have, cheaper then CFD's (no spread - only $5 each way per contract @ $25 per point), no problem with liquidity and no market maker hi-jinxes. But you really need to get your head around how and what you are trading.

Aussie market not the best market to scalp imo but it is do-able.

skc · 2 December 2011

Punta said:
Thanks SKC, that goes a long way to alleviating some confusion.

The spread doesn't seem like the worst thing in the world - similar in percentage terms as e.g. a 2c spread on BHP. The liquidity seems like a real problem though - obviously there's no scalping to be had if you can't enter/exit on your triggers.

IQ doesn't have poor liquidity - it has poor trading volume due to a lack of interest.
I think ASX employs market makers to provide liquidity and unless you plan to do massive volumes you "should" get your fill at bid/ask without too much problems.

But as nomore4 said, if you are doing anything more than $25/tick, you are better off just trading the real APZ1. You can get real data for that as well from various vendors.

OTC CFDs may be evil with counter part risks etc but it can be made profitable if you know what you are doing.

Punta · 2 December 2011

nomore4s said:
3) Trade the AP futures contract with IB. EG - December contract APZ1

I'm not sure what you are trying to achieve but the best instrument to trade is the SPI futures contract, but you then need to make sure that your testing relates to these contracts.

API futures are really the only decent option you have, cheaper then CFD's (no spread - only $5 each way per contract @ $25 per point), no problem with liquidity and no market maker hi-jinxes. But you really need to get your head around how and what you are trading.

Aussie market not the best market to scalp imo but it is do-able.

Thanks yeah haven't really looked into this yet.

Basically I'm just looking for a product that rises/falls with the XJO on an intraday time frame. I doubt the future will have a tight enough correlation with the "spot" index for my strategy to make money, but will look into it...

skc · 2 December 2011

Punta said:
Thanks yeah haven't really looked into this yet.

Basically I'm just looking for a product that rises/falls with the XJO on an intraday time frame. I doubt the future will have a tight enough correlation with the "spot" index for my strategy to make money, but will look into it...

Why does your strategy only work with cash XJO?

I remember reading somewhere that the XJO calculations are at 15-30sec intervals. Not sure if that informs your strategy or not.

nomore4s · 2 December 2011

Punta said:
Thanks yeah haven't really looked into this yet.

Basically I'm just looking for a product that rises/falls with the XJO on an intraday time frame. I doubt the future will have a tight enough correlation with the "spot" index for my strategy to make money, but will look into it...

Mate the SPI futures contract is exactly what you want. CFD providers contracts are just market maker versions of this.

Punta · 2 December 2011

skc said:
Why does your strategy only work with cash XJO?

I remember reading somewhere that the XJO calculations are at 15-30sec intervals. Not sure if that informs your strategy or not.

My analysis just does a decent-ish job of picking daily XJO changes (open to close), before the market opens, and I'm trying to figure out if there's a product that will let me profit from that.

I would have thought that if there is a CFD that perfectly tracks the XJO (regardless of an arbitrary offset you mentioned above), this would be the product to go with, assuming the strategy successfully picks days where the index change is larger than the spread.

Punta · 2 December 2011

nomore4s said:
Mate the SPI futures contract is exactly what you want. CFD providers contracts are just market maker versions of this.

Yeah thanks I'm looking into that now. My initial thought is that the futures price would low-pass filter some of the index changes, and so might not fully reflect intraday changes.

E.g. the futures price for one year from now wouldn't be expected to go up/down with daily fluctuations in the spot price of the underlying. The closer to expiry the future contract is, the less low-pass filtering could be expected, but I would have thought there'd always be some degree of filtering.

I'll check it out. Obviously, new to all this...

elbee · 2 December 2011

Punta,

The XJO does not have anything like the large gap in price between the close of one day's trading and the start of the next day that individual stocks or the SPI can have.

The XJO does not have a true opening price because the opening of the individual stocks that make it up are staggered.

In addition because it is not directly tradeable the market dynamics that effect the volatility of a traded security are missing.

It may therefore perform well in backtesting when a tradeable security fails.

skc · 2 December 2011

Punta said:
My analysis just does a decent-ish job of picking daily XJO changes (open to close), before the market opens, and I'm trying to figure out if there's a product that will let me profit from that.

You are aware the XJO open price is meaningless due to the staggered open on the ASX...

Punta · 2 December 2011

skc said:
You are aware the XJO open price is meaningless due to the staggered open on the ASX...

Yeah I'm aware of that. That's why I also backtested against IB's calculated "SPI index", thinking (hoping) that the CFD would be fixed relative to that.

I still need to understand how a CFD can trade when it's underlying is undefined, if the price of the CFD itself is supposed to be locked to the underlying.

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