Is the live open interest(OI) data being provided by exchanges correct?

General
1

Everyday 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%).

Am I missing something? Does it make sense to track the live OI and use it as part of trading strategy?

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2

Yes, the live open interest (OI) data streamed by exchanges is correct, but I donā€™t think it is a smart move to use the intraday OI data as part of your trading strategy. This is because of how institutional trades are settled.

Below is the reason why

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 fundā€™s positions/funds is 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. Itā€™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 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.

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3

I have been looking for this answer since a long timeā€¦

Thanks

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4

By ā€˜Institutional Clientsā€™, do you mean ā€˜Domestic Institutionsā€™ or ??
They come under which category of Market Participant ? under FIIs or Client or PRO ? becoz. FIIs/PRO must be using their own Trading accounts ?! @Nithin

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All institutional business (almost all domestic and all FII) happens through custodians/clearing members. Yes they use their own trading accounts, but all positions and everything else is managed by custodians/clearing members.

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To get the correct data. Can I take take the OI data from the option chain after 4.30??

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Yep, best to rely for the end of day OI that exchanges declare along with the bhavcopy

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Hey Nithin , I am day trader in bank nifty , so what should i follow Open Interest or Change in Open Interest to take my positions in this case?

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In MCX, institutional activity is extremely less. Many entities (from mutual funds to FIIā€™s) are not allowed to trade commodities F&O.

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Mrudul, like I said, if you are looking at intraday OI data or % OI change data, the data you are seeing could still be different than the actual OI or actual % change of OI

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thanx Nithin

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Does this apply to the options OI data as well??.. Is the options OI data visible in the options chain vulnerable to these adjustments???

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HI
You have to Take both the things into considering while intranet trader

14

Thanks for the great explanation.

15

Thanks a lot sir for such a nice explanation. I have some doubts.
When and why will the Hedge fund rejects the trade?
Whether the rejection occurs frequently or rarely?
Whether hedge funds do this intentionally to inflate OI numbers and trap retailers who go short?
Thanks in advance

16

Nitin, Donā€™t you feel it is ridiculous to let some one to trade/close the position after the market hours. Isnā€™t there a possibility of manipulation? By doing so they let the institutions to have an advantageous position compared to common public.

I wish to proceed legally against Sebi and other exchanges. I would like to take your inputs.

Thanks,

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It is not trading after 3.30, it is just exact OI number update will come after 4. There wonā€™t be any change in volume.

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Now, rules updated a little bit. Sebi allows foreign entities in commodity derivatives market.
With an aim to deepen the commodity derivatives market, regulator SEBI Tuesday (Oct 09, 2018) allowed trading in the segment by foreign entities with exposure to the Indian physical commodity market.
SEBI said it has ā€œdecided to permit foreign entities having actual exposure to Indian commodity markets to participate in the commodity derivative segment of recognized stock exchanges for hedging their exposureā€.
Such foreign entities will be known as Eligible Foreign Entities (EFEs).

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does that mean we will now have good volume in Commodity as well ?

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can we also do like this ? OR this privilege is only restricted to the institutions only ?

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