# 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...


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## 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??!
> 
> ...




Which provider are you with?


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## nomore4s (1 December 2011)

*Re: CDF pricing re. the underlying*

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


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## 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...

??


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## 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.
> 
> ...




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?


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## 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.


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## 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.


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## 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.


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## 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.
> 
> ...




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...


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## 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...


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## 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
> 
> ...




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.


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## 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.


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## 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.
> 
> ...




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...


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## 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.


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## 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.


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## 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.


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## 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...


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## 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.


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## 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...


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## 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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## Punta (2 December 2011)

elbee said:


> 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.





Yeah I think I get most of this - the price jumps in XJO that are associated with up/down gaps in the individual stocks that make up the index, will be spread over the staggered open



elbee said:


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




Yeah for sure, just exploring the possibilities here...


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## elbee (2 December 2011)

Punta said:


> 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.




As skc pointed out before the CFD price won't necessarily reflect the underlying. Certainly not in the case of an index which is not itself tradeable.


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## Punta (2 December 2011)

elbee said:


> As skc pointed out before the CFD price won't necessarily reflect the underlying. Certainly not in the case of an index which is not itself tradeable.




Ah right, I'm a slow learner!

So the CFD is a contract for the difference in the futures price, which is always well defined, and not for the difference in the index itself.

To test how well the futures price matches the index, it would make sense to put together a time series of whichever future contract was nearest to expiry, and plot that against the XJO?  

I have just pulled a few months of data for the SPI future that expires in Dec 2011, and compared the closing price for each day, with the close of the XJO.  They look pretty similar, considering the close is 30 mins apart, especially as the time approaches the expiry.





Unfortunately I can't really test the open-to-close change, because the opening times of the SPI are so different from the XJO...

Anyway, thanks for the heads up/tips - I will forward test with futures and CFD, and see how it goes...


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## Punta (2 December 2011)

Hmm I think my intraday index dreams might be over.  Looking for a product that tracks the XJO, I just extracted data for APZ1 from IB, and compare it with the XJO.

During the last month, the XJO close matches APZ1 at 4pm quite well:




However, the XJO open does not match the APZ1 at 9.50 am at all




The APZ1 has been trading all night, so it already contains information that is going to move the XJO during the day.

Bottom line: you can't trade the index, so there's no point looking for open-to-close strategies for an index?  Lower frequency, or higher frequency index strategies might be worth pursuing I would guess because there are products that more closely track the index at these periods...


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## nomore4s (2 December 2011)

Punta said:


> Hmm I think my intraday index dreams might be over.  Looking for a product that tracks the XJO, I just extracted data for APZ1 from IB, and compare it with the XJO.
> 
> During the last month, the XJO close matches APZ1 at 4pm quite well:
> 
> ...




There are no free lunches in trading, and if there are they are normally exploited very quickly by the pros.

The big problem you will get in doing testing on the XJO is the staggered opens, it makes any open data you use unreliable. Even if the futures contract didn't trade all night the opening gaps pretty much take care of any edge you might think you have, look at the HSI futures contract and see how the overnight gaps account for huge chunks of the overall moves even though the HSI still has very good daily ranges.

You are correct, you can't trade an index so no point testing trading strategies on it but why not do testing on actual products you can trade like a futures contract? There are edges to exploit in those markets.


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## Punta (2 December 2011)

nomore4s said:


> You are correct, you can't trade an index so no point testing trading strategies on it but why not do testing on actual products you can trade like a futures contract? There are edges to exploit in those markets.




Yeah I have a few equity strategies paper trading at the moment, which seem to be ticking along alright.  They're not particularly scalable though.  

In looking for a scalable strategy, I just assumed that I would be able to find a product for an index-based strategy.  Turns out it's not that simple!!


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## Tannin (14 July 2012)

(Oh dear! First post here and I'm dragging up an old, old thread .... This is not a good look.  No matter, it's a point no-one else seems to have raised so far and it really ought to be mentioned, so I'll post it anyway. I don't usually drag up ancient history. Honest!)

If you are looking for a security that tracks the S&P ASX200 closely, simply buy a basket of the underlying securities. 

Although the ASX200 seems from its name to track 200 different companies, in reality the largest 8 or 10 of them account for by far the greater part of it. BHP alone is one eighth of the XJO. In fact, you can just about throw away the smallest 190-odd constituents and just consider the big four banks, Telstra, the two supermarket giants, and the big two miners. That's more than three-quarters of the index right there. And you don't need to buy all nine. Surely you could pick just one of the banks as a proxy for the other three, don't worry about Rio (the BHP price is much more important, and they both depend on iron ore demand and prices more than any other factor so they tend to go up and down together), and a single supermarket. At this point we have just four shares to buy - BHP, Telstra, Westpac, and Wesfarmers. (Or BHP, Telstra, Woollies and NAB, whatever.) 

Depending on how exactly you want to track the index, you could throw in one or two other stocks, perhaps by deciding which two other sectors need a small representation to mimic the index more closely. But even with just four stocks, you are holding about half the value underlying the index, so you are already going to be in the ballpark. And with ordinary shares to trade instead of CFDs or options or ETFs or any other fancy stuff, you have no problems with extra brokerage or greedy spreads or lack of liquidity and life is simple. Simple is good.


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## Joules MM1 (26 June 2017)

some stuff from the weekend


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