Jan

9

Volume, to me from the back-benches of the Market Microstructure class, is a struggle for the discovery of price. Increase in struggle is a reduction in the polarity of the prevailing meme.

Open Interest, to me from the similar back-benches of the Market Microstructure class, is variation in the participation of the struggle of price discovery. This could be number of trading strategies at work, number of trading minds at work. To this simpleton mind larger open interest implies increasing complexity of bets and reduced open interest means increasing simplicity of bets for a straighter payoff.

So, reduction in open interest if coming more from larger specs than smaller ones would imply the struggle for price discovery is shifting within the minnows and if the small specs are reducing the open interest it means the bigger boys are struggling harder against each other.

The first scenario would likely lead to a change in meme (a.k.a. a change in trend) and the second scenario would likely mean a large jump in prices due to the smaller fish being reduced in numbers in the food chain.

Experts on COT Analysis, your stab please?

Kurt Specht writes:

My guess, and it's purely a guess, is that large companies are getting spooked by the recent run up and are more aggressively hedging through their intermediaries to protect against additional upside during the year. I'm speaking of large manufacturing companies that would see escalation in their production costs and could have their bottom lines impacted negatively for this year if they don't lock in their energy costs now.


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2 Comments so far

  1. Kermit Johnson on January 9, 2011 10:01 am

    The data is readily available. The analysis software is also readily available (and reasonably priced). If we cannot quantify relationships (using out-of-sample data), we are probably just guessing.

  2. Brendan Dornan on January 11, 2011 10:19 pm

    Tradestation integrated this data to make it even easier to test COT strategies.

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