9/28/22, 8:51 PM Is the live open interest (OI) data being provided by exchanges correct?

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Is the live open interest (OI) data being provided by exchanges correct?
Modified on: Thu, 9 Jun, 2022 at 7:21 PM

Yes, the live open interest (OI) data streamed by exchanges is correct, but it is not a smart move to use the intraday OI
data as part of one's 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 hours post which the positions actually crystallize.

Assume a hedge fund X using Y for Clearing and broker Z for trading. All the hedge fund’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. It’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 3:30 PM could hugely vary compared to the end
of day OI on Bhavcopy 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, it's best to use only end of day OI data.

Courtesy: TradingQ&A by Zerodha

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