Commodity futures index and methods and systems of trading in futures contracts that minimize turnover and transactions costs

Abstract

This invention relates to methods and systems for reducing transaction costs and minimizes turnover in the trading of futures contracts. The invention further describes an algorithm whose output is a unique method of investing in futures contracts that reduces the rate of turnover, and thus the cost of trading, of certain common trading strategies. The primary application of this method is to a class of strategies referred to as indexing strategies that incorporate a dynamic asset allocation approach using futures contracts.

1 . A method of trading futures contracts comprising the following steps: 
 determining an allocation difference by subtracting an actual allocation from a target allocation, wherein the target allocation is a number of futures contracts in a given market that a futures trading strategy indicates should be held, and wherein the actual allocation is a number of futures contracts held by an investor;    if the allocation difference is greater than or equal to a maximum roll quantity, increasing a nextout position by a quantity of nextout contracts that is equal to the maximum roll quantity, wherein the maximum roll quantity is the largest percentage of futures contracts that will be rolled over in a day, and wherein the nextout position comprises one or more nextout contracts;    if the allocation difference is less than the maximum roll quantity and if the allocation difference is positive, increasing the nextout position by a quantity of nextout contracts that is equal to the allocation difference;    if the actual allocation is equal to the target allocation, maintaining the nextout position and a nearby position, wherein the nearby position comprises one or more nearby contracts;    if the allocation difference is negative, and if the absolute value of the allocation difference is less than the maximum roll quantity, decreasing a nearby position by a quantity of nearby contracts equal to the absolute value of the allocation difference;    if the allocation difference is negative, and if the absolute value of allocation difference is greater than or equal to the maximum roll quantity, decreasing the nearby position by a quantity of nearby contracts equal to the maximum roll quantity;    wherein a nextout contract is a futures contract with an expiration date later than an expiration date of a nearby contract;    wherein a nearby contract is a futures contract that has the expiration date prior to the expiration date of a nextout contract.    
   
   
       2 . The method according to  claim 1 , further comprising the step wherein, if there has been a change in the nextout position and/or the nearby position and if a nearby allocation exceeds a maximum nearby allocation by an amount, rolling the nearby allocation by the amount by which the nearby allocation exceeds the maximum nearby allocation.  
   
   
       3 . The method according to  claim 2 , wherein the maximum nearby allocation is the product of a daily roll quantity and a number of days until a last roll date.  
   
   
       4 . The method according to  claim 1 , wherein the algorithm is part of a computer program.  
   
   
       5 . the method according to  claim 2 , wherein the algorithm is part of a computer program.  
   
   
       6 . The method according to  claim 2 , wherein the target allocation and the actual allocation comprise one or more commodities.  
   
   
       7 . The method according to  claim 6 , wherein the commodities are selected from the group consisting of crude oil, heating oil, gasoline, natural gas, gold, copper, aluminum, corn, wheat, soybeans, cattle, lean hogs, cotton, and coffee.  
   
   
       8 . The method according to  claim 2 , wherein the futures trading strategy is the NCCI.  
   
   
       9 . The method according to  claim 2 , wherein the futures trading strategy is the AIA Global Index.  
   
   
       10 . The method according to  claim 2 , wherein the target allocation is determined at least in part by a momentum-based trading rule.  
   
   
       11 . The method according to  claim 2 , wherein the given market comprises one or more markets.  
   
   
       12 . The method according to  claim 11 , wherein the one or more markets is selected from the group consisting of the American Commodity Exchange, AMEX Commodities Corporation, Chicago Board of Trade, Chicago Mercantile Exchange, Chicago Rice & Cotton Exchange, Coffee, Sugar & Cocoa Exchange, COMEX Division of New York Mercantile Exchange, Kansas City Board of Trade, London Metals Exchange, MidAmerica Commodity Exchange, Minneapolis Grain Exchange, New York Cotton Exchange, New York Futures Exchange, New York Mercantile Exchange, Philadelphia Board of Trade, Pacific Commodity Exchange, Pacific Futures Exchange, and Twin Cities Board of Trade.  
   
   
       13 . The method according to  claim 11 , wherein the one or more markets is selected from the group consisting of Sydney Futures Exchange, Montreal Stock Exchange, Eurex, Osaka Securities Exchange, London International Financial Futures Exchange, Chicago Mercantile Exchange, Tokyo Stock Exchange, and Chicago Board of Trade.  
   
   
       14 . A method of reducing transaction costs in trading futures contracts comprising employing a system that uses an algorithm wherein said algorithm performs the following steps: 
 determining an allocation difference by subtracting an actual allocation from a target allocation, wherein the target allocation is number of futures contracts in a given market that a futures trading strategy indicates should be held, and wherein the actual allocation is a number of futures contracts;    if the allocation difference is greater than or equal to a maximum roll quantity, increasing a nextout position by a quantity of nextout contracts that is equal to the maximum roll quantity, wherein the maximum roll quantity is the largest percentage of futures contracts that will be rolled over in a day, and wherein the nextout position comprises one or more nextout contracts;    if the allocation difference is less than the maximum roll quantity and if the target allocation is greater than the actual allocation, increasing the nextout position by a quantity of nextout contracts that is equal to the allocation difference;    if the actual allocation is equal to the target allocation, maintaining the nextout position and a nearby position, wherein the nearby position comprises one or more nearby contracts;    if the actual allocation difference is greater than the target allocation and if the absolute value of the allocation difference is less than the maximum roll quantity, decreasing a nearby position by a quantity of nearby contracts equal to the absolute value of the allocation difference;    if the actual allocation difference is greater than the target allocation and if the absolute value of allocation difference is greater than or equal to the maximum roll quantity, decreasing the nearby position by a quantity of nearby contracts equal to the maximum roll quantity;    wherein a nextout contract is a futures contract with an expiration date later than an expiration date of a nearby contract;    wherein a nearby contract is a futures contract that has the expiration date prior to the expiration date of a nextout contract.    
   
   
       15 . The method according to  claim 14  further comprising the steps wherein, 
 if there has been a change in the nextout position and/or the nearby position and if a nearby allocation exceeds a maximum nearby allocation by an amount, rolling the nearby allocation by the amount by which the nearby allocation exceeds the maximum nearby allocation.    
   
   
       16 . The method according to  claim 14 , wherein the computer system is accessible through a web site.  
   
   
       17 . The method according to  claim 15 , wherein the computer system is accessible through a web site.  
   
   
       18 . The method according to  claim 15 , wherein the futures trading strategy varies the target allocation for commodities.  
   
   
       19 . The method according to  claim 15 , wherein the futures trading strategy is the NCCI.  
   
   
       20 . The method according to  claim 15 , wherein the futures trading strategy is the AIA Global Index.  
   
   
       21 . The method according to  claim 15 , wherein the target allocation is determined by a momentum-based trading rule.  
   
   
       22 . The method according to  claim 18 , wherein the target allocation is determined by a momentum-based trading rule.  
   
   
       23 . A system for transacting the purchase and sale of futures contracts comprising: 
 an algorithm that performs the following functions: 
 determining an allocation difference by subtracting an actual allocation from a target allocation, wherein the target allocation is number of futures contracts in a given market that a futures trading strategy indicates should be held, and wherein the actual allocation is a number of futures contracts;  
 if the allocation difference is greater than or equal to a maximum roll quantity, increasing a nextout position by a quantity of nextout contracts that is equal to the maximum roll quantity, wherein the maximum roll quantity is the largest percentage of futures contracts that will be rolled over in a day, and wherein the nextout position comprises one or more nextout contracts;  
 if the allocation difference is less than the maximum roll quantity and if the target allocation is greater than the actual allocation, increasing the nextout position by a quantity of nextout contracts that is equal to the allocation difference;  
 if the actual allocation is equal to the target allocation, maintaining the nextout position and a nearby position, wherein the nearby position comprises one or more nearby contracts;  
 if the actual allocation difference is greater than the target allocation and if the absolute value of the allocation difference is less than the maximum roll quantity, decreasing a nearby position by a quantity of nearby contracts equal to the absolute value of the allocation difference;  
 if the actual allocation difference is greater than the target allocation and if the absolute value of allocation difference is greater than or equal to the maximum roll quantity, decreasing the nearby position by a quantity of nearby contracts equal to the maximum roll quantity;  
 wherein a nextout contract is a futures contract with an expiration date later than an expiration date of a nearby contract;  
 wherein a nearby contract is a futures contract that has the expiration date prior to the expiration date of a nextout contract.  
   
   
   
       24 . The system according to  claim 23 , further comprising the step wherein, if there has been a change in the nextout position and/or the nearby position and if a nearby allocation exceeds a maximum nearby allocation by an amount, rolling the nearby allocation by the amount by which the nearby allocation exceeds the maximum nearby allocation.  
   
   
       25 . The system according to  claim 23 , wherein the algorithm is part of a computer program.  
   
   
       26 . The system according to  claim 24 , wherein the algorithm is part of a computer program.  
   
   
       27 . The system according to  claim 25 , wherein the computer program is accessible through a web site.  
   
   
       28 . The system according to  claim 26 , wherein the computer program is accessible through a web site.  
   
   
       29 . The system according to  claim 24 , wherein the futures trading strategy is the NCCI.  
   
   
       30 . The system according to  claim 24 , wherein the futures trading strategy is the AIA Global Index.  
   
   
       31 . The system according to  claim 24 , wherein the given market comprises one ore more markets.  
   
   
       32 . The system according to  claim 31 , wherein the one or more markets is selected from the group consisting of American Commodity Exchange, AMEX Commodities Corporation, Chicago Board of Trade, Chicago Mercantile Exchange, Chicago Rice & Cotton Exchange, Coffee, Sugar & Cocoa Exchange, COMEX Division of New York Mercantile Exchange, Kansas City Board of Trade, London Metals Exchange, MidAmerica Commodity Exchange, Minneapolis Grain Exchange, New York Cotton Exchange, New York Futures Exchange, New York Mercantile Exchange, Philadelphia Board of Trade, Pacific Commodity Exchange, Pacific Futures Exchange, and Twin Cities Board of Trade.  
   
   
       33 . The system according to  claim 24 , wherein the one or more markets is selected from the group consisting of Chicago Board of Trade, Chicago Mercantile Exchange, Coffee, Sugar & Cocoa Exchange, COMEX Division of New York Mercantile Exchange, London Metals Exchange, New York Cotton Exchange, and New York Mercantile Exchange.  
   
   
       34 . The computer-readable medium according to  claim 24 , wherein the one or more markets is selected from the group consisting of Sydney Futures Exchange, Montreal Stock Exchange, Eurex, Osaka Securities Exchange, London International Financial Futures Exchange, Chicago Mercantile Exchange, Tokyo Stock Exchange, and Chicago Board of Trade.  
   
   
       35 . A computer-readable medium having a program code recorded thereon for execution on a computer for displaying market information relating to and facilitating trading of a commodity being traded in an electronic exchange, the program code causing a machine to perform the following method steps: 
 determining an allocation difference by subtracting an actual allocation from a target allocation, wherein the target allocation is number of futures contracts in a given market that a futures trading strategy indicates should be held, and wherein the actual allocation is a number of futures contracts;    if the allocation difference is greater than or equal to a maximum roll quantity, increasing a nextout position by a quantity of nextout contracts that is equal to the maximum roll quantity, wherein the maximum roll quantity is the largest percentage of futures contracts that will be rolled over in a day, and wherein the nextout position comprises one or more nextout contracts;    if the allocation difference is less than the maximum roll quantity and if the target allocation is greater than the actual allocation, increasing the nextout position by a quantity of nextout contracts that is equal to the allocation difference;    if the actual allocation is equal to the target allocation, maintaining the nextout position and a nearby position, wherein the nearby position comprises one or more nearby contracts;    if the actual allocation difference is greater than the target allocation and if the absolute value of the allocation difference is less than the maximum roll quantity, decreasing a nearby position by a quantity of nearby contracts equal to the absolute value of the allocation difference;    if the actual allocation difference is greater than the target allocation and if the absolute value of allocation difference is greater than or equal to the maximum roll quantity, decreasing the nearby position by a quantity of nearby contracts equal to the maximum roll quantity;    wherein a nextout contract is a futures contract with an expiration date later than an expiration date of a nearby contract;    wherein a nearby contract is a futures contract that has the expiration date prior to the expiration date of a nextout contract.    
   
   
       36 . A computer-readable medium having a program code recorded thereon for execution on a computer for displaying market information relating to and facilitating trading of a commodity being traded in an electronic exchange, the program code comprising one or more of the following program codes: 
 a first program code for determining an allocation difference by subtracting an actual allocation from a target allocation, wherein the target allocation is number of futures contracts in a given market that a futures trading strategy indicates should be held, and wherein the actual allocation is a number of futures contracts    a second program code that, if the allocation difference is greater than or equal to a maximum roll quantity, increases a nextout position by a quantity of nextout contracts that is equal to the maximum roll quantity, wherein the maximum roll quantity is the largest percentage of futures contracts that will be rolled over in a day, and wherein the nextout position comprises one or more nextout contracts;    a third program code that, if the allocation difference is less than the maximum roll quantity and if the target allocation is greater than the actual allocation, increases the nextout position by a quantity of nextout contracts that is equal to the allocation difference;    a fourth program code that, if the actual allocation is equal to the target allocation, maintains the nextout position and a nearby position, wherein the nearby position comprises one or more nearby contracts;    a fifth program code that, if the actual allocation difference is greater than the target allocation and if the absolute value of the allocation difference is less than the maximum roll quantity, decreases a nearby position by a quantity of nearby contracts equal to the absolute value of the allocation difference;    a sixth program code that determines, if the actual allocation difference is greater than the target allocation and if the absolute value of allocation difference is greater than or equal to the maximum roll quantity, decreases the nearby position by a quantity of nearby contracts equal to the maximum roll quantity;    wherein the actual allocation is number of futures contracts held by an investor;    wherein a nextout contract is a futures contract with an expiration date later than an expiration date of a nearby contract;    wherein a nearby contract is a futures contract that has the expiration date prior to the expiration date of a nextout contract.    
   
   
       37 . The computer-readable medium according to  claim 36 , further comprising a seventh program code wherein, if there has been a change in the nextout position and/or the nearby position and if a nearby allocation exceeds a maximum nearby allocation by an amount, rolls the nearby allocation by the amount by which the nearby allocation exceeds the maximum nearby allocation.  
   
   
       38 . The computer-readable medium according to  claim 36 , wherein a trader is able to access the computer-readable medium through a web site.  
   
   
       39 . The computer-readable medium according to  claim 37 , wherein a trader is able to access the computer-readable medium through a web site.  
   
   
       40 . The computer-readable medium according to  claim 36 , wherein the target allocation is determined by a momentum-based trading rule.  
   
   
       41 . The computer-readable medium according to  claim 37 , wherein the target allocation is determined by a momentum-based trading rule.  
   
   
       42 . The computer-readable medium according to  claim 40 , wherein the target allocation is determined by a momentum-based trading rule that is also part of a computer program.  
   
   
       43 . The computer-readable medium according to  claim 41 , wherein the target allocation is determined by a momentum-based trading rule that is also part of a computer program.  
   
   
       44 . The computer-readable medium according to  claim 37 , wherein the given market comprises one or more markets.  
   
   
       45 . The computer-readable medium according to  claim 44 , wherein the one or more markets is selected from the group consisting of the American Commodity Exchange, AMEX Commodities Corporation, Chicago Board of Trade, Chicago Mercantile Exchange, Chicago Rice & Cotton Exchange, Coffee, Sugar & Cocoa Exchange, COMEX Division of New York Mercantile Exchange, Kansas City Board of Trade, London Metals Exchange, MidAmerica Commodity Exchange, Minneapolis Grain Exchange, New York Cotton Exchange, New York Futures Exchange, New York Mercantile Exchange, Philadelphia Board of Trade, Pacific Commodity Exchange, Pacific Futures Exchange, and Twin Cities Board of Trade.  
   
   
       46 . The computer-readable medium according to  claim 44 , wherein the one or more markets is selected from the group consisting of Chicago Board of Trade, Chicago Mercantile Exchange, Coffee, Sugar & Cocoa Exchange, COMEX Division of New York Mercantile Exchange, London Metals Exchange, New York Cotton Exchange, and New York Mercantile Exchange.  
   
   
       47 . The computer-readable medium according to  claim 44 , wherein the given market is selected from the group consisting of Sydney Futures Exchange, Montreal Stock Exchange, Eurex, Osaka Securities Exchange, London International Financial Futures Exchange, Chicago Mercantile Exchange, Tokyo Stock Exchange, and Chicago Board of Trade.  
   
   
       48 . A Commodity Futures Index comprising the method of  claim 1 .  
   
   
       49 . A Commodity Futures Index comprising the system of  claim 23.