Commodity Futures Index and Methods and Systems of Trading in Futures Contracts that Minimize Turnover and Transaction 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.

That which is claimed is: 
     
         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.