Notice:
  The views and information expressed in this document reflect the opinions and experience of the author Robert C. Pelletier.  Neither CSI nor the author undertake or intend to provide tax advice or trading advice in any market or endorse any outside individual or firm.  All recommendations are provided for their informational value only.  Readers should consult competent financial advisors or outside counsel before making any software purchase or investment decision.  CSI does not stand behind or endorse the products of any outside firms.

Copyright (c) 1998 Commodity Systems Inc. (CSI).  All rights are reserved.
 
 
 
 
 
 
 

INTRODUCTION

   Every once in a while, an e-mail crosses my computer screen that gives me pause; It makes me try to imagine using CSI's services for the first time. This is not always easy for me, having devoted nearly thirty years of my life to building and guiding this company. Over the decades, CSI numbers, conversion factors, Perpetual Contract® formula and the like, have become part of my daily vocabulary. They are the jargon of our industry and I often use them freely. Then along comes one of those e-mails: The ones that say, in one form or another, "What in the world are you talking about?" In the interest of unraveling the confusion that may surround some of CSI's terminology, this month's Technical Journal explains some of the words and applications that are unique to our service or the data vending industry.
 

THE CONVERSION FACTOR SYSTEM

   Starting with the very heart of our service, it seems that some users are unsure of the meaning of the data they receive in their daily downloads. Although it may not be obvious to the user, CSI's system of tracking the markets depends heavily on CSI's conversion factor system, which emulates pricing information to conform with pricing you would see in the newspaper the next day. The conversion factor system establishes the currency value of a given price using the last (terminal) digit or digits for interpretation. In many cases, the parent exchange uses the same common denominator of the raw price as we do. There are, however, some differences.

   The concept of conversion factors was introduced because there are no decimal points or fractions in the CSI database. It allows the receiving software to convert the raw database numbers to the appropriate values in terms of decimals, eighths, etc. Our earliest customers were all commercial banks and brokerage houses, which processed the data themselves through mainframe computers. They still need to know the conversion factors, as do the software programs used by most of our customers today. Unfair Advantage®, QuickTrieve®, MetaStock®, and other software programs that use CSI data invisibly and seamlessly employ the conversion factor before displaying data on your computer screen or chart.
 

CONVERSION FACTOR KEY:

   For those who want to fully understand conversion factors, here are the details:  A positive conversion factor simply tells how far the decimal point should be placed to the left to obtain the "newspaper" price. A negative conversion factor indicates that the final (rightmost or terminal) digit(s) represent fractional values as: -1 = eighths, -2 = 16ths, -3 = 32nds, -4 = 64ths, -5 = 128ths, -6 = 256ths. Examples for the raw value 56111 are below:
 
 

   Although most CSI users need never concern themselves with conversion factors, the conversion factor system is key to saving space in data storage and space both for newspapers and computer disk resources. For example, the number 9817, with a conversion factor of -3 (for 32nds), in decimal form would be presented as 98.53125. This value would take considerably more bytes of storage and more newsprint space.

   One notable exception to seamless conversion factor application is in currency trading. There are two schools of thought on how some currency prices should be presented. While most trading systems require currencies be quoted with a conversion factor of +4 (.6115), others require a conversion factor of +2 (61.15). For this reason, we allow the user to modify conversion factors, but advise that such changes be made only as directed by CSI or your software vendor.
 

EXCHANGE POINTS VS. CSI POINTS

  The "Point Value" is the currency value of the movement of one point in the terminal digit of a price. A good example is the Australian All Ordinaries Index on the Sydney Futures Exchange (CSI#230). In this commodity, the CSI price would be held as 16430 with a conversion factor of +1. The exchange sees this as 1643.0 (after applying the conversion factor). To the exchange, a one-point move is twenty-five Australian dollars, which is the difference between 1643.0 and 1644.0. In CSI's lowest denominator system, the value of one CSI point is AUD2.50, because one point is measured before the conversion factor is applied, such as in the difference between 16430 and 16431.
 

GETTING THE RIGHT COMMODITY

Before you get too far into studying contract specifications, it is essential to be sure you are looking at the contract you want to trade. Live Cattle, for example, is currently available at three exchanges: the Chicago Mercantile Exchange (CSI #2); the Bolsa de Mercadorias & Futuros in Sao Paulo, Brazil (CSI #392) and the Mid-America Commodity Exchange (CSI#113). CSI also uses a symbol for each commodity. The symbol is a one-,two- or three-character designation that is an exchange-approved
abbreviation. If your analysis software can't process the three-character symbols used for overseas commodities, please see Tech Talk.
 

TRADING UNITS

   Once you are sure you have found the correct market on our fact sheets, examine the "Unit of Measure." The Unit of Measure entry simply reveals the currency of trading for the particular commodity and the units (bushels, bales, tons, metric tonnes, pounds, grams, kilograms, ounces, percent, points, cross-rate currency, BTUs (or Therms) [A BTU = a unit of heat equal to 232 calories], basis points, acres, barrels, 100 weight (CWT), percent, bags, index, megawatt hours (MWH), gallons, MMBTUs, etc. of product. CME live cattle, for example, is traded in cents per pound (C/LB).

   You should also check the fact sheets to find the "Contract Size" for your commodity. Using the above information, you can calculate the total value of any contract by multiplying the contract size times the point value times the CSI price, taking into account the conversion factor. Keep in mind that your out-of-pocket investment cost is usually much less, due to the common practice of margining commodity trades.
 

THE CONCEPT OF MARGIN

   Margining is a convenience given to futures traders based upon the idea that, because the future product you are trading doesn't exist as an "actual," there is no reason to force you pay the full price as though it were. Futures can be margined without borrowing money as stock traders must do for the same reason. The margin for a market is often pegged at about 5% of the future product value, or about what the broker might have to suffer if the trader doesn't hold sufficient funds in his account to protect the
broker from potential loss. Be cognizant of this terminology when evaluating trading systems, because one person's 10% gain maybe another's 1/2% gain, depending on whether you use margin or future value as the investment cost basis.

   By now you probably recognize that the fact sheets are full of valuable information, some of which is useful to traders, and some of which is primarily used by programmers or users of UA's API interface.  We'll address more of these issues and other concepts that are important to our customers in upcoming issues. Whenever possible, we try to clarify confusing or incomplete passages as we become aware of them. Your Emails help us along the way.