Ask Colin

Can I get open interest data for equities market, or is open interest data only available for futures? Is open interest in equities market the same as on balance Volume?

There is an essential difference between share markets and derivative markets. In the share market, what are traded are pieces of paper that represent assets. Companies are formed when the promoters raise money from the public. In proportion to the money contributed, pieces of paper called shares are issued to these investors that evidence ownership of the company. These shares can be traded on or off a stock market, which is known as a secondary market, because it allows trading between people other than the primary or original investors in the company.

A derivative market is totally different in the way what is traded is created. What is being traded is a contract that specifies a right or obligation to perform some action in the future. Each contact has two parties to it who are undertaking to take the opposite side of the transaction that is the subject of the contract. To understand this, imagine that you are a manufacturer of gold products, and that you want to lock in the current price of gold for a big contract. You can buy from a gold miner the right to buy gold at the current price on a future date, which is when you have to make the products. In effect this is a contract. To make it easy for miners and manufacturers to lock in price certainty, standard contracts are created and traded on a futures market with speculators and others providing liquidity. You can buy a contract or sell a contract. If you buy it you are long and have to take delivery of the gold at the end of the period. If you sell it you are short and have to make delivery at the end of the period. At any time you can take the opposite action to cancel out your position.

In a share market, no matter what trades are made, there is always the same number of shares in existence. However, in a derivatives market, if you sell a contract you hold to someone who was short, then it is of no effect any more and ceases to exist. In a formal derivatives market the matching of opposite sides of contracts is achieved through a clearing house. So, the number of contracts goes up and down depending on whether the net effect of trading is to cancel contracts or open new ones.

Open interest is the number of open contracts in a futures or exchange traded options market. It goes up or down depending on whether market participants are generally expanding or contacting their exposure to, or if you like, their interest in, the market involved. If open interest is rising, then both sides are increasing their exposure to their positions. If open interest is falling, then both sides are unwinding their exposure.

Open interest is quite different to On Balance Volume. On Balance Volume is a volume indicator invented by Joseph Granville. It relies on the rule that if prices rise on a day (close today > close yesterday) then the day’s volume is given a plus sign. If prices fall on the day, it is given a minus sign and if the price is unchanged, volume is ignored. The idea is that buyers drive prices up and sellers drive prices down. All the volumes, plus and minus, are accumulated and the resulting number is plotted as a line. If the line rises it tells us that buyers are increasing their commitment to that stock. If the line is falling, they are unwinding their commitment. We should also be very wary when price move the opposite way to On Balance Volume. Rising or steady prices with falling On Balance Volume suggests distribution. Falling or steady prices with rising On Balance Volume suggests accumulation. In either case a change in trend or breakout may be indicated.