This week IFC Markets announced that it was introducing Personal Composite Instrument or PCI trading, but what are Personal Composite Instruments or PCIs and how do they work? Do they really represent a revolution in online trading?
The concept behind PCI is very simple, and similar to trading forex pairs, where your price action is the behaviour of one currency in relation to another (in most forex trades this will be a quoted currency against the USD). The PCI is a much broader concept, as it allows not only currency cross-pairs but the performance of an entire portfolio to be measured against another.
This flexibility of approach will allow traders and investors to test out their ideas, for example trading an instrument against their own national or base currency rather than the US dollar. IFC Markets quotes the example of trading the gold price against the AUD. A trader could create the instrument XAU / AUD for instance, obtain the price history of that instrument, and carry out fully-fledged technical analysis.
Traditionally, online CFD markets have been dictated by the established securities and derivatives markets, and the way investment banks have liked to trade and hedge. Such levels of customisation were only really available via sophisticated OTC (over-the-counter) derivative brokers.
The PCI approach could be applied to a range of trading methodologies, including spread trading, pair trading, or simply hunting for opportunities in the market. It does allow for inter-market analysis at a level not previously possible, simply because brokers have not been offering such a degree of flexibility in the way instruments are quoted.
Other potential opportunities include:
- Identification of and analysis of the periods of anomalous behaviour between financial assets;
- Optimisation and periodic re-balancing of a created portfolio (e.g. of Contracts For Difference) in order to increase or reduce risks;
- Exchange of one portfolio with another – e.g. good versus bad portfolio prioritisation;
- Application of those trading strategies which require long-term, stable relationships between assets (e.g. trend following);
- Detecting hedging opportunities for portfolios which have certain sensitivities to economic factors.
PCI is based on the GeWorko Method, an innovative approach to financial markets and the analysis of their dynamics. Under this method, the sum of the values of all assets in each portfolio, taking into consideration weight coefficients, delivers an absolute dollar-denominated value. The method calculates a ratio between the two portfolios, which can be quoted as a ‘price’, even though this may not relate to any quoted instrument on a live exchange. However, the raw pricing data is still derived from live instruments or markets.
PCI has been integrated already into NetTradeX, IFC’s analytical platform for traders. This allows the creation, modification and deep price reflection on the charts to be readily integrated with live trading. It is supported by IFC’s analytical mechanisms and visualisation capabilities for in-depth analysis.
Investors can compare past portfolio reactions to market drivers in order to try to forecast future behaviour. Weights of individual assets can be changed in order to achieve a superior calibration. Ultimately, more light can be shed on the interrelationship between different combinations of assets.
Such in-depth analysis is probably more suited to the requirements of experienced traders used to managing multiple open positions congregated into portfolios. It is a customisation tool that allows traders who don’t want to be boxed in by the restrictions of existing suites of instruments to look at markets from a different perspective. This could be highly valuable to proponents of inter-market analysis.
IFC’s ability to deliver such a tool is partly based on the fact that the firm already deals with professional trading customers in the forex and CFD markets, although it also caters to retail traders via both its in-house NetTradeX platform and MT 4
