macrocephalopod

First you need to know about the GSCI -- the Goldman Sachs Commodity Index. It was created by GS in 1997 to track passive long exposure to commodity markets. Crucially it is an *investable index* which means that you can replicate its returns by trading in liquid instruments,

in this case commodity futures. GS fully laid out the methodology for calculating the index and how to replicate it by trading in futures, which meant that dealers were able to sell swaps on the index and pull in a nice fee, which they started doing in size.

The index is now administered by S&P and you can find the full methodology here. Apart from some tweaks to the exact commodities included and their weights, it is exactly the same as it was in 1997 https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-gsci.pdf …

The key that makes the trade possible is to replicate the index dealers need to hold near-term futures and roll them to a later expiry before they become due. The index methodology lays out the exact schedule of rolls for every commodity, including which contract months will

be held, and which days they will be rolled on -- in basically every case the roll takes place over five days, with 20% of each position being rolled before the close on the 5th, 6th, 7th, 8th and 9th and ninth business days of the month.

Because the aum tracking the index got so large, this created a predictable and sizable flow in commodity futures spread contracts which you could get ahead of. The strategy was to put on the same spread that the dealers would need to do, five days before they

After 2008 too many people knew about it and the trade became unprofitable after costs (and newer commodity indices were developed which weren't as vulnerable to front running) but a cute twist was to try to front-run the front-runners, i.e. do everything another 5 days early