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February 2006

SYSTEMS
OF ALL TIME
page 42
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Contents
FEBRUARY 2006 VOLUME XXXV NUMBER 3

42

cover story
PICTURED: JIM ROGERS

Top ten systems


By George Pruitt and Joe Bobek

Trading systems come and go but some withstand the tests of time and market sentiment. Independent system tester Futures Truth lists the systems that have performed well historically. Further, in analysing these systems, our authors breakdown each and describe the common elements that are instrumental in successful trading systems.
ILLUSTRATION BY:

F
MARKETS
26 Energy markets could find home in the range
By Carla M. Bauch

TRADING TECHNIQUES
38 Understanding the arb trade
By Ben Lichtenstein

TECHNOLOGY & TRADING


60 Intermarket analysis: What works today
By Murray A. Ruggiero Jr.

Some analysts predict higher crude prices and others say energy prices will stabilize during the first half of 2006. What kind of price range will this new year bring?

While not as viable as it once was, the arb trade still exists. Heres how it affects markets and possibly your trading. 50 Has technical analysis kept up with the (Dow) Jones?
By Darrell Jobman

Intermarket analysis can be a powerful tool if used properly. We show you some of the many applications from simple to complex.

EQUITY TRADING TECHNIQUES


34 The versatility of buy-write strategies
By Mike Oyster

Creating strategies through futures and options on futures may be more effective than using securities.

Technology has changed the way you trade, but has technical analysis kept up with these changes? We speak with some key experts about significant indicators of yesterday and how todays technology might have altered them.

Contents Continued, page 8

Futures (ISSN 0746-2468) is published monthly except semimonthly in January, June and September by The National Underwriter Co, DBA Highline Media, 5081 Olympic Blvd., Erlanger, KY 41018-3184. Subscriber rates in the United States, Canada and Mexico are one year, $69; two years, $118. All other areas, $121per year. International online version also available; call 800-4581734 for details. All orders from outside the United States must be paid in U.S. dollars by international money order only. Single copies $6.95 in the United States, $8.95 in Canada. Periodical postage paid at Covington, KY and additional mailing offices. Postmaster: Send address changes to Futures, PO Box 2122, Skokie, IL, 60076-7822. Allow four weeks completion of changes. To Order: call (800) 4581734. CPC IPM Product Sales Agreement No. 1254545. Canadian Mail Distributor information: EMI, P.O. Box 25058, London, ON N6C 6A8, Canada. Printed in the USA. COPYRIGHT 2006 by Futures Magazine Inc. All rights reserved. Reproduction or use of the text or pictorial content in any manner without written permission is prohibited. CONTRIBUTORS: Return postage must accompany unsolicited manuscripts, photographs and drawings if return is desired. No responsibility is assumed for unsolicited material. Futures Magazine Inc. believes the information contained in articles appearing in FUTURES is reliable, and every effort is made to assure its accuracy, but the publisher disclaims responsibility for facts or opinions contained herein. MICROFILMS and MICROFICHE of all issues of FUTURES are available from University Microfilms Inc., 300 N. Zeeb Ave., Ann Arbor, MI 48106; Information Access Co., 11 Davis Drive, Belmont, CA 94002. The full text of FUTURES: News, analysis and strategies for futures, options and stock traders also is available in the electronic versions of the Business Periodicals Index.

FUTURES | February 2006

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Contents continued D E PA R T M E N T S
10 Editors Note Taking a long view 12 Sound Off! 14 Trendlines CFTC half way home
Chartview: A run on seat prices New DB boss joins merger mania CBOT moves in on Asia When is a deal a deal? International news Musical CEOs Oil giant charged with violating CEA group publisher / editorial director Ginger Szala
managing editor Daniel P. Collins associate editor Yesenia Salcedo associate editor Chris McMahon editor at large Steve Zwick contributing editors James T. Holter Murray A. Ruggiero Jr., Carla M. Bauch art director Carl Walanski graphic designer Sean Kealey advertising coordinator Abby Dahlinghaus

32 Forex Trader The gift of the


break-even trade

58 Software Review NinjaTrader 64 Online Trading Growing options


volume electronically

69 New for Traders 70 Funds Review 77 Dateline February and March

18 Managed Money Review 20 Trading Places Webber to head


Patsystems

22 Hot Commodities 10-year T-notes,


corn and E-mini S&P

advertising director

79 Ad Index 86 Trader Profile Bernie Carey


Its in the blood

midwest/southeast sales
Peter D. Djuvik phone: (312) 846-4606 fax: (312) 846-4638

24 Market Strategy How to benefit


from an inverted yield curve

west/east coast sales manager


Tracey Goldvarg phone: (312) 846-4611 fax: (312) 846-4638 classified & web sales manager Jennifer Testa phone: (847) 526-7434 fax: (847) 526-7435 international sales representatives Europe: Carolyn Hicks London, England phone: (44) 208-340-3273 Japan: Ken Masunaga Hiroyuki Naruke M.K. News, phone: (81) 03-3664-9271 futures learning center sales manager Gary Kamen (312) 846-4618 futures magazine group office 833 W. Jackson Blvd. 7th Floor Chicago, Ill. 60607 phone:(312) 846-4600 fax:(312) 846-4638 futures circulation offices P.O. Box 2122 Skokie, Ill. 60076-7822 Circulation Service phone:1-(800) 458-1734 (U.S. only) phone:(847) 763-9252 (outside of U.S.) fax:(847) 763-9269 Calls accepted 8:00 am-4:30 pm CST e-mail: futures@halldata.com international subscription reseller Ken Masunaga phone:(81) 03-3664-9271 (Japanese language version available)

F E AT U R E S
FUTURES 101
60 Step-by-step into the ag markets
By Chris McMahon

TRADE TRENDS
72 Tops & bottoms
By Daniel P. Collins

Trading opportunities in the agricultural markets dont only present themselves during the growing season. We show you what to look for year-round.

MANAGED MONEY
66 The Great Divide(s)
By Steve Zwick

From Refco to IPOs to a Chinese copper trader, there was always something to talk about in 2005 in the derivatives industry. In our annual tongue-in-cheek review, we look back with some bows and yes, many arrows.

Successful CTAs arent just from the United States anymore. Europe has ample performance when it comes to running hedge funds.

For reprint information contact: Claudia Stachowiak FosteReprints (866) 879-9144 ext. 121

page 72

TOPS

Futures is a unit of Highline Media


president and ceo Andrew L. Goodenough chief financial officer Thomas M. Flynn executive VP, Administration George L. Stanton vice president & group publisher Thomas A. Fowler

BOTTOMS

FUTURES | February 2006

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Taking the long view


EDITORS NOTE

ast November during a conversation with Chicago Board of Trade Chairman Charlie Carey, we discussed the successful initial public offering launched by the CBOT. He mentioned Bernie Carey, his uncle and a CBOT trader of long ago, rang the bell at the New York Stock Exchange (NYSE) the day the Chicago exchange went public. Of course we got to talking about changes in the industry, and it made me think that if I feel there has been seismic change in the industry since I began covering it in the 1980s, what must Bernie Carey think? So we asked him, and as a result hes our profile this month in Bernie Carey Its in the blood, page 89, by Associate Editor Yesenia Salcedo. This month the CBOT also is celebrating the 30-year anniversary of the contract that started it all for interest rates, the Ginnie Mae. Its not that the contract is still being traded, but the chain of contracts it preceded, from the 30-year Treasury to 10-year note to Eurodollars, Eurobunds and all other present and past interest rate contracts, has made the worlds economic pulse healthier. That anniversary reminded me that Futures magazine turns 34 years old this month and thats a milestone of success in both publishing and trading. The changes in the business have been breathtaking. To illustrate part of this, we asked the original Futures editor Darrell Jobman to take a look at how technical analysis, especially key indicators, have survived or thrived as the business moved into the electronic age. In Has technical analysis kept up with the (Dow) Jones? page 50, Darrell interviews some of the originators of every day indicators that traders across the world use and finds out if those tools have withstood the test of time. The answers are surprising. We also wanted to see how trading systems those systems that

are purchased off-the-shelf have performed over the years. We asked the independent system testing group Futures Truth, started by icon John Hill, to update our readers on the best 10 systems of all time. (See Top 10 systems, by George Pruitt and Joe Bobek, page 42.) Although many traders, especially todays professional trader, build their own proprietary systems, people can still buy some solid off-the-shelf black box and open systems. Futures Truth analyzes these systems by paper trading every signal to test performance. The article also analyzes what seems to work and what doesnt, and that information can be used by all traders. While putting together this look back issue, Ive thought about some of the icons of today Ive interviewed, long before they became icons. Traders such as John W. Henry, Paul Tudor Jones, Louis Bacon; industry innovators, such as Leo Melamed, Richard Sandor, Henry Jarecki; trail blazing brokers such as Barry Lind, Les Rosenthal, Lee Stern, Tom Dittmer, John Conheeney people who have affected this industry through innovation, time and sheer talent. There are hundreds of people out there, still in the industry today, still blazing trails, still spurring industry growth and innovation, which has been startling. Not only volumes, but image: On Oct. 20, 1987, did anyone believe that the Chicago Mercantile Exchange and CBOT stock would be traded on the NYSE? Recently John Geldermann, an industry icon, died. John was always helpful, always straightforward. Several years ago I interviewed John and his brother Tom while aboard their fishing boat on Lake Michigan. It was a rough day. Not feeling well, I went inside where John was steering. He took one look at me and said, Get outside quick and keep your eyes on the horizon! He was right of course, and it seems the industry followed that advice as well. E-mail me at gszala@futuresmag.com

C U S T O M E R

S E R V I C E

C E N T E R

Subscription inquiries can be made toll-free at (888) 804-6612. Calls accepted between 8:00am-4:30pm CST. If you reside outside the United States, the number is (847) 763-9565. If you receive duplicate or have missed issues, please contact the numbers above, fax (847) 763-9569, or via e-mail, futures@halldata.com. Please provide your full name, address and zip code. Address changes can be sent to Futures Magazine, P.O. Box 2122, Skokie, IL 60076-7822. Please include your old label with your new address. Special issues are published three times a year; the Sourcebook, a directory of futures and options industry businesses, in January; the Guide to Computerized Trading, which provides a list of software database, Internet and computerized services, in July; and a trading issue in September. For credit card orders, send information to Futures Magazine, P.O. Box 2122, Skokie, IL 60076. Call (888) 804-6612 or (847) 763-9565 (outside of U.S.) or fax (847) 763-9569. Calls accepted 8:00am-4:30pm CST. Single special issue copies vary from $10-$20 each. Futures Learning Center provides booklets and educational services for

traders. For information, call (800) 221-4352 (outside U.S., the number is (312) 846-4618). Article reprint orders of 100 copies or more can be made through Claudia Stachowiak at FosteReprints: phone, (866) 879-9144, ext. 121. Single issue copies ($10 each) can be purchased at (847) 763-9569. Questions regarding past articles location should be directed to (312) 846-4600, but may incur a $25 fee. Article submissions: Call, write or e-mail us for a copy of our writers guidelines. Questions about an article can be sent to the editors (dcollins@futuresmag.com). Questions are welcome, but due to time, we may not respond to everyone. For outside, by-lined articles, we provide the authors e-mail address or Web site in the biography. Futures Web site is our Internet version of Futures magazine (www.futuresmag.com). The Web site includes the latest issue of the magazine with full text of selected stories, daily updates with commentary on hot markets, spreadsheet downloads, a library of articles, market news and links to other sites.

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Sound Off!
MORE ALTERNATIVE INVESTMENTS I read your managed money piece Alternatives abound, January 2006. Nicely done. Steve Lamb, via e-mail Thank you. Futures will soon expand our performance reporting of the alternative investment arena in the Managed Money Review section of the magazine. In addition to commodity trading advisors, Futures will present the recent performance history of several of the most popular hedge fund strategies based on the Barclay/Global HedgeSource indexes. Ed TOP 50 BROKERS? Every year we get questions about how we collect data for our annual December Top 50 Brokers story. Futures faxes a questionnaire to the top 70 or so futures commissions merchants based on current segregated fund data provided by the Commodity Futures Trading Commission (CFTC). We compile the list based on those responses. Because the Refco bankruptcy occurred after the most recent CFTC data was released, our Top 50 Story did not reflect the most current information. Futures has subsequently posted on our Web site, at www.futuresmag.com/mid_month_ update/images/Mid-month_spread.xls, an updated ranking based on October numbers. That, however, did not include the full scope of change including Man Financials acquisition of Refco. We will post another updated ranking when data is available. Ed JOHN GELDERMANN John Geldermann, founder of Geldermann Inc., passed away in early January. Geldermann, 80, was long known in the futures industry as an innovator. Not only did he and his brother Tom start a clearing business in the
Have an opinion, question, objection, idea or beef? Let us know.
Sound Off! Futures, 833 W. Jackson Blvd., 7th Floor Chicago, Ill. 60607, Fax: (312) 846-4638

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Keep letters to 250 words. We reserve the right to edit for grammar, space and taste.

1950s on the Chicago Board of Trade for renowned locals such as Henry Shatkin and Dave Goldberg, John and a partner launched Computer Information Systems (CIS) in 1967, the first computerized back office system for accounting and one still used today by industry professionals. John was active in industry governance, having just been inducted into the Futures Industry Associations Hall of Fame, as well as serving for years on the Chicago Mercantile Exchange board. He is survived by his wife, children and a large extended family, including all those in the futures industry who will miss him dearly. Ed

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News, trends and insights for traders


ONE CHAMBER DOWN... the Chicago Mercantile Exchange (CME) in particular, likes the bill because of three things, none of them related to energy. The bill closes loopholes related to retail forex trading, mandates a structure to allow risk based margining for security futures products (SFP) and equity options and authorizes the trading of certain debt and foreign security indexes by June 30, 2006. CME Chairman Emeritus Leo Melamed says the exchange worked with the Congress to correct some small problems in the last reauthorization. It is fixing some of the things that were wrong with the [Commodity Futures Modernization Act of 2000]. We are looking for the Senate to pass substantially the same legislation. Right now we are very pleased that the House did, Melamed says. Damgard is not as confident the Senate will follow through. It is unfortunate that we are not getting the CFTC reauthorized. The reason we are not is that they are amending the act to require the CFTC to do stuff that is beyond its mission. Damgard is joined by several trade organizations and members of the Presidents Working Group (PWG) who are unhappy with the amendment. In a Dec. 12 letter to Michael Oxley, R-Ohio, chairman of the House Committee on Financial Services, Department of Treasury (DOT) Under Secretary Randal Quarles expresses concern about the energy amendment on behalf of DOT Secretary John Snow. The letter points out the Treasury and other PWG members are concerned about provisions that could affect OTC derivatives markets, including energy and natural gas. Quarles calls the scope of the amendment broad. These provisions could result in unintended adverse consequences and undermine the regulatory relief and legal certainty that were so carefully crafted through the [CFMA], the letter states. The PWG worked on several of the fixes in the reauthorization but the energy amendment was somewhat of a late surprise and may simply be protection for some in Congress from the wrath of their constituents over the expected high energy costs this winter. In a way it is a little bit of a cruel hoax on the consumer to make them think that somehow the CFTC requiring a lot of reporting is going to prevent prices from going up, Damgard says. BENEFITS The CFMA attempted to give the CFTC authority on all retail forex trading but that was challenged by an Illinois court decision in the Zelener case. That had to be fixed and that is what this act does, Melamed says. The other fixes relate more to the

Trendlines

CFTC half way home


Before its Christmas break, the House of Representatives passed legislation reauthorizing the Commodity Futures Trading Commission (CFTC), which also granted the Chicago exchange community many of the items on its wish list. But one item in the bill an energy amendment giving the CFTC expanded authority could cause a delay that may push reauthorization into the next holiday season. It passed with the energy legislation, which has a lot of people concerned that this is beyond the purview of the CFTCs expertise, says John Damgard, president of the Futures Industry Association. The Chicago exchange community,

CHARTVIEW: A RUN ON SEAT PRICES


As 2005 came to a close the Chicago Board Options Exchange (CBOE) established a progression of record seat sales, the top being $875,000. That is not bad considering that the first seat sold in 2005 went for $299,000. The record sales come at a good time, as CBOE will operate as a for-profit exchange as of Jan. 1, 2006, despite having a ways to go in the demutualization process. Exchange boss Bill Brodsky says IPO talk is premature but sees the rising seat values and record volume, which is 30% above 2004, as a healthy sign. Seat [prices] are a barometer of the interest of investors, Brodsky says.
$1,000.0 $900.0 $800.0 $700.0 $600.0 $500.0 $400.0 $300.0 $200.0 $100.0 $0.0
01/13/00 05/01/00 08/18/00 12/06/00 01/02/01 04/18/01 11/01/01 02/21/02 03/06/02 04/01/02 05/02/02 06/03/02 07/16/02 08/29/02 11/13/02 12/17/02 04/22/03 07/18/03 09/26/03 01/06/04 02/12/04 05/11/04 08/26/04 11/18/04 03/03/05 04/08/05 04/18/05 05/18/05 08/17/05 11/02/05 12/09/05
Source: eSignal

CBOE SEAT PRICES (IN THOUSANDS)

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FUTURES | February 2006

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jurisdictional problems stemming from the 20 plus year Shad/Johnson agreement that was repealed as part of the CFMA. The Securities and Exchange Commission (SEC) failed to meet commitments to create a risk based margining scheme for SFPs, now they will be required to. Many insiders blame the lack of success of SFPs to not having futures style margining. Perhaps the item with the most potential for exchanges will be the ability to trade certain debt and foreign security indexes. This will be accomplished through a new definition for what constitutes broad-based foreign indexes. Melamed says the world has changed a great deal since Shad/Johnson and the U.S. investor needs to be able to hedge many of these non-U.S. indexes. We are talking 20 years later, the whole world has changed many times and many of these Asian countries are important geographical centers of investment and we need these instruments of finance. By changing that definition, it opens up a whole new vista of risk management and that is important, Melamed says. By Daniel P. Collins NEWYEX AND EUROPA BOERSE?

to offer stock options. The long-awaited global clearing link, which would allow German traders to execute trades in the United States, and visa versa, has been on ice since CFTC Chairman Reuben Jeffery took over in July, 2005. His predecessor, Sharon Brown-Hruska, had given the setup a provisional nod in late 2004, and sources close to the Deutsche Boerse management board tell Futures the CFTCs backtracking drove the decision to seek a strategic partner in the United States. Within Europe, continental press reports at one time had Francioni talking of merging Deutsche Boerse and Euronext, but competition concerns quickly put the kibosh on that. Whether or not those talks took place, sources close to Deutsche Boerses supervisory board tell Futures no such concerns would prevent the exchanges from forming a joint ven-

ture to distribute prices or cooperate on clearing and settlement. The E.U. Commission has long advocated consolidation of continental clearing and settlement for use by all exchanges, but Deutsche Boerse was by far the largest advocate of one-stop vertical silos, where all trades are executed, cleared and settled through one entity. Italy and Spain are among other countries also offering vertical silos, but Germanys sheer mass gave the model credibility. Euronext, under the leadership of Jean-Franois Thodore, has advocated a central clearing and settlement entity for all continental securities and derivatives products, with exchanges focusing on product development and managing initial public offerings (IPOs). If Francioni holds a similar vision, the entire competitive landscape of the continent could change. Meanwhile, at press time, both

JADE FUTURES?

CBOT moves in on Asia


Most memorandums of understanding (MOU) are vague and do not result in near-term action, but the Chicago Board of Trade (CBOT) and the Singapore Exchange (SGX) made a bold move a few short months after their August MOU, announcing they will establish a regional commodity derivatives market called the Joint Asian Derivatives Exchange (JADE). The all-electronic market, half-owned by each partner, is expected to launch in the third quarter of 2006. We saw a fragmented marketplace in Asia and we wanted to fill that puzzle. This puts us in the Asian market in a very concrete way, says Robert Ray, senior VP, business development at the CBOT. CBOTs electronic platform, built on LiffeConnect technology will be the trading backbone of JADE. The CBOT will be responsible for straight-through processing into SGX Clearing Corp. We will bring eCBOT customers direct access to SGX and JADE, and were bringing to SGX 25,000 independent software vendor screens and 140,000 quote vendor boxes, Ray adds. Former SGX head Tom Kloet, now COO at Fimat, says both exchanges should benefit. SGX is locked into financials and this allows them to expand into an asset group they had no exposure in. For the CBOT, this continues their interest in Asian commodities in general, Kloet says. The CBOT is a great distribution channel and SGX is a strong clearing structure, so the exchanges are very complimentary to each other. The challenge will be to sift through products and pick the right ones. And while the volume created will not be a panacea, theres a lot of potential for this to be good, Kloet adds.

New DB boss joins merger mania


Reto Francioni has certainly shaken up the exchange landscape. Since his tenure as head of Deutsche Boerse began in September, not only has Eurex boss Rudi Ferscha departed, but the exchange has begun talks to forge joint ventures with cross-continental rival Euronext. Francioni also has been talking to several U.S. exchanges about turning Eurex US into a joint venture with a local partner. The most likely candidate is the New York Stock Exchange (NYSE), which has made no secret of its desire to get into the derivatives game, while Eurex has made no secret of its desire

By Yesenia Salcedo
www.futuresmag.com | February 2006

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International News
DEUTSCHE CDO TRADER BURIES LOSSES
While auditing its trading accounts for year-end bonuses in December, Deutsche Banks London office uncovered a little discrepancy if you consider 30 million little. In January, the bank told the Financial Services Authority it had zeroed in on the problem: collateralized debt obligation (CDO) trader Anshul Rustagi had been covering up his losses. At press time, its not clear whether Rustagi will face criminal charges, but he certainly wont be qualifying for bonuses any time soon. by an NFA hearing panel, is a result of an NFA complaint issued on May 26, 2005, and reflects a settlement offer submitted by Wallstreet and DiCrisci. The NFA complaint charged Wallstreet, DiCrisci and Mitchell with making deceptive, misleading and high-pressured sales solicitations, which included false statements, exaggerated profit claims and inadequate risk disclosures. The complaint also charged Wall Street and DiCrisci with failing to diligently supervise employees and agents in the conduct of their commodity futures activities. The reason DiCrisci can reapply but Mitchell can not is because of the severity of the offenses. DiCrisci acted more as a manager while Mitchell was the one making deceptive solicitations. The common bad practices in the industry remain the same, its just the topics that change, like right now its all about commodities affected by the hurricanes, says Larry Dykeman, NFA director of communications and education. The underlying message is the same in terms of the unrealistic gains and not disclosing the risks. In the Wallstreet case 100% of the customers lost their money. The NFA also ordered Platinum Trading Group Inc., a former IB and commodity trading advisor located in Boca Raton, Florida, not to apply for NFA membership for ten years. The NFA Complaint charged Platinum with making deceptive and misleading solicitations encouraging individuals to open accounts to trade OTC forex.

Trendlines continued
Euronext and Australias Macquarie Bank Ltd were preparing their offers for the London Stock Exchange (LSE). Although it was Deutsche Boerses bid for LSE that brought Francioni to the helm of Deutsche Boerse, he has said nothing to indicate he wont lead the exchange into merger talks with the LSE. Meanwhile, the LSE has taken a page from Deutsche Boerses book, offering to return 250 million to investors if it stays independent through 2006. Whatever the exchange bosses decide, competition authorities will be looking at the derivatives market. The big question: Do you look at exchange-traded products like those on Eurex and Euronext.Liffe, or do you look at OTC products cleared via Eurex Clearing, Euroclear, and LCH.Clearnet? By Steve Zwick COMPLEX IN THE CITY

STEAK WELL DONE


Japan has opened its door to some U.S. and Canadian beef. The ban relating to North American cases of mad cow disease has been in effect since 2003. Japan lifted the ban on beef from cows younger than 21 months, if the heads and spinal cords have been removed. In addition, Korea and the United States are scheduled to open talks about reopening South Korea to boneless U.S. beef in mid-January.

When is a deal a deal?


Last we heard, the New York Mercantile Exchange (Nymex) had signed a definitive agreement with venture capital firm General Atlantic LLC (GA) to sell 10% of the exchange for $135 million. A streamlined board of directors and an IPO were to follow. Now the word is the exchange is in talks with the CME who would like a piece of Nymex. CME share prices increased $9 on the day news of the talks hit the wire services. This comes on the heels of Nymex Chairman Mitchell Steinhauses open letter to shareholders, members and staff explaining changes to be made to the GA deal after some of the members objected to details as described in the preliminary proxy filed with the SEC. Changes include decreasing the total number of shares to be authorized to 89 million from 220 million, and details regarding the ability of the shareholders to call special meetings,

NFA KEEPS CLEANING UP THE INDUSTRY


The National Futures Association (NFA) continues to crack down on bad practice offenders by permanently barring Wallstreet Financial Trading Inc. (Wallstreet), a former futures introducing broker (IB) in West Palm Beach, Fla., from reapplying for NFA membership or acting as a principal of an NFA member. The NFA has also permanently barred Andre C. Mitchell, an associated person of Wallstreet, from NFA membership. Joseph C. DiCrisci, the sole owner and principal of Wallstreet, can not apply for NFA membership or associate membership or act as a principal of an NFA member for one year. The decision, handed down

BEING PREPARED
CBOE has completed implementation of systems and testing of an off-site back-up facility which is now operational. The back-up facility will not include a trading floor, operating completely electronically.

16

FUTURES | February 2006

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amend the bylaws and elect directors. The GA deal is subject to a vote by the Nymex shareholders. Any changes would have to be agreed to by GA and there is no penalty for either party killing the deal. Cataldo J. Capozza, owner of three authorized Nymex trading shares, filed a lawsuit against Nymex demanding records to investigate whether the GA deal is fair, protects open outcry, undervalues Nymex, and whether the board seriously considered other offers. It also includes the assertion that there is adequate reason to believe that the bidding process was rigged to ensure that the bids would be identical, or nearly identical, in value and that the Board would accept the GA proposal. Nymex has so far denied Capozzas entitlement to the documents. In a press release, Steinhause declined the request, characterizing it as a disruptive and costly effort to confuse

shareholders as the board tries to close the GA deal. A petition to call a special meeting to elect a new 25-member board at Nymex has been temporarily shelved, giving the board breathing room to forge a deal with the CME. Typically, only a third of board seats are open to election in a single year. Nymex has asked for a period of a month or so, give or take, for the opportunity to try to renegotiate some deal. And they have said that they would like the opportunity to negotiate a deal with the CME, says Mark Rifkin, Capozzas lawyer. Mr. Capozza would like to work with the exchange to facilitate an appropriate agreement with the CME, one thats in the best interest of Nymex and all its shareholders, Rifkin adds. Representatives of the CME, Nymex and GA declined to comment on the record. Ironically, Nymexs plans continue

to be stymied by parochial concerns despite that they have been demutualized for a number of years. By Chris McMahon REFCO ROUND UP

Musical CEOs
Refco Inc. named Harrison J. Goodin CEO, replacing interim chief Robert Dangremond. Goodin was senior managing director of Goodin Associates LLC and the fourth CEO named since the implosion. Unsecured Refco creditors filed a lawsuit in response, this one to block the appointment of a bankruptcy trustee, citing Goodins expertise and a desire to limit expenses and maximize a potential return to burnt customers. The bankruptcy court has approved the sale of Refcos retail FX
Trendlines continued, page 19

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17

Managed Money Review


BY DANIEL P. COLLINS

Man agrees to release info


fter a testy exchange between lawyers for Man Financial and U.S. District Court Judge Michael Baylson at a Dec. 16 hearing, Lee A. Rosengard, attorney for receiver C. Clark Hodgson, withdrew the receivers contempt motion against Man after Man agreed to release all of the requested information related to its role as broker to the defunct hedge fund Philadelphia Alternative Asset Management (PAAM). In June the Commodity Futures Trading Commission obtained a motion to freeze the assets of PAAM as part of a fraud action against the $230 million commodity pool and appoint a receiver to obtain custody of all the assets of

PAAM and its affiliates. Judge Baylson also requested Thomas Gilmartin, Man Financial SVP, who is on leave from Man and was a shareholder in PAAM, be deposed. Much of the information requested is related to emails and audiotapes of conversations between Gilmartin and PAAM officials. In response to the motion, Man claimed they had complied with their obligations and that the receiver had gone beyond its mandate. WHOS HOLDING THE BAG? In December, Cargill Inc. filed an objection in U.S. Bankruptcy Court to the notice to assume and assign to Man Financial exclusive agreements

between Refco Group Ltd. and Cargill. The objection argues the notice to hold Cargill to a five-year exclusive agreement with Refco and its affiliate entities should not be enforced without assigning to Refco obligations related to its purchase of Cargills futures commission merchant business. Under the purchase and sales agreement, Refco agreed to a post closing earnout of $67 million to $192 million based on performance. Cargill claims Refco owes an additional $59.5 as well. In a reply to Cargills objection, Refcos attorney claimed the exclusivity agreement stands alone and should be assigned without reference to other agreements and without Cargills consent.

Comparing index returns


S&P 500 Total Return Index Lehman Brothers Treasury Index Morgan Stanley EAFE Index Futures Public Funds (November) November +3.78% +0.65% +2.25% +3.31% YTD +4.88% +4.18% +5.98% -0.03%

public funds summary December 2005 Number reporting: 96 for the month: -1.37% Average performance
Funds up: 33 Down: 62 Unchanged: 1 YTD

Top performers in December


Fund Trading advisor(s)
December Return

Novembers top CTAs


November Barclay CTA Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+2.82% Barclay Sub-Indexes: Agricultural Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . .+1.61% Currency Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+1.42% Diversified Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+3.94% Financials and Metals Traders . . . . . . . . . . . . . . . . . . . .+1.39% Discretionary Traders . . . . . . . . . . . . . . . . . . . . . . . . . . .+0.33% Systematic Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+3.22% More than $10 million under management 1. Hasenbichler DRC AG . . . . . . . . . . . . . . . . . . . . . . .+29.96% 2. Meyer Capital Mgmt. . . . . . . . . . . . . . . . . . . . . . . . .+19.51% 3. TradeCom CTA Pool XXL . . . . . . . . . . . . . . . . . . . . .+17.98% 4. Beach Capital Mgmt. Ltd. (Discret.) . . . . . . . . . . . . .+17.89% 5. Quadriga Trading Mgmt. (Superfund) . . . . . . . . . . .+17.29% Less than $10 million under management 1. BAM Asset Mgmt. (Program 1) . . . . . . . . . . . . . . . .+25.88% 2. Calaveras Trading (Standard 2X) . . . . . . . . . . . . . . .+22.99% 3. Marshall-Weins Trading (Version #2) . . . . . . . . . . . +22.88% 4. SMI Management . . . . . . . . . . . . . . . . . . . . . . . . . . .+21.12% 5. Fort Orange Capital Mgmt. (Gl. Strat.) . . . . . . . . . . .+19.00%
Based on estimates of the composite of all accounts under management; does not reflect the performance of any single account. Source: Barclay Trading Group Ltd., Fairfield, Iowa; (641) 472-3456

YTD . . .+2.11% . . .+4.37% . . .+0.07% . . .+0.98% . . .+2.03% . . .+5.79% . . .+1.87% . . .+5.29% . . . .-7.69% . . .-22.78% . .+10.25% . . .-19.34% . . .+8.80% . . .+2.88% . . . .-0.38% . . . .-4.73% . .+30.75%

Smith Barney AAA Energy . . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . . . .12.53% . . . . . .91.10% SB AAA Energy Fund L.P. II . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . . . .12.04% . . . . . .88.91% Triad Trading Fund LP . . . . . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . . . .11.20% . . . . . .74.81% GSL-JWH Financial & Metals* . . . . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8.23% . . . . . .-13.97% GSL-JWH Strategic Allocation* . . . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.80% . . . . . . .-9.25% Worst performers in December Dean Witter Portfolio Strategy Fund . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-12.07% . . . . . .-24.25% Shearson Mid-West Futures Fund . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-11.67% . . . . . .-24.17% Smith Barney Mid-West Futures II . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-11.67% . . . . . .-24.32% Smith Barney Westport Futures Fund . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-11.53% . . . . . .-22.82% Dean Witter Cornerstone Fund II . . . . . . . . .Northfield Trading; J.W. Henry . . . . . . . . . . . .-8.67% . . . . . .-19.43%

2005 results
(through Dec. 31)

Number reporting: 96 Average performance for the year: -0.26% Funds up: 42 Down: 54 Unchanged: 0
Trading advisor(s)

Top performers in 2005


Fund
December Return

YTD

Smith Barney AAA Energy . . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . . . .12.53% SB AAA Energy Fund L.P. II . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . . . .12.04% Triad Trading Fund LP . . . . . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . . . .11.20% AHL Capital Markets Ltd* . . . . . . . . . . . . . .Man Investment Prod. Ltd. . . . . . . . . . . . . . . . . .0.27% Wimbledon Fund Ltd. Class C Shares* . . . .Multiple Advisors . . . . . . . . . . . . . . . . . . . . . . . .1.33%

. . . . . .91.10% . . . . . .88.91% . . . . . .74.81% . . . . . .22.94% . . . . . .18.68%

Worst performers in 2005 Smith Barney Mid-West Futures II . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-11.67% . . . . . .-24.32% Dean Witter Portfolio Strategy Fund . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-12.07% . . . . . .-24.25% Shearson Mid-West Futures Fund . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-11.67% . . . . . .-24.17% Shearson Select Advisors Futures Fund . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-5.15% . . . . . .-23.92% Man AHL Diversified plc* . . . . . . . . . . . . . . .Man Investments . . . . . . . . . . . . . . . . . . . . . . . .-8.22% . . . . . .-23.21%
Note: Listed return may not be fully attributable to listed advisor(s). * Offshore fund.

18

FUTURES | February 2006

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Trendlines continued
Trendlines Continued, page 17

business and the 35% interest in FXCM owned by Refco Capital Markets (RCM). The likely buyer is FXCM. RCM claims to owe customers $4.16 billion. Refco Inc. still owes $16.8 billion to unsecured creditors. Refco Securities LLC now faces liquidation after a bankruptcy judge ordered the company to return $117 million that was already transferred to RCM. Thomas H. Lee, founder of the friendly takeover firm that bears his name, has resigned. Thomas H. Lee Partners owned a 35% equity stake in Refco. Investors in Beeland Management Co.s Rogers Raw Materials funds have filed suit against

the company, alleging a breach of fiduciary responsibility. Beeland has $374 million tied up in the Refco bankruptcy and has filed suit against Refco, alleging the company improperly moved the funds from secured to unsecured business units just prior to Refcos collapse. By Chris McMahon SHELL GAME

Oil giant charged with violating CEA


The CFTC on Jan. 4 filed and settled charges against Shell Trading US Company (Stusco), Shell International Trading and Shipping Co. (Stasco) and Nigel Catteral, former chief trader for Stusco, for engaging in prearranged trades

on Nymex, a violation of the Commodity Exchange Act. The order assesses a $200,000 fine against Stasco and a $100,000 fine against Catteral. Royal Dutch Shell is the parent of both firms. According to the order, traders for Stasco and Stusco prearranged and executed non-competitive crude oil futures trades on five occasions between November 2003 and March 2004. Traders for the two related firms agreed to take the opposite side of crude oil trades with the quantity and contract month predetermined. Catteral, Stusco and Stasco consented to the order, which found they violated the CEA without admitting or denying its findings. They are directed to cease and desist from further violations. By Daniel P. Collins

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Trading Places
B Y C H R I S M CM A H O N

Webber to head Patsystems


avid Webber replaces Kevin Prior to AttentiV, Webber was an Ashby as CEO of Patsystems accountant with Price Waterhouse. PLC as of Jan. 03, 2006. Previously, Webber was managing Edward T. Tilly will serve as vice director of software compachairman of the Chicago ny AttentiV, where he Board Options Exchange for a worked for 10 years. Pats third and final term. The vice has built itself up into a big chairmanship is the highest platform made up of blue member-elected position at chip customers, Webber the exchange. Tilly has been a says. They have a very CBOE member since 1989. strong, capable management Gary R. King has been team and a very strong cusappointed to the board of DAVID WEBBER tomer base; I am going to directors of the Dubai have the benefit of building Mercantile Exchange (DME), off that foundation and creating some the joint venture between the New real growth. Thats what Im about, York Mercantile Exchange Inc. and getting them through the next phase. Dubai Holding.

Send news of personnel moves to:


Futures, 833 W. Jackson Blvd., 7th Floor Chicago, Ill. 60607, Fax: (312) 846-4638 Attn: Chris McMahon

E-mail: cmcmahon@futuresmag.com

Russ Rausch will rejoin Trading Technologies Inc. as executive vice president global support and chief information officer after a short stint as head of Calyon Financials electronic brokerage for North America. The Chicago Mercantile Exchange has named C.F. Wong managing director, Asia. Wong has more than 25 years experience in international futures markets. He previously served as CEO at ABN-AMRO Asia Futures.

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Hot Commodities
B Y C H R I S M CM A H O N

Notes stuck in range


Holly S. Liss, VP of Citigroup Global Markets Inc., expects to see the March 10-year note contract just below 108-00. On the outside, you do have a 62% retracement of the entire range from September to November that comes in at 110-13, and I think that is your topish area, Liss says. SA September Federal Reserve policy paper says demand from foreign central banks is suppressing 10-year yields by as much as 150 basis points, says B. Craig Elder, SVP of fixed income research at Robert W. Baird 10-year T-note (March 06) daily & Co. Inc. Somethings got to give, he says, but hes not expecting any surprises from new Fed Chair Ben Bernanke, whom he expects to be very conservative in Q1 and Q2 and to tighten interest rates in the fall. The key is a 4.42% yield which the notes have been hovering just below in Source: eSignal early 2006 says Brian Reynolds, market strategist at M.S. Howells & Co. When yields go below 4.42%, mortgage companies buy futures, pushing yields down; they sell if yields go above 4.42% due to less refinancing. I view this as a shock absorber for the economy. If the economy is strong, yields go above 4.42%; [if it] is too soft, they go below 4.42.

Minis looking large


The early 2006 equity rally has traders bullish even with bearish technicals. Independent trader Stephen Hallman says the E-mini S&P 500s breakout
E-mini S&P (Mar 06) daily

Source: eSignal

Sideways corn
Analysts are bearish on corn despite an impressive December rally, particularly after the March contract failed to take out Octobers highs. Daniel W. Basse, president of AgResource Company, attributes the rally to short covering by index funds and expects the large supplies to drive the market sideways until news breaks on the next growing season. He pegs the March contract to a range between $2.10 and $1.90 per bu. and doesnt see any help on the demand side as increased production from bio-genetics has absorbed any increase in world demand. Although the grains look cheap in the context of the CRB index, the fundamentals just arent $ per bu. there yet, Basse says. Corn (March 06) daily Bob J. Wiedeman, principal at Strategic Ag Trading, is only slightly more optimistic. He cites directional trades that get kicked in by moving averages as a bearish factor. The dryness in South America, coupled with the short positions in corn in the last month or so, Source: eSignal has driven it to 20 off the lows. Now we backed off 10 from the highs, Wiedeman says. He calls a low of $1.90 and a high of $2.15.

of an upward sloping wedge pattern is usually a sign of an imminent sell-off, but Hallman is not selling. He says that by breaching the upper line, the way could be clearing for a higher move. As a result, hes looking to go long. The main factors influencing price action in equities has been the Feds interest rate increases, which the Fed has hinted are nearing the end. We know they are going to raise the rate, thats already baked in. If they are at or near the end, then that opens the door for more upside, Hallman says. He expects March S&Ps to rally 3%, to about 1325. He sees support at around 1250. I like the 1250 area to buy it. Stewart DeSoto, president of DeSoto Capital Management LLC, says seasonal factors indicate a strong rally in the index. Despite high oil prices, and gold prices going through the roof, I just dont see anything holding the market back, DeSoto says. He says there is a lot of pent up demand given the tight trading ranges that equity indexes have been stuck in, particularly in the Dow. DeSoto expects the March contract to hit 1360 in February, a 6% rally from the start of the year. He sees 1280 as a likely near-term low.

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FUTURES | February 2006

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Market Strategy
BY MICHAEL BENHAMOU

How to benefit from an inverted yield curve


While an inverted yield curve is a general bearish indicator he end of the year 2005 rally was affected after the for equities, its negative implications to the banking two-year Treasury note yielded more than the 10-year sector makes that sector a prime target to short. The Regional Treasury note for the first time in five years. Some Bank Holders Trust (RKH) is an exchange trade fund (ETF) investors interpret an inverted curve as an indication that traded on the New York Stock Exchange. There are currently the economy will soon experience a slowdown, which caus19 companies included in this ETF, among the largest es future interest rates to give even lower yields. Before a and most liquid U.S slowdown, it is better traded stock involved to lock money into in the regional long-term investINVERSION TRADE Banking industry. In ments at present preBy using options you can profit from inversion opportunities with limited risk. 2003 the RKH went vailing yields because up 33%, 10.46% in future yields will be 150 2004 and 4.3% in even lower. 2005 (as of Dec. 28) These yield curve 140 after a rally of 10% in inversions are rare, and the last three months they form during 130 of the year. If the yield extraordinary market curve remains invertconditions wherein 120 ed for a while, the the expectations of RKH will most likely investors are complete100 give back a large part ly the inverse of those of its gain. demonstrated by the ND J F M A M J J A S O N D J F M A M J J A S O N DJ F M A M J J A S O N D J F M A M 2003 2004 2005 2006 2002 A good way to play normal yield curve. In Source: TradeStation a downside move on such abnormal market the RKH is the followenvironments, bonds ing option strategy: with maturity dates furDate: Dec. 28, 2005 ther into the future are expected to offer lower yields than bonds with shorter maturities. The inverted yield curve indiRKH last price is $142.75 cates the market currently expects interest rates to decline as time moves further into the future, which in turn means the Historical high 144.70 (Dec. 27, 2005) market expects yields of long-term bonds to decline. Remember that as interest rates decrease, bond prices increase Historical low since 2003 is $91.20 (March 11, 2003) and yields decline. Note that RKH was trading at 126.70 in October 2005 That the inversion has been somewhat limited does not disqualify its importance. Even though yields between the two Buy a RKH May 130 put (debit $1.80) year and 10-year have moved back and forth in positive and Sell a RKH May 145/150 bull spread ($4.40 credit and negative territory, the fact remains that it has inverted. $2.60 debit) Total cost is zero excluding brokerage and margin Previous yield curve inversions took place in 1998 and then again in 2000, just before two economic downturns, but note Risk/ reward analysis also that the 1996 inversion was followed by an economic Max risk is $5 (or 3.3% of nominal) if the RKH is > 150 boom, so it does not always work! No less an expert than outas of May 20, 2006 going Federal Reserve Board Chairman Alan Greenspan has You are short RKH > 145 (with a natural stop loss at 150) discounted the connection between a yield curve inversion No exposure if RKH is between 130 and 145 as of and recession. While Greenspan acknowledges that the conMay 20 2006 nection has existed in the past, he has noted growing economUnlimited profit if RKH is < 130 at as of May 20, 2006. ic complexity has altered that connection. Therefore, if its hard to predict the future of the economy, Michael Benhamou is co-managing partner of Louis Capital Markets it is easier to understand that the immediate consequence is a (LCM). Prior to founding LCM, he was head of sales & investment strategy negative for banks, as they can not conduct their carry trade as in foreign exchange at Credit Lyonnais Securities in New York after having a profit: borrow short, lend long-term and capture the spread. worked at Smith Barney Inc.

24

FUTURES | February 2006

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MARKETS
Will crude oil prices continue to cool off this year or is the recent pullback a brief correction in another long-term bull move? While opinions differ on predictions for the first half of the year, the consensus is price and volatility in crude oil, and other energies will not live up to what we witnessed in 2005.

Energy markets could find home in the range


BY CARLA M. BAUCH
hile a few experts predict we will revisit $70 per barrel crude oil in 2006, many analysts expect energy prices to stabilize during the first half of the year. Predictions of crude oil prices in the mid to high $50s are the norm as analysts call for range-like markets instead of the trending markets energy traders have came to know so well. Vikram Patel, senior technical analyst for Informa Global Markets, explains, A top is in place and we are not going back to these levels any time soon. Patel reminds us the largest gain is often at the end of a bull market. From approximately May to August of last year, the price of crude oil rallied $25.00. This is the largest dollar increase in the shortest time frame, Patel says. He points out the retracement levels of $46.20 and $70.85 the later reached in August 2005 after Katrina hit the Gulf of Mexico lead to a 61.8% retracement of $55.40. After seeing two solid Fibonacci levels intersecting at the same point, Patel forecasts the price of crude will hold above $55.00 through June of this year, but

not head north of $70. We are not in a trending environment. We expect to see range trading up to May or June of this year, Patel says. (See Less volatility for crude, below). Jamal Qureshi, lead analyst of PFC Energys oil market group agrees crude will settle into a trading range the first half of this year. We see significant

changes due to the fact that we have reached a multiyear high in prices, Qureshi says. As an average for the year, Qureshi expects crude to trade in the upper $50s. More specifically, he sees price ranges between $57 to $59 during the first half of this year and around $54 during the second half. Qureshi points to hedge fund activity as

LESS VOLATILITY FOR CRUDE


Most analysts predict crude will experience less volatility in the first half of 2006 and prices will range from the mid to high $50s per barrel.
$/bbl. 70.00 65.00 60.00 55.00 50.00 45.00 40.00 35.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004 2005
Source: eSignal

30.00

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FUTURES | February 2006

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a telling tale of crudes sentiment. Hedge funds are not automatically bullish. They are now inclined to play both sides, he says. This year instead of focusing on how high crude will climb, analysts are debating what the low for the year will be. The mission in 2006 is to find what the floor price is, explains Tim Evans, senior energy analyst, IFRMarkets.com. Evans explains there is inherent tension in the relationship between high stock prices and high energy prices. They dont normally go together and this is a serious bearish fundamental risk for the crude oil market, Evans says. Tom Bentz, energy analyst with BNP Paribas Commodity Futures, Inc., sees crude oils drop as a correction that could make its way to $45. Prior to crude seeing a bit of a topping action in mid December, Bentz would have predicted crude to retest recent lows of $55, but after the commodity spiked a bit Bentz sees $45 to $47 as a downside target area. However, Bentz explains, The long term trend is still up. We could see a correction down to $45 and then we are probably looking for the beginning of the next leg up that could last for two to three years. DEMANDS INFLUENCE A bigger question than where the price will fall to is how much will demand grow in 2006. In mid December the International Energy Agency (IEA) said global demand for oil would amount to 83.4 million barrels per day in 2005 and 85.2 million barrels per day in 2006, adding that world demand growth for 2005 would end up at 1.4% and estimated demand growth for 2006 at 2.2%. In 2004, the market experienced a much larger demand growth of 3.8%, with a demand of 82.2 million barrels per day. (See World oil demand growth, page 28). Somehow we take 3.8% demand growth in oil consumption as if the world is coming to an end, when really it is not that much of a stress on the system, Evans says. However, Evans notes this years high prices may very well dampen growth. Evans expects the mar-

ket to be the final judge. I dont think we are going to see 3% demand growth unless we see $30 per barrel crude. If the price stays up here we wont see strong growth. The price has to go to a lower price level to get demand growth back. Bentz explains while we have read

numerous reports about demand destruction, if you look closely at the numbers there has not been a tremendous drop in demand since Katrina and Rita struck the gulf coast. For instance, [demand of] gasoline over 9 million barrels a day is good and gaso-

Tech Talk: Crude projections


BY JOHN RAWLINS

he first chart is a projection of crude oil made on Dec. 23, 2004, projected out one year. It is not a projection of price but price momentum. The price is smoothed so we are able to extract a more constant cyclical behavior and then proprietary filters extract and combine those cycles to give a future projection. The second chart is a crude oil weekly chart. You can see the relative strength index (RSI) under the chart with a vertical line indicating where the crude forecast was made from Dec. 23, 2004. Compare the Dec. 23, 2004 forecast with the RSI to note the close correlation. The strength of this program is its ability to project the timing of the next high or low. However, like all programs that are using historical data to project future price behavior, they are subject to unforeseen events like wars and hurricanes that can disrupt the analysis. The last chart is the current weekly projection of crude and indicates momentum moving higher into March 2006 with a decline into May 2006.

84.4 75.5 66.1 56.8 47.4 38.0 8/6 10/15 2004

CRUDE OIL, 12-23-04

12/23

3/11 5/20 2005

7/29

10/7

12/23

70 60 50 40 80 70 70 60 50 Oct Jan Apr 2005 Jul 40 Oct

76.1 68.8 61.5 54.2 46.8 39.5 5/13 2005

CRUDE OIL, 12-28-05

7/6

9/2

10/28

12/23

John Rawlins is a trader and private researcher.

2/10 2006

4/7

6/2

www.futuresmag.com | February 2006

27

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Markets continued
line is still running at 9.2 million barrels a day, he says. XpressTrade LLC futures analyst Mike Zarembski poses the same question as Evans: Can growth estimates continue if prices remain this high? Zarembski, who expects to see crude oil between $58 and $64 in the first quarter range, reminds us that while China imports a large amount of oil, the country is serious about the conservation of energy. The China Petroleum and Chemical Industry Association predicts the countrys crude oil import will total 130 million tons this year. Kevin Harris, chief economist with Informa Global Markets, expects the pace of Chinese growth to slow. China will continue to grow, but they will get more out of every BTU, he says. Added efficiency could also temper Chinese demand. This is the year that China will manage its bottlenecks, Harris says. Before the country did not have the capacity to properly unload its barges. China is going to manage its imports better this year after realizing what a strain this put on world markets. OPEC TO ACT Lower prices, forecasts for lower global demand growth and seasonal demand drop all lead the Organization of Petroleum Exporting Countries (OPEC) in the direction of making cuts to its quota. Most analysts predict these cuts will come in the second quarter 2006. OPEC agreed on Dec. 12 to keep output quotas unchanged at 28 million barrels a day. Also in mid December, the IEA stated OPEC would have to pump 28.5 million barrels a day in 2006 to meet demand. Some say OPECs magic number is around $53 and if prices reach this level cuts would already have been acted on at its Jan. 31 meeting. The decision to meet again this early after the December meeting is saying OPEC is going to be proactive, Qureshi says, adding OPEC will have to react by second quarter 2006. In mid December, OPEC also agreed to withdraw a previous offer to use as much of its 2 million barrels a day of spare capacity as needed, which was made available after hurricanes Katrina and Rita hit. While prices have leveled off since the hurricanes struck the United States, oil and natural gas production is still struggling in the Gulf. We still havent got full capacity back since the hurricanes, Zarembski explains. It will be about mid 2006 before that happens. According to the

WORLD OIL DEMAND GROWTH


World oil demand is estimated to increase by about 1.7 million barrels per day in 2006, up from 1.2 million barrels per day in 2005.
1.6 1.4 OECD* 1.2 1.0 0.8 0.6 0.4 0.2 0.0 20032004 20042005 20052006

CHANGE FROM PREVIOUS YEAR


Non-OECD Asia FSU** and Eastern European Forecast Other

Million barrels per day

*Countries belonging to Organization of Economic Cooperation and Development **Former Soviet Union Short-Term Energy Outlook, December 2005
Source: Energy Information Administration

28

FUTURES | February 2006

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EIA, as of the beginning of December, some 36% of normal daily federal Gulf of Mexico oil production and approximately 29% of federal Gulf of Mexico natural gas production remain shut-in due to Hurricanes Katrina and Rita. In Louisiana, shut-in onshore oil and natural gas production is down to about 40% of prehurricane capacity and is projected to be fully restored by the end of March 2006. However, as of Dec. 22, shut-in oil status in the Gulf was down to 412,687 barrels a day a more than 126,000 barrel improvement from early December. (See Hurricane recovery, below.) NATURAL GAS FOLLOWS SUIT Natural gas appears set for a calmer first half of 2006 as well. Traders and analysts are predicting less volatility and a range

bound market for the first six months of the year. (See Natural gas due to stabilize, page 30.) Patel, sees natural gas in February and March trading around $10 to $12 per mBtu, but later in the year expects to see ranges around $12 to $14. Evans notes natural gas recently gapped 20% above the cost of heating oil. If we see a drift down in crude oil it will help shape the sentiment for natural gas prices. We cant sustain a 20% premium over heating oil prices, Evans says. He blames the unprecedented high natural gas prices on reaction to the hurricanes. We priced in a shortage, he says. And while analysts opinions differ on their view of the supply situation of natural gas and other energies, statistics from the Energy Department tell us that U.S. supplies of crude, heating oil and natural gas as of the week of Dec. 16

HURRICANE RECOVERY
Gulf crude oil production has improved at a slower pace than natural gas. Some hurricane affected facilities will remain out of service through the second quarter of 2006.
Mbd 2,000 1,600 1,200 800 504 400 0 8/22 9/11 10/1 10/21 11/10 Mbd=Thousand barrels per day, $/bbl.=Dollars per barrel Bcf/d 10 8 12.34 12.51 12.02 6 4 2.4 2 1.5 1.0 0.7 9.93 12 8 4 392 331 297

SHUT-IN FEDERAL OFFSHORE GULF CRUDE OIL PRODUCTION


Shut-in Production (left axis) WTI Crude Oil Price (right axis) 60.00 Forecast

$/bbl. 72 66 60 54 48 42

63.00 61.75 62.50

11/30 Dec Jan Feb Mar Short-Term Energy Outlook, Dec. 2005

SHUT-IN FEDERAL OFFSHORE GULF NATURAL GAS PRODUCTION


Shut in Production (left axis) Henry Hub Price* (right axis) Forecast

$/Mcf. 20 16

0 0 8/22 9/11 10/1 10/21 11/10 11/30 Dec Jan Feb Mar *Trading on Henry Hub suspended from 9/23-10/6, Bcf/d=Billion cubic feet per day, $/Mcf.=Dollars per thousand cubic feet Short-Term Energy Outlook, Dec. 2005
Source: EIA

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Markets continued
NATURAL GAS DUE TO STABILIZE
Like crude oil, natural gas, according to most experts, is headed for a range trading market this year.
$/mBtu. 16.00 15.00 14.00 13.00 12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004 2005
Source: eSignal

were above the five-year average. Even with the upside potential that it stays cold, there is not a shortage in natural gas. The supply situation is not in bad shape, Evans says. On Dec.13, natural gas reached an all-time high of $15.78, after a cold wave moved across the United States. In late December, natural gas prices were more than 70% above prices form a year ago at that time. In addition, gasoline futures as of late December were up close to 50% from the previous year at that time and heating oil experienced more than a 30% gain over the past year. Even though it appears crude oil and natural gas will not be as volatile this year as in 2005, traders participating in the energy markets are still looking for ways to manage the risk that goes hand in hand with energies. Take for instance, natural gas. A lot of customers are trading natural gas, XpressTrades Zarembski says. However, he explains because margins are so high, traders are looking at options. By trading options, traders can play the market [without] taking quite as high of a risk in their outright position, he says. It is not only traders, though, taking notice of natural gas. On Dec. 14, 2005, Congress also has a closer eye on the market. The House of Representatives approved legislation to reauthorize the Commodity Futures Trading

Commission (CFTC) for another five years, which included a controversial amendment aimed at providing more transparency to the natural gas markets. According to the House Committee on Agriculture, the amendment charges the CFTC with preventing and detecting manipulation of the natural gas markets, outlines increased record keeping requirements for large traders operating on the exchanges and increases the civil and criminal penalties for violations of CFTC antimanipulation rules. The amendment has received opposition from several groups including the Treasury Department, the Federal Reserve and industry associations such as the Futures Industry Association. In a Dec. 13 letter to Congress Federal Reserve Chairman Alan Greenspan referred to the language in the amendment as rather vague and explained it could be read to require the CFTC to broaden record-keeping and reporting requirements beyond futures. The Senate must still approve the bill and while the Senate Agriculture Committee approved a version of the bill in July, the Committee is still working out details with the Senate Banking Committee. As of late December, the bill was not yet on the Senates schedule. FM

Carla M. Bauch is a freelance writer in Chicago.

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Forex Trader
BY ABE COFNAS

The gift of the break-even trade


tions such as anxiety, guilt, fear or greed. We all know that nderstanding your experience in forex trading this is not an uncommon experience. depends on what measures are used. A straightforward However, the break-even trade also can become a huge approach often applied is quantifying our results in opportunity to evolve into a mature trader by going beyond terms of profit vs. losses. Being profitable is where all of us an obsession for profits. Many of us approach each trade in desire to be. Yet, this measure cannot be, by itself, sufficient an arrogant fashion, as the chance to grab profits, to scalp or to sustain our motivation. All traders have periods of losses take pips from the market. This concept reflects a common en route to profits. As a result, a single-minded desire for held view that trading is a zero-sum battle between the trader profits may itself be a factor in furthering losses and actually and the market, where the trader wins or loses against the reduce the potential for success. market. But some of the best trading programs produce a win Once a person desires profits, resulting losses turn into ratio just above 50% (see Waiting on a winner). The disappointments. The experience of disappointment may majority of trades are roughly break-even. Every flat or small then unleash a host of destructive emotions. The problem losing trade keep us in the game. Traders get in trouble when becomes how we handle the losses and not the fact that they stubbornly hold onto a trade refusing to believe their they occur. How can a trader overcome becoming obsessed hunch, system or simply their timing, is wrong. with profits and being emotionally unprepared for the realiYet, there is a ties of losses? better and ultiThe solution is mately more effecto step outside WAITING ON A WINNER tive approach. the conventional The top technical currency programs throughout the last three years. What if we humbly profit and loss Manager % Winning Avg. Winning % Losing Avg. Losing Up Dev / Compound Months ROR Months ROR Down Dev Annual Return reconfigure our paradigm that 1 Monarch Capital Mgmt. 58.82 8.74 41.18 -3.12 3.62 50.06 mindset and view dominates us 2 Spot Forex Mgmt. (Zurich) 61.76 7.02 38.24 -3.76 2.61 37.49 the forex market and realize that 3 MIGFX Inc. (Managed) 76.47 3.47 23.53 -2.73 2.31 26.2 4 Pacific Asset Mgmt. (Alpha) 41.18 17.16 58.82 -7.12 2.34 25.14 as a magnificently between the realm 5 Alterama Inc. (Trendoscil FX) 50 10.93 50 -6.06 2.19 24.12 complex place full of profits and loss6 Grossman Asset Mgmt. (IPS Currency) 55.88 4.61 44.12 -2.33 2 19 of opportunity, es is a neutral zone 7 Wallwood Consultants (Forex) 64.71 5.23 35.29 -4.97 1.4 18.73 that when properly that allows the 8 Spot Forex Mgmt. (Geneva) 61.76 3.06 38.24 -1.31 2.9 17.51 9 DKR Capital (DKR Strat. Currency) 70.59 3.35 29.41 -3.17 1.9 17.44 understood protrader to pause. 10 EChange Capital 58.82 5.05 41.18 -3.87 1.4 15.64 vides valuable From a mathematNote: Top 10 programs based on compound annual return. Most have a 2/1 upside/downside standard deviation. trades? We would ical perspective Source: Barclay Map experience a shift the neutral zone is in our entire menrepresented by the tal and emotional focus. The market then becomes not our number 0. Obviously one moves from the negative numbers enemy, but a field of opportunities that when understood can of losing trades to the positive column of winning trades. produce profits. Those who take this approach do not But having trades that are break-even, or 0 on the profit and demand nor expect pips to be handed over as if they belong loss register or reasonably near that range, is actually a very to us. Instead we aspire to obtain a great trade by recognizing good outcome. Foremost among its benefits is it allows one to a winning pattern. Pips become what we earn by applying keep intact the capital at risk for another and perhaps our knowledge. The market becomes our partner, it is a better trade. Breaking even may not elicit the praise of others reciprocal relationship. The ability to trade each day by empbut it is a sustaining event. How you get to break even is tying ourselves first of ego satisfaction may not be easy, but it also important. is the distinguishing characteristic of traders in the process of If the 0 entry on the trading log is the result of a profitable transforming and evolving themselves from frenetic begintrade turning into a loss, it may represent an astute observanings to a level of competence. If your next trade is neither a tion by the trader that conditions have changed and getting profit nor a loss, pause and relax, because in the case of forex out is preferable to seeing negative numbers. On the other trading, the result of 0 is a positive number. hand, a break-even trade may be the outcome of a quick exit by the trader fearing a loss. A frequent number of these break-even trades in ones account may reveal the trader is Abe Cofnas is president of learn4x.com LLC. E-mail: learn4x@earthlink.net. becoming overwhelmed by the setting in of destructive emo-

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FUTURES | February 2006

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EQUITY TRADING TECHNIQUES


Here are a couple ways to use buy-write options strategies to mimic the performance of traditional bond and stock investments as well as an approach that uses a relatively new derivative instrument.

Versatility of buy-write strategies


BY MIKE OYSTER

ast month we outlined the theory behind the buy-write trading strategy. Buy-write, also called covered call writing, programs have experienced stratospheric growth recently and now include more than $18 billion in assets. Although the growth has been impressive, the concept remains in its infancy as virtually all the assets are managed with the same general philosophy. The idea can, however, be stretched and molded to form different investments to meet different needs. Most investments fall into one of two distinct categories: those that seek capital appreciation and those that generate income. Although exceptions exist, stocks are expected to provide capital appreciation and bonds are used for generating income. Being able to classify an investment as one or the other is an important aspect of effective portfolio construction, but most buy-write programs are not easily classified as stock-like or bond-like. They may still merit consideration, but the concept could prove more effective if implemented with a more focused performance agenda.

The most significant growth for covered call writing came after the Chicago Board Options Exchange (CBOE) commissioned the development of a passive buy-write index. This index, the BXM, showed the performance of a completely decisionfree foray into covered call writing. Most buy-write strategies today are similar to the BXM, which behaves uniquely relative to both stocks and bonds. In other words, BXM-like programs can be expected to grow assets modestly and generate income, but not a tremendous amount of either. Thus, we can bend the BXMs rules a little to create some different investments that target more specific goals. GROWING PRINCIPAL As a capital appreciation tool, the BXM has good potential. The principal inhibitors to the BXMs asset growth qualities are the call options written barely out-of-the-money (at the strike price just above the current indexs price). Upward moves in the market are capped at that strike because any additional appreciation is offset by an equal

liability to buy back the call. But what if a call option was written a bit further out-of-the-money? It wouldnt provide as much income, but would allow for greater capital appreciation. An example can illustrate how that might work. On Nov. 21, the S&P 500 index futures closed at 1257.00. The BXMs philosophy, if used in the futures market, would dictate selling a call at the next highest strike with one month until expiration in this case, the December 1260 call. Selling this call at 10.3 would have generated $2,575, but capped capital appreciation at only 0.2% until the options expired the third Friday in December. Lets loosen the cap a little and write a call approximately 1% out-of-themoney so we can capture 1% per month in capital appreciation if the market advanced that much or more. Selling the December 1270 would do the trick and would also generate $1,450 in income. So, we have an unleveraged position that is on pace to generate 5.5% in income $1,450 times 12 divided by $314,250 (1257 x $250) and

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FUTURES | February 2006

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allows for 1% per month in capital appreciation. This can be particularly compelling if future stock market returns are, as many expect, below historical averages, because giving away the upside will be far less painful than it would be if the market posts 20% returns. Certainly the stock market will not go up 1% every month, but even if we captured just 5% of the upside during a given year, combining that with the 5.5% in income could result in greater capital appreciation than the stock market in general. MONEY FLOW To create a fixed-income generating vehicle, we sell a higher-priced option at a lower strike price. This will produce more cash, but we dont want to just spend all of the income immediately. Monte Carlo simulations indicate that if all the income from a covered call writing program was spent, the total value of the investment would soon deteriorate to zero because it endures all the downside moves of the stock market and enjoys none of the upside. A better idea is to kick out the income you need and reinvest the rest. Unlike a bond, which will return the principal to the bondholder at maturity, the principal of a covered call writing strategy is the cash used for investing in S&P 500 futures, which must be replenished after negative stock market performance. Looking again at Nov. 21, we see the 1250 call could have been sold for 16.5, which would have generated $4,125 in income a 15.8% annualized yield on an unleveraged investment of $314,250. Spending that much income without reinvesting anything would lead to total depletion of assets. So some of the income should be reinvested back into the program in order to maintain the principal value of the investment. How much should be reinvested? That depends, and requires some com-

OPTIONS FOR ETFS


While many of the options on ETFs lack liquidity, some of those listed by the Chicago Board Options Exchange (CBOE) are based on popular underlying markets.
Options on Diamonds (DIA) Diamonds are shares in an ETF that is designed to track the performance of the Dow Jones Industrial Average. Options on this ETF are physically settled and represent 100 shares of the underlying Diamond. They are American style exercise. They have been trading at CBOE since May 20, 2002. Options on iShares MSCI EAFE (EFA) The MSCI EAFE index is a stock index based on Europe, Australian and Far Eastern holdings. Options on this ETF have been traded since Sept. 25, 2002. Options on iShares S&P 100 Index (OEF) An option on 100 shares of the iShares S&P 100 index ETF, an exchange-traded fund managed by Barclays Global Fund Advisors to track the S&P 100. These are American style options. Options on Nasdaq-100 Index Tracking Stock (QQQ) An option on 100 shares of the Nasdaq 100 index ETF, an exchange-traded fund designed to track the performance of the Nasdaq 100. These also are American style options. Options on SPDRs (SPY) An option on 100 shares of Standard & Poor's Depositary Receipts (SPDRs). This ETF option also has American style expiration.
Source: CBOE

promise. The more income spent, the greater the risk of principal loss. Some studies show if 10% of covered call writing income is spent and the remainder reinvested, the principal value of the investment could be maintained. Even if only 8% was generated in income, such a yield would prove far superior to most fixed income strategies in use today. However, it should be noted that certain market environments could make even that much income difficult to generate while still preserving principal. Transaction costs and taxes should be considered as well. OPEN THE TOOLBOX Now that we can see how a buy-write strategy can be created to achieve more specific investment goals, we can dis-

cuss the specific financial tools for implementation. Our examples used futures and futures options, but most buy-write programs are constructed with S&P 500 index (SPX) options. The problem with using SPX options is that there is no underlying security that can be delivered if the written calls are exercised. More to the point, selling SPX calls as part of a buy-write program would be considered a naked position, necessitating hefty margin requirements that would lessen the efficiency of the program. One potential solution may be found in an entirely different derivative: exchange traded funds (ETFs). There are ETFs that have options connected directly to them. Using ETFs might allow a buy-write program to be con-

The problem with using SPX options is that there is no underlying security that can be delivered if the written calls are exercised.
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35

Equity Trading Techniques continued


AMPLE OPPORTUNITY
While buy-write strategies can be constructed using SPX options or options on the ETF (SPY), the best opportunities may be found using options on the S&P 500 futures.
S&P 500 Futures January Calls (OS) Est.
Strike Open High Low Last Settle Change Volume Open Int.

S&P 500 Futures January Puts (OS) Est.


Strike Open High Low Last Settle Change Volume Open Int.

1260 1265 1270 1275 1280 1285 1290 1295

15.3 12.7 9.5 8.8 6.7 4.5 3.3 2.2

16.0 14.0 10.3 8.8 6.7 4.7 3.7 2.4

15.3 16.0 12.7 14.0 9.5 8.2 5.7 4.3 2.8 2.2 10.3 8.2 6.7 4.3 3.5 2.4

15.5 12.6 10.0 7.8 5.9 4.3 3.1 2.2

UNCH UNCH -10 -10 -20 -30 -20 -20

80 30 345 55 111 45 236 56

588 53 846 3842 4506 559 6587 5092

1225 1230 1240 1250 1255 1260 1265 1270

3.0 3.4 5.0 7.1 8.3 11.0 12.5 15.2

3.0 3.4 5.2 7.3 8.3 11.0 12.5 15.2

2.5 3.3 4.7 6.5 8.3 9.4

2.8 3.3 4.7 6.5 8.3

2.8 3.4 4.9 7.1 8.6

-70 -70 -90 -100 -110 -120 -120 -130

55 830 190 75 25 31 540 330

3010 1727 7335 3846 46 3488 263 229

10.2 10.3

12.4 12.4 12.4 14.4 14.4 14.8

Source: CME.com

structed without excessive margin requirements, but doing so brings about a new set of problems. Of the ETFs that have options connected to them, most are relatively illiquid, with wider bid-ask spreads. Also, most ETF options have a limited

number of strike prices, inhibiting opportunities to build precise strategies. Finally, there is the tax issue. An investor who generates short-term option income while holding the underling ETF for the long term may be forced to pay income tax on a posi-

tion that actually lost value. However, having the investment completely contained within a futures program may allow more favorable tax treatment of profits and the opportunity to offset losses. The greater awareness of covered call writing has increased the average investors comfort with this terrific investment tool. Additionally, creating strategies through the use of futures and futures options may prove more efficient and effective than using securities. As the concept becomes more widely understood, we can say with a high degree of confidence that various forms of covered call writing strategies will be designed and offered to fulfill far more FM specific investment needs.
Michael J. Oyster is a CFA, CTA and is the author of Mission Possible, Achieving Outperformance in a Low Return World. www.AchievingOutperformance.com.

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FUTURES | February 2006

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TRADING TECHNIQUES
Floor traders constantly try to profit from price anomalies between open outcry and electronic contracts through arbitrage. Part of their strategy is the not-so-subtle ways they try to influence either market. This plays a major role in the price flow of both markets.

Understanding the arb trade


BY BEN LICHTENSTEIN
rbitrage is one of the most influential but commonly misunderstood factors that drive price activity in modern futures markets. Understanding how arb trades work can give you an edge regardless of your trading approach. A successful arb, in the simplest of terms, is the instantaneous, or near instantaneous, purchase of one product and the sale of another that results in a profit but a net zero position. Popularly traded products, such as the S&P 500 futures, that offer side-byside open outcry and electronic trading provide some of the best opportunities to execute arb trades today. Floor traders frequently are in position to take advantage of price discrepancies that occur regularly in the two separate marketplaces. These regular discrepancies create arb opportunities throughout the trading day. With a basic knowledge of the simple terms and procedures used we can break down this trade, show how it affects prices, and broaden our understanding of a major influence on these markets.

MANY FACES Arb opportunities can present themselves in many different forms. There are arb situations that occur because the market is slow and situations that are available only because the market is extremely busy and moving fast. One arbitrage opportunity that was popular recently was the spread between cash currencies and futures. Back in the 1980s and early 1990s, banks and institutional traders would arb the interbank cash markets and the futures traded in the pit. As prices diverged, traders would buy the cash and sell the futures for instant profit. While this type of arb certainly was the predecessor to the arb of today, the two are different in many ways. However, before we get into the specifics of modern arb trades and the influence on the markets, we need to understand the basics. First, we have the trading pit. The trading pit is the arena where all open outcry orders are executed, or filled. The pit has three types of participants, filling brokers, locals and arb locals. Filling brokers execute trades for customers. Locals attempt to scalp the

middle out of each trade by buying the bid and selling the offer. Arb locals only trade when an arb opportunity is present. Arb locals rarely hold a position for more than a second, if that long. They are in constant communication via wireless headset to another local who is sitting in front of a Globex terminal located around the perimeter of the pit. The bid and offer are commonly misunderstood. A bid is not any buyer, and an offer is not any seller. A bid represents a buy order of a certain quantity at a certain price. An offer represents a sell order of a certain quantity at a certain price. The current bid/offer represents the narrowest spread between buyers and sellers. The difference between the bid and the offer is the spread. Trade occurs when the bid and the offer find a price within the spread they both agree upon or when a third party enters the equation and executes a trade at the standing bid or offer. Differences in prices and tick values are necessary for the arb to occur. For instance in the S&P 500 futures, pittraded contract prices change in 0.10

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FUTURES | February 2006

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increments, such as 1192.20 to 1192.30. The cash value of this change (tick) is $25.00. The E-mini contract is one-fifth the value of the pit-traded contract and it ticks in 0.25 increments such as 1192.00 to 1192.25 (see Different ticks, page 40). Even though the move is bigger, the contract value is smaller, so the cash value of this one-tick move in the E-mini is $12.50, or half the value of a one-tick move in the pit-traded contract. It's primarily contract size and tick size that create the opportunities. SLOW AND STEADY Arb groups are usually made up of just two traders. One trader stands in the pit, being constantly fed bids and offers on where the E-mini is trading. When the E-mini contract is showing a 1249.25 bid, the arb locals in the pit are all showing a 1249.20 bid. If paper comes to the pit to sell at the market, the filling broker will sell to the locals showing the 1249.20 bid. Immediately after buying the 1149.20s in the pit, the second member of the team, who sits in front of an E-mini terminal, sells the 1149.25s in the E-mini on the screen. Because the ratio is five E-mini's to every one S&P, he needs to sell five minis for every one contract his partner bought in the pit. If an arb local buys 20s in the pit and sells 25s on the screen, he has made 0.05 per contract, which is a total profit of $12.50 for that trade. Arb locals would also try to buy at 1249.70 when the market in the E-mini is showing a 1249.75 bid. Or on the sell side they would try to sell at 1249.80 when it is offered in the E-mini at 1249.75. In theory, the arb is a guaranteed moneymaker. In reality, the trade requires a great deal of discipline, skill, patience and the ability to adapt to constantly changing market conditions. These examples are simple but it doesn't always work out that way. Arb locals are not without risk. After buying the pit contract at 1249.20, they need to sell at 1249.25 to make

MARKET TERMINOLOGY
Understanding these basic terms will help you realize the workings and influence of arb trades.
Trading pit: The arena where all open outcry orders are executed or filled. Filling brokers: Open outcry participants who execute customer orders (fill paper) for a commission. They typically stand on the top step. Locals: So-called scalpers, locals are the open outcry participants who are the middlemen to the majority of trades. They provide market liquidity. They are the market makers. They typically stand in the middle of the pit. Arb locals: Local traders whose sole purpose is to take advantage of the arb opportunities between the price in the pit and the price trading on the electronic markets. Bid: Someone trying to buy a certain quantity at a certain price. Offer: Someone trying to sell a certain quantity at a certain price. Spread: The difference between the price where bids are willing to buy and the price where offers are willing to sell. Tick values: The minimum distance a market can move. The different tick values of the pit- and electronically-traded markets is one of the main reasons arb opportunities exist.

the tick. If they miss the 25s and end up selling the 1249.00s, they go from a profit of $12.50 per contract to a loss of $50.00 per contract. To be a successful arb local, you need to be in constant communication with your partner, who's watching the E-mini screen and can immediately execute the other leg of the spread for a profit or minimal loss. The speed in the communication between the two is essential to avoid missing the second leg of the trade. This coordination occurs hundreds of times a day and has in many ways added liquidity to the pit. FAST AND FURIOUS The basic or slow arb trade is just one of many that arb locals capitalize on regularly. Another type of arb, the fast arb, presents itself when the market makes a sudden move up or down. If a broker in the pit is working a limit order to pay 1249.60 on 50 contracts, arb locals would be offering 1249.80. Why are they offering the 80s? The most likely reason should be clear: 1249.75 is probably the offer in

the E-mini. But what if something causes the E-mini market to drop abruptly, which is often the case when a large sell order hits the screen or the pit? Say the Emini drops to 1249.50. The arb locals now have a chance to sell to the limit order in the pit at 1249.60 and buy the new offer on the screen at 1249.50. In this case, the arb local has to be aggressive to get the filling broker to trade with him. If he does, he has completely exploited the arb; this is the closest anyone will ever get to free money. OVERFLOW EFFECTS While the arb affects price activity in many ways, there are two specific results are worth examining. The first is the arb slows a very fast moving market, reducing volatility. The second is though many traders believe the electronic markets lead the floor, the arb creates this illusion that the E-mini contract leads the pit when the opposite is true. To demonstrate, assume that the spread in the pit is 1249.50 bid at 1250.00 offer.

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39

Trading Techniques continued


DIFFERENT TICKS
The larger S&P pit-traded contract moves in smaller price increments, so they appear to move in a smoother fashion than the electronically traded E-mini contract. This discrepancy creates arb opportunities.
1259.50 1259.40 1259.30 1259.20 1259.10 1259.00 1258.90 1258.80 1258.70 1258.60 1258.50 1258.40 1258.30 1258.20 1258.10 1258.00 1257.90 1257.80 1257.70 1257.60 1257.50 8:30:17 8:31:23 8:31:36 8:33:01 8:33:10 8:33:10 8:30:05 8:30:27 8:32:39 8:34:05 8:34:32 8:35:16 8:35:38 8:35:34 8:35:37

SELECTED TIME & SALES DATA (DEC. 8, 2005)


E-mini (RHS) Pit contract (LHS)

provides a market for the market makers. It enables locals to create a winning trade for a very small profit out of a trade that in the past would have been an immediate loser. The illusion this creates to traders off the floor is that the E-mini contract leads the pit, but the opposite is true. When a large sell order hits the pit it is the arb locals selling the E-mini contract to lock in small profits that you first see on the screen. Traders off the floor see the bids getting hit in the E-mini and then prices moving lower in the pit. This also creates the illusion that it is initiative action in the E-mini contract when it is actually responsive. HISTORY LESSON The markets have gone through many changes since the introduction of electronic trading. The arb has become increasingly popular and will continue to grow in popularity as the depths of the market increase on the electronic platforms. The changes the market has gone through as a result of electronic trading are not always obvious to many day-traders and the effects the arb has on price activity within markets that offer side-by-side trading often similarly go unnoticed. It's important that these traders understand the influence this type of trading has to recognize potential pitfalls as well as profitable opportunities. No matter what product you trade, you need to obtain all the information possible that affects it. With new derivatives products coming online all the time futures, options, ETFs, options on ETFs, futures on ETFs, etc. based on the same or similar underlying, it creates more arbitrage opportunities. By understanding the fundamentals of the arb trade in the S&P 500, even if that trade is not as viable as before, traders can equip themselves to take advantage of these new FM opportunities as they appear.
Ben Lichtenstein is the president of TradersAudio.com and a member of the Chicago Mercantile Exchange.

Source: CME

Five years ago when most S&P 500 orders were still executed in the pit, if a larger firm such as Morgan Stanley had large quantities to sell, say 500 contracts, the order almost always would push the price dramatically lower. This is called slippage. Depending on the market conditions and the size of the large order, slippage could be anywhere from one to three full points, or from 1250.00 down to 1247.00, before all contracts were sold. But now that the E-mini has achieved a critical level of liquidity slippage has been reduced dramatically, sometimes to as little as half a point for a 500 lot order. This can be attributed to the arb locals in the pit having access to the E-mini contracts, which allow them to take a profit on a trade

that without the E-mini would have been a loss. Before, many locals were forced to step aside when such orders came into the pit or risk getting run over. No one wants to be the first buyer of a large sell order. As the order is laid off into the market, it eats up all the current demand. The game was anticipating the last chunk of the big order, anticipating the eventual surge higher. Now, when a large firm has a big order it tends to have much less impact on the market. Instead of having to get out of the way, locals can provide a bid that is just below that of the existing bid in the E-mini. If the seller gives to their bid, the arb locals immediately sell the E-mini to lock in a small profit. The arb trade, in turn,

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TRADING TECHNIQUES
A good trading system works well throughout the years, not just weeks or months. And it's about more than raw returns, you also need a risk/reward profile that lets you stick with the program through the bad times, so you're still around for the good ones. Here are 10 programs that fit the bill.

TODAYS

TOP 10
BY GEORGE PRUITT AND JOE BOBEK

TRADING SYSTEMS
time. That's not the time it takes to analyze it, but the time it takes for the system to play out in the markets, day by day, month by month, decade by decade. Time is one thing that todays top 10 trading systems have on their side.

F
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inding a good trading system takes the one resource that nobody can buy:

FUTURES | February 2006

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This is the fourth long-term review of the top 10 trading systems. The previous three were published in 1993, 1997 and 2001. As before, this current list was not solely determined by profitability. The following criteria were used to pick 10 systems from a universe of more than 200:

TOP 10 THROUGH TIME


There are a few constants on this list of the top 10 commercially available trading systems (listed alphabetically). 1993 1997 2001 2005 Black or White Aberration Aberration Abberation Culler Currency CatScan 1 Basis II Basis II DCS-II Combo Advantage DCS II Checkmate Dollar Trader Culler Currency Dollar Trader Dollar Trader Pilot Trader DCS II Dynamic Break Out Golden SX Quad Level Trend Dollar Trader Golden SX R-Breaker Time Trend III Grand Cayman Grand Cayman R-Mesa Ultimate II R-Breaker R-Breaker ReadySetGo Volpat Time Trend III STC S&P Day Trade STC S&P Daytrade Wilder's Volatility Universal LT TrendChannel TrendChannel
Source: Futures Truth Inc.

1. A minimum of four years of realtime simulated results. 2. Consistency of returns; minimum drawdowns relative to profits. 3. Minimum amount of curve fitting to past data. 4. Consistent parameters for all markets traded.
Top 10 through time (above) lists today's top 10 trading systems alphabetically. It also alphabetically lists the top 10 trading systems of past years. There wasn't any one system that stood head and shoulders above the rest. While we hoped we would produce a list that included a mix of markets and strategies, the performance figures of trend following and S&P 500 day-trading systems rose to the top of the heap. Seven systems on our list are trend followers and the other three are S&P 500 day-trading systems. WHAT'S GOOD? In our selection process, long term viability was more important for inclusion than recent performance; we looked at the big picture. For example, many day-traders have migrated from the S&P (mini and fullsize contracts) to the mini contracts of the Russell 2000 and Mid Cap 400. The once highflying mini Nasdaq has fallen out of favor altogether. The year 2005 will go down in history as one of the worst performing years for day-trading. Volatility, the fuel for day-trading profits, has sunk to levels last seen in the mid-1990s. However, the latter part of the year did show an up-tick in volatility and system performance. Like the day-traders, trend followers also have been beaten down by 2005.

The year 2004 ended on a sour note and the first few months of this year pushed many commodity trading advisors (CTA) and trend traders into the cellar. Many of them have yet to climb out. There are exceptions; many of the advisors that focus on the energy markets have had spectacular results. November produced good trending markets and many trend traders were able to capitalize and pull their year-to-date numbers up to respectability. This is evident in the equity curves of the trend-following systems that we have included in our list. It was tough compiling this list, and we were limited to those systems that we currently track. This top 10 list may be biased toward systems with longer real-time results (only results obtained with data after the systems release to the public are included). Do note, however, all of the system performance numbers presented are hypothetical. They only traded in the world of the computer. Real-life trading and simulated trading can be quite different, and this difference can be further magnified by a higher frequency of trading. Of the 10 systems, two, R-Mesa 3 and Checkmate, are black box systems (trading logic is encrypted). The rest disclose their rules to customers and researchers. Obviously, the top 10 list has changed through time. Some of the systems naturally fell off because they were no longer available. Others fell off because their

performance diminished with time. This raises the question that all system developers and traders struggle with: Do all good systems eventually fail? The answer is not a simple yes or no. The accompanying tables and graphs demonstrate that these 10 systems, despite being on this list, have gone through some gut-wrenching drawdowns. Many of the results may suggest these systems have failed. However, it's important to view the results with an open mind. The markets as a whole have exhibited a less-than-friendly trading environment through the past three years, with 2005 leading the way. Trend followers have had it especially tough in this period with only a handful of markets providing profitable trends. Nonetheless, these 10 systems have performed in the past and are doing so right now in these difficult market conditions and should do so in the future. After all, the one constant of system trading is there is no perfect system: There is no Holy Grail. TESTED MARKETS Where applicable, we have tested the systems on a portfolio of 16 different markets: U.S. Treasury bonds,Treasury notes, British pound, Japanese yen, Swiss franc, euro FX/Deutsche Mark, soybeans, cotton, live cattle, copper, sugar, orange juice, heating oil, crude oil, natural gas and silver. Markets were chosen based on liquidi-

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Trading Techniques continued


TOP 10 SYSTEMS: JUST THE FACTS
The performance figures of each system are listed by market traded. The statistics are the composite figures through the 20-year test period. The accompanying equity curve charts show how the hypothetical equity for these systems might have grown through time, although such performance would have been unlikely for any one person trading these systems in the past due to the benefits of hindsight and other realities of actual trading. The systems are listed in alphabetical order. Some systems have limited data available due to artifacts of their trading approach or black-box nature.

ABERRATION
TYPE: Longer-term trend following Developer: Keith Fitschen Web site: www.trade-system.com Cost of system: $2,295
Total $PL T-bonds 25660 T-note 20840 British Pd. 37644 Japanese Yen 124588 Swiss Franc 56625 Euro (DM) 106088 Soybeans 335 Cotton 61360 Live Cattle -8044 Copper 21450 Sugar -739 Orange Juice -4155 Heating Oil 58048 Crude Oil 62620 Natural Gas 109100 Silver -26090 Avg $PL/Yr 1288 1046 1890 6255 2843 5349 17 3081 -404 1077 -37 -209 2915 3144 7001 -1310 Max P/L DrawDn Trds DrawDn (Last 12 mo) (Last 12 mo) /Yr 25590 -3980 8280 5 25590 -7780 8570 4 29725 -2588 5744 5 19113 7475 6350 5 16588 -1375 5188 5 26900 225 9750 5 45390 5000 5000 7 15990 -6290 10730 6 17892 -1996 4616 8 26338 14288 3525 6 13563 1680 1243 6 32505 -3053 5273 7 21357 -979 19043 7 16980 -8440 13490 7 42000 24740 31740 7 46265 -4315 10030 5 Wins (%) 47.8 46.1 40.7 50.0 51.0 46.4 34.8 44.6 36.1 40.7 39.6 39.8 47.0 54.8 47.8 36.8 TIM W:L Gain (%) ratio /Mr+DD 58 1.3 4.6 5 1.3 3.9 57 1.3 6.1 65 2.3 29.4 63 1.5 15.4 62 1.7 18.2 61 1.0 0.0 64 1.6 18.1 65 0.9 -2.2 61 1.3 3.8 61 1.0 -0.3 64 0.9 -0.6 68 1.4 12.5 71 1.7 15.4 71 1.7 14.6 56 0.7 -2.7 $667,000

AFTER RELEASE BEFORE RELEASE

$592,000 $517,000 $442,000 $367,000 $292,000 $217,000 $142,000 $67,000 $0,000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

BASIS II
Type: Intermediate-term trend following with oscillator-based indicator Developer: Alfaranda CTA Web site: www.alfanetsys.com Cost of system: $2,500
Total $PL T-bonds 72960 T-note 60530 British Pd. 53350 Japanese Yen 146988 Swiss Franc 127500 Euro (DM) 114238 Soybeans -9385 Cotton 71630 Live Cattle -4608 Copper 30163 Sugar 2274 Orange Juice 1463 Heating Oil 42332 Crude Oil 40820 Natural Gas 87600 Silver -12650 Avg $PL/Yr 3663 3039 2679 7380 6402 5760 -471 3596 -231 1514 114 73 2125 2050 5621 -635 Max P/L DrawDn Trds DrawDn (Last 12 mo) (Last 12 mo) /Yr 14460 -3650 8600 9 18200 -6850 7870 11 29263 -1788 7581 10 24775 15700 4413 10 14250 11213 4463 10 31800 -4163 14225 7 35720 -2390 8540 13 24620 -1900 6005 11 20760 -576 5080 12 22825 12938 4938 11 14661 3562 1019 11 20138 1350 1980 13 22915 0 0 11 20060 -5100 5100 11 25620 0 0 9 38550 -6365 12565 13 Wins (%) 44.0 45.1 41.5 41.2 44.8 43.2 36.6 46.1 39.9 38.6 41.4 38.1 47.0 42.8 43.7 34.5 TIM W:L Gain (%) ratio /Mr+DD 86 1.5 21.3 92 1.5 15.4 90 1.3 8.7 86 1.8 27.4 89 1.8 39.8 56 1.7 16.8 95 0.9 -1.3 92 1.5 14.0 98 1.0 -1.1 92 1.2 6.1 98 1.0 0.7 97 1.0 0.3 81 1.3 8.5 91 1.3 8.7 65 1.8 17.7 93 0.9 -1.5 $826,000

BEFORE RELEASE

AFTER RELEASE

$733,000 $640,000 $547,000 $454,000 $361,000 $268,000 $175,000 $82,000 $0,000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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CHECKMATE
Type: Longer-term trend following black box system Developer: Dean Hoffman Web site: www.traderstech.net Cost of system: $1,695
Total $PL 48575 3622 55631 102088 38663 146013 11400 28925 -6746 -75 651 2948 31804 30575 110365 -28185 Avg $PL/Yr 2429 181 2782 5104 1933 7300 570 1446 -337 -3.75 32.55 147 1590 1529 5518 -1409 Max DrawDn 6863 8941 19038 6113 8813 6300 10425 8050 13065 13425 7285 10665 12917 5475 21025 41115 Wins (%) 51.85 35.19 38.46 50.00 37.93 52.73 40.00 44.00 19.35 29.31 28.57 33.33 35.59 47.17 48.89 22.73 W:L ratio 2.11 2.01 3.19 3.24 2.86 3.44 2.05 2.57 3.28 2.41 2.58 2.20 2.91 2.49 3.41 1.80 $500,000 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

T-bonds T-note British Pd. Japanese Yen Swiss Franc Euro (DM) Soybeans Cotton Live Cattle Copper Sugar Orange Juice Heating Oil Crude Oil Natural Gas Silver

AFTER RELEASE BEFORE RELEASE

DOLLAR TRADER
Type: Longer-term trend following Developer: Dave Fox Web site: www.dollartrader.com Cost of system: $1,050
Total $PL Euro 52325 Japanese yen 155425 Avg 2627 7804 Max 19100 17175 P/L -4050 9163 DrawDn 14850 7713 Trds 4 9 Wins (%) 41.7 51.4 TIM 88 83 W:L 1.6 2.0 Gain 12.2 39.5 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 $215,000

AFTER RELEASE BEFORE RELEASE


(%) ratio /Mr+DD

$190,000 $165,000 $140,000 $115,000 $90,000 $40,000 $15,000 $0,000

$PL/Yr DrawDn (Last 12 mo) (Last 12 mo) /Yr

GOLDEN SX
Type: Longer-term trend following Developer: Randy Stuckey Web site: www.mindfire-systems.com Cost of system: $1,475
Total $PL T-bonds 29320 T-note 41910 British Pd. 22975 Japanese Yen 109313 Swiss Franc 49188 Euro (DM) 91250 Soybeans -9435 Cotton 51475 Live Cattle 6576 Copper 18413 Sugar -10293 Orange Juice 12540 Heating Oil 7510 Crude Oil 64040 Natural Gas 135180 Silver -43845 Avg $PL/Yr 1472 2104 1154 5489 2470 4601 -474 2585 330 925 -517 630 377 3215 8675 -2201 Max P/L DrawDn Trds DrawDn (Last 12 mo) (Last 12 mo) /Yr 19250 -2650 6600 7 18420 -3390 5820 7 52769 -4500 8575 8 26038 6650 5150 7 24725 -5200 7388 8 32450 275 9338 8 47810 -410 6115 9 28595 -11135 12555 8 19440 760 3928 9 23788 12138 5388 8 20821 1579 2766 8 28898 2093 2715 9 33256 4145 19286 9 19490 4670 10060 9 45610 22850 26940 10 64060 -7895 13610 8 Wins (%) 38.4 47.4 31.8 42.9 39.5 36.0 37.6 43.2 42.2 38.6 40.1 42.6 34.4 47.8 44.4 34.0 TIM W:L Gain (%) ratio /Mr+DD 66 1.2 6.7 72 1.4 10.6 62 1.1 2.1 68 1.8 19.5 68 1.3 9.3 58 1.5 13.2 74 0.9 -1.0 70 1.4 8.7 85 1.1 1.7 77 1.2 3.6 88 0.9 -2.4 84 1.2 2.1 70 1.0 1.1 79 1.5 14.1 76 1.8 16.8 70 0.7 -3.3

$596,000

AFTER RELEASE BEFORE RELEASE

$528,000 $460,000 $392,000 $324,000 $256,000 $188,000 $120,000 $52,000 $0,000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Trading Techniques continued


ty and diversification. Diversification is probably the most important cog in your trading machine and your best ally in fighting drawdowns. A portfolio of noncorrelated markets should have drawdowns at different times and therefore help reduce the overall maximum drawdown, which would be more severe when trading overly correlated markets. Some systems on the list werent designed to trade a basket of markets and their results are shown only on those markets recommended by the vendor. R-Breaker, STC-VB and R-Mesa 3 were tested on the S&P only. Dollar Trader for Currencies was tested on the Japanese yen and euro. TrendChannel was tested on the euro, 10-year Treasury notes and Japanese yen. The performance of each trading system consists of a hypothetical backtest and a walk-forward test. (Due to data requirements, R-Mesa 3 does not include a backtest.) The two testing periods are identified on the equity curve charts that accompany the data. Although not valid for predicting future performance, it is helpful to include the hypothetical backtest data with the walk-forward test data to give insight into a 20-year performance window. Also, it's intriguing to see how a system's walk-forward test compares with its backtest. Performance results are based on a one-contract basis. This allows us to compare apples to apples. Each roundturn trade was levied a $75 ($100 for S&P) commission/slippage charge. In addition to the equity curves of each system, a composite analysis, contact information and a brief summary are provided. The composite analysis consists of total profit, maximum draw down, percentage wins and win-to-loss ratio. DIFFERENT STROKES The top 10 trading systems do not use

READY-SET-GO
Type: Longer-term trend following Developer: Alan Pryor Web site: www.longtermtrading.com Cost of system: $995
Total $PL T-bonds T-note British Pd. Japanese Yen Swiss Franc Euro (DM) Soybeans Cotton Live Cattle Copper Sugar Orange Juice Heating Oil Crude Oil Natural Gas Silver 10863 22000 84919 131375 84100 150250 -6244 18545 4955 -7413 8864 5378 -17743 25330 127530 20800 Avg $PL/Yr 543 1100 4246 6569 4205 7513 -312 927 248 -371 443 269 -887 1267 6377 1040 Max DrawDn 14456 17934 10575 16550 13363 20938 21644 23965 11933 29400 11611 24158 36100 8970 26270 14570 Wins (%) 36.84 44.00 46.15 49.38 44.87 43.82 41.10 39.76 42.55 35.82 46.88 37.33 31.03 47.44 48.33 43.33 W:L ratio 1.94 1.69 2.79 2.80 2.50 3.06 1.31 1.89 1.55 1.60 1.51 1.85 1.84 1.58 3.25 1.82 $200,000 $100,000 $0,000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 $300,000 $500,000 $400,000 $600,000

AFTER RELEASE BEFORE RELEASE

R-BREAKER
Type: Breakout and countertrend Developer: Richard Saidenberg Web site: www.soundviewcapital.com Cost of system: $3,000
Total $PL S&P 300650 Avg 15223 Max 36200 P/L -20800 DrawDn 23025 Trds 146 Wins (%) W:L Gain ratio /Mr+DD $336,000 $298,000 $260,000 $222,000 $184,000 $146,000 $108,000 $70,000 $32,000 $0,000

AFTER RELEASE BEFORE RELEASE

$PL/Yr DrawDn (Last 12 mo) (Last 12 mo) /Yr

43.80 1.30 36.3 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Trading Techniques continued


R-MESA 3
Type: Breakout and countertrend black box system Developers: John Ehlers and Mike Barna Web site: www.mesa-systems.com Cost of system: Contact vendor
Total $PL S&P 279178 Avg $PL/Yr 34897 Max DrawDn 24600 P/L DrawDn Trds /Yr 209 Wins (%) 37.50 W:L ratio 2.11 $50,000 $0,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 $300,000 $250,000 $200,000 $150,000 $100,000 (Last 12 mo) (Last 12 mo) 6250 8875

STC S&P DAYTRADE


Type: Breakout and countertrend Developer: Stafford Trading Web site: www.staffordtrading.com Cost of system: $1,200 (locked); $1,800 (open)
Total $PL S&P 283900 Avg $PL/Yr 14375 Max P/L DrawDn Trds /Yr 113 Wins (%) 45.90 W:L ratio 1.30 Gain /Mr+DD 39.8 $294,000 $261,000 $228,000 $195,000 $162,000 BEFORE RELEASE $129,000 $96,000 $63,000 $30,000 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 $0,000

AFTER RELEASE

DrawDn (Last 12 mo) (Last 12 mo) 30325 0 12825

TRENDCHANNEL
Type: Longer-term trend following Developer: John Tolan Web site: www.trendchannel.com Cost of system: Contact vendor
Total $PL Japanese Yen 134663 Euro (DM) T-note 116400 42560 Avg Max P/L DrawDn Trds Wins (%) 46.4 43.7 43.6 TIM W:L Gain

AFTER RELEASE BEFORE RELEASE

$302,000 $267,000 $232,000 $197,000 $162,000 $127,000 $92,000 $57,000 $22,000

$PL/Yr DrawDn (Last 12 mo) (Last 12 mo) /Yr 6761 5869 2137 22450 26138 13240 8088 -2738 -5560 5300 15625 6480 7 7 7

(%) ratio /Mr+DD 76 74 74 2.1 1.6 1.4 27.5 20.5 14.5 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

$0,000

KEY:
Total $PL: The total dollar profit or loss the system has made in that market during the test period. Average $PL/Yr: The average dollar profit or loss the system makes in that market in one year. Max DrawDn: The maximum cumulative equity loss the system has sustained across trades before making a new equity high. P/L (Last 12 mo): The hypothetical profit or loss the system has made in the last 12 months. DrawDn (Last 12 mo): The hypothetical drawdown the system has made in the last 12 months. Trds/Yr: The average number of trades the system made in one year during the test period. Wins (%): The percentage of the trades that were wins during the test period. TIM (%): The percentage of time the system was in the market with live trades during the test period. W:L ratio: The ratio of the average win to the average loss. Gain/Mr+DD: The dollar gain as a percentage of the sum of the margin and market drawdown.

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the same analysis techniques to predict the markets. They fall into four basic approaches: Trend following: A system that follows the overall market direction on any time frame. Break out: A system that capitalizes on market surges after stages of consolidation. These can vary from short intraday to long-term, meaning weeks or months. Countertrend: This system tries to capitalize on the contrarian view, taking advantage of opposite moves against the longer-term trend. Oscillator: Incorporates an oscillating indicator to determine trend changes to pick tops and bottoms. The majority of these systems would be classified as longer-term trend followers. This approach seems to be prevalent among the systems with the longest

shelf life except S&P systems, which tend to be shorter. There has been a void of successful shorter-term systems (other than day-trading). To create a successful short-term system, one that trades three- to five-day swings, the system needs a high percentage of wins and an average trade figure that's large enough to cover execution costs and still build equity. Through the years, developers have tried to create such a system and some have had enough short-lived success to grab the attention of brokers and the public. Even though many short-term systems cant stand on their own as a primary trading vehicle, they can be used to help hedge the bets of long-term trend following. Also our $100 commission and slippage charge may be overly punitive given brokerage competition and the liquidity of electronic markets. The two major beefs with trend following are drawdowns and leaving too

much money on the table. Marrying the short- and long-term approaches can alleviate the impact of these drawbacks. The salient statistics of each of the top 10 systems are found in "Top 10 systems: Just the facts" (page 43). Of course, there is no guarantee these systems will produce profits like those shown here or won't enter into an unbearable drawdown next month. However, a trader who takes the time to correctly develop a trading plan with a solid money management overlay, has a much greater chance of success. Starting with a trading system that has done well FM throughout time is step one.
George Pruitt is director of research of Futures Truth magazine and coauthor of Building Winning Trading Systems with TradeStation and The Ultimate Trading Guide. George can be reached at george@futurestruth.com or www.futurestruth.com. You can view Pruitts previous top 10 systems features at www.futuresmag.com/previoustopten .

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TRADING TECHNIQUES
Markets have taken advantage of technology during the last 30 years, but where are the advances in analyzing price movement?

Has technical analysis kept up with the (Dow) Jones?


BY DARRELL JOBMAN
echnology has revolutionized the way business is done around the world, including many aspects of trading during the last 30 years, but has it really produced any innovations in technical analysis for todays global, 24-hour electronic markets? Some new ideas in technical analysis have certainly surfaced throughout the years, as chronicled in these pages. Welles Wilder introduced the relative strength index (RSI) in 1978: RSI: A momentum oscillator that can help you spot market turns, (Commodities, June 1978); Louis Mendelsohn wrote about backtesting software concepts (three articles in 1983); Steven Nison introduced candlestick charts to the Western world in Learning Japanese-style candlesticks charting, December 1989; and John Murphy advocated the use of intermarket analysis, to name a few technical analysis developments. (See Indicating profits, right.) But aside from moving concepts from hand-drawn charts to calculators to computers that are ubiquitous in trading today, what has technical analysis done for traders lately? Where

are todays Charles Dows, R.N. Elliotts or W.D. Ganns with original analytical ideas? Ask some of the people who have played prominent roles in the marketplace about the state of technical analysis today and youll get a wide range of answers. SAME OLD THING? Technical analysis today is not that much different than it was 25 years ago, says Mendelsohn, president of Market Technologies LLC and developer of VantagePoint intermarket analysis software. The only difference is that the charts have different dates and the computers ability to produce these charts quickly and easily is vastly improved. New technical analysis ideas are still being generated by hedge funds and proprietary traders using their extensive resources to develop advanced trading methods, but the institutional traders are keeping these proprietary secrets to themselves. If there is a new technical analysis genius or concept, no one will ever hear about it. But Mendelsohn doesnt think most of these sophisticated traders are any

better at analysis than the individual trader. You would think that with so much money involved and the incentive that money managers have to produce profits, they would have the best state-of-the-art analysis possible, but thats not so, he says, noting the poor performance of many public futures funds (47 funds down an average of 4.49% through October, according to Futures). However, most of the high-end system development talent has gravitated to private placement hedge funds and commodity trading advisors. PLENTY OF TOOLS John Bollinger, whose extensive study of market volatility resulted in the concept of Bollinger Bands, believes traders still have an awfully good set of technical analysis tools available to them. However, with the type of market participants and trading around the clock around the world today, the character of the data has changed. As part of his ongoing research, he has found it instructive to feed a data series with technical patterns to an indicator to see how it responds,

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noting the behavior during steady market moves and during periods of price deceleration. What traders really need to do is understand the response characteristics of the indicator tools they are using better than they do now, he says. What he suggests is not necessarily discovering new indicators but using todays computational power to mine the ideas from analytical work before the 1960s more thoroughly. Like the automobile, the basic problem (of analysis) has been solved. Now its more about finesse, Bollinger says. Look at the old masters and their techniques. Theres still a ton of information there, especially in analyzing the micro structure of the market. MAKING INDICATORS WORK One analyst who is using techniques he developed more than 25 years ago to trade systems successfully is Welles Wilder, whose 1978 book, New Concepts in Technical Trading Systems, introduced the Relative Strength Index, Directional Movement Index, Volatility Index, average true range and a number of other technical tools that are now included in most analytical software. Wilder spends most of his time in New Zealand and is also known for his Delta Society systems, which incorporate several concepts from the book with his Delta turning point analysis and have produced profits averaging $50,000 a year, he says. One of the techniques, the Volatility System, is mostly overlooked, but he says it may be the best stand-alone system in the book, illustrating that sound analytical techniques from the past do not go out of date. The Parabolic System also is standing the test of time in helping traders get out of a position once profits are built up, he adds. LOTS OF MUMBO-JUMBO Whatever type of technical analysis is in vogue these days, most of it is mumbo-jumbo, contends Larry Williams, an author/trader whose

INDICATING PROFITS
Innovations in technical analysis in the 1970s and 1980s included candlesticks showing price action and three indicators: RSI, DMI and average true range introduced by Welles Wilder. Are there more such developments ahead?

10800.00 10600.00 10400.00 10200.00

Average True Range(14) Directional Movement(14, 14) RSI(14, C)


25 1 8 Aug
Source: eSignal

100 25 0 100 50 0

15 22 29 6 12 19 26 3 10 17 24 31 7 Sep Oct Nov

14 21 28 5 Dec

GETTING A HEADS UP
A predicted moving average based on intermarket relationships provides new insight for an old lagging indicator.
5-yr. U.S. Treasury notes, continuous
108^42

108^05 Actual 10-day moving average 107^32

106^59 Predicted 10-day moving average

106^22

105^49

105^12 Sep05
Source: www.TraderTech.com

Oct05

Nov05

Dec06

accomplishments include turning a $10,000 account into $1 million in a year and writing a number of popular trading books including The Right Stock at the Right Time and Long-Term Secrets of Short-Term Trading. I am not enamored by technical analysis and I have probably beaten up

the numbers as much as anyone, says Williams, whose name is often associated with the %R indicator but whose books have made a transition from a technical focus in his early trading days to mostly fundamental in recent years. What has stood the test of time is that trend matters, Williams empha-

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Trading Techniques continued

...fundamental analysts missed the end of the Nasdaq bubble in 2000...the fundamental community didnt see the spectacular rise in oil prices over the last couple of years when the chartists did. John Murphy, technical analyst
sizes. If prices move from 10 to 50, its due to fundamental conditions. You dont forecast 50 with an indicator. First, you have to see the condition (or trend) of the market, then you can use a timing tool like %R to buy on a pullback or sell on a trendline breakout. Its pretty simple. I see no value in that artsy-craftsy stuff like Elliott Wave or Gann. Williams compares markets to a boat ride. You dont want to be looking backward at the (technical indicator) waves to see where the boat went. You want to keep your eye on where the pilot (conditions) is steering the market, he explains. Williams, who hasnt gotten into electronic trading but submits orders to his broker by e-mail, does find value in a couple of old technically related tools that are still reliable, the Commitment of Traders report and seasonal patterns, which he views as market fundamentals or conditions. Another old analytical standby, volume, has not kept up with the times in futures trading, however, because arbitragers, long-term program traders and investable indexes are behind huge spikes in volume every 90 days at expiration in many markets. This volume is not reality. It does not reflect the real supply/demand situation, Williams says. Volume is dead as an indicator. Or if its not dead, its not the same as in the past. WRONG TARGET? John Murphy, whose books Technical Analysis of the Financial Markets and Intermarket Analysis are among the bibles of modern technical analysis, doesnt even like the premise of an article on the status of technical analysis. It implies that technical analysis hasnt kept up with the times when the exact opposite is true, he says. Why not write an article asking why economists and fundamental analysts missed the end of the Nasdaq bubble in 2000 when it was clearly seen on the charts? Or why the fundamental community didnt see the spectacular rise in oil prices over the last couple of years when the chartists did? Or why Wall Street has completely missed the secular bull market in gold and other commodities over the last three years while chartists didnt? I think a more pertinent article would be about how well technical analysis has done in the new global environment and why the economic and fundamental communities havent kept pace, he suggests. ADVANCES TO COME Whatever the view of current technical analysis, theres not a lot of incentive to come up with innovative ideas, Mendelsohn says. The largest numbers of traders are newcomers to the market and thats the way it will be forever, he notes. Its like they are all starting kindergarten and learning how to read. The teacher knows how to read, but the students have to go through a learning process. Theres no incentive for the industry to innovate as long as it can keep giving new traders old things. Mendelsohns VantagePoint software uses neural network technology and intermarket analysis to give a new look to an old indicator. The software, using prices of 10 related markets, attempts to turn a moving average from a lagging to a leading indicator to produce predicted moving averages for a target market. The predicted moving average often turns ahead of simple moving averages (see Getting a heads up, page 51). One issue with this is that intermarket relationships tend to change and can actually reverse (see Intermarket analysis: What works today, page 54). Mendelsohns programs are able to adapt to this. Mendelsohn says traders need to blend technical and fundamental analysis into a synergistic approach and the next analytical advance will come when fundamental data is formatted so it can be combined with technical data in one analytical package. Technical analysis low stature today may be a victim of a general bull market, according to Bob Prechter, one of the foremost advocates of Elliott Wave theory. He sees a sharp setback ahead for the U.S. stock market. In a bear market everyone looks to technicians for explanations and the timing of buy signals. In a bull market Wall Street firms apparently decide the market will go up forever so they dont need technical analysts, as shown by the downsizing or elimination of technical analysis departments in recent years. The firings of technical analysts in 2005...is a great big sell signal for money-center banks and a buy signal for the field of technical analysis, Prechter writes in Elliott Wave Theorist. (Technical analysis) new uptrend has a long way to go. FM
Darrell Jobman, senior market analyst for www.TradingEducation.com, is a former editor of Futures magazine and has been writing about financial markets for more than 35 years.

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TECHNOLOGY & TRADING


The key to intermarket analysis is devising a reliable strategy for determining when it won't work. Here, we look closely at that process for an intermarket system based on T-bonds and the S&P 500.

Intermarket analysis: What works today


BY MURRAY A. RUGGIERO JR.
fter reviewing the basics of intermarket analysis in the December 2005 issue, we looked at three trading systems developed by Ruggiero during the 1990s and discussed why they still work. We also considered a big weakness of intermarket analysis the decoupling of market relationships, which can cause large losses in intermarket-based trading systems. This weakness is magnified because they often occur during periods of intermarket inversion. Instead of just breaking down, the relationships flip, causing losses to accelerate. Our next step is to look closer at the effect of intermarket decoupling and how it can be dealt with when using intermarket analysis in trading. Well start by looking at a classic relationship that used to be a staple for many stock index traders: the relationship between Treasury bonds and the S&P 500, which until 1998 was so powerful that it was all that was needed to create an amazing system. In Cybernetic Trading Strategies (John Wiley & Sons, 1997), a simple

intermarket divergence system using T-bonds to predict the S&P 500 was explained. A positive relationship was assumed. This is the code for that system. This and subsequent codes are written in TradersStudio Basic but the logic can be programmed into other platforms: Sub ClassicPosCorIntermark(TrLen,Int erLen) Dim InterAve Dim TrAve InterAve=Average (Close Of independent1,InterLen) TrAve=Average (Close,TrLen) If Close>TrAve And Close Of independent1<InterAve Then Sell(BuyEnt,1,0,Market,Day) End If If Close<TrAve And Close Of independent1>InterAve Then Buy(BuyEnt,1,0,Market,Day) End If End Sub The original analysis was run on data from April 21, 1982, to Feb. 7,

1996, and showed profits of $344,675. When the analysis simulation was rerun for this article, slightly different dates were used, along with data from a different vendor. A second test, in an effort to replicate the results, was run today through the time period Jan. 1, 1983, through Feb. 7, 1996, using available data from a different vendor and adjusting for the $500 point value of the time. Results show $334,650. This matches the previous results about as closely as could be expected. When this system was first published, it was profitable on about 69% of its trades with an intrabar drawdown of about $26,000 and an end-of-day intratrade drawdown of just $9,600. This system performed well until the end of 1997, making $114,125 in pre-split $500 per point dollars from February 1996 to Dec. 31, 1997. This represented about one-third of what it made during the previous 14 years during that first 21 months in out-of-sample testing. In 1998, the stock market began its irrational exuberance rally and the intermarket link broke down with it.

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The system subsequently lost more than $94,000 during 1998 and 1999 at $250 per point. Perhaps more relative to our original results, this represents almost $190,000 at $500 a point more than half of the profits that the system had produced during the previous 14 years. The results for 2000 were relatively good, but 2001 and 2002 show the bottom really falling out, losing almost $142,000 at $250 a point, or $284,000 at $500 a point. The results of this methodology returned to mediocre during 2003 and 2004 with 2005 being a marginal year. The system in 2001 had just one winner in seven trades. In other years the overall yearly winning percentages of the methodology were respectable. The problem, as illustrated in Fortunes lost (above), was that there were some very large losing trades. These trades produced some big problems for the methodology in a short time. These five trades lost more than $161,000 at $250 a point ($322,000 at $500 a point) in less than two years. By studying this relationship closer, we can find out what really happened here. PEARSON KNOWS If we plotted the Pearson correlation coefficient (calculated through a rolling 40-day period) between the 30-year T-bond and the S&P 500, the graph will show that from November 2000 to November 2001 the relationship was well below zero. Our system performance relies on this relationship being strongly positive. For example, during 1996 and 1997 the correlation coefficient was about 0.75 three-quarters of the time. Then the relationship inverted. To understand what happened, we need to know why this relationship exists. When T-bond prices move up, it indicates interest rates are falling. As interest rates move lower, stock prices will rally as investors shift funds into stocks for higher returns.

FORTUNES LOST
Several very large losses in 2001 doomed this intermarket analysis based trading system.
ORDER Buy Sell Buy Buy Sell DATE 2/5/2001 3/28/2001 6/4/2001 5/28/2002 10/14/2002 SIZE 1 1 1 1 1 PRICE 1398.2 1206.0 1297.5 1098.2 839.5 DATE 3/28/2001 6/4/2001 7/2/2001 10/14/2002 11/11/2002 ORDER Sell Buy Sell Sell Buy SIZE 1 1 1 1 1 PRICE LOSSES ($250) 1206 1298 1256 840 901 ($48,050.00) ($22,875.00) ($10,400.00) ($64,675.00) ($15,375.00) LOSSES ($500) ($96,100.00) ($45,750.00) ($20,800.00) ($129,350.00) ($30,750.00)

Source: TradersStudio

This flow between asset classes and asset allocation exists down to shortterm time frames. One known problem with this relationship is during periods of major market disasters, such as the crash of 1987, the relationship can totally decouple as a flight to quality takes place. The relationship can also decouple in latter stages of a bull market when the Federal Reserve increases interest rates in an effort to combat inflation. This relationship does not follow the script when the market is at turning points of long-term trends. In some ways, this may be the cause of the weak system performance in 2005 because the yield curve is very flat. The long end of the yield curve relationship to the 10-year outlook of a stock market investor does not have the same historical differential. As a result, the yield curve is flat and the relationship changes. Of course, we have the help of hindsight to figure all this out. The goal is to be able to determine in the future when the relationship will break down. The use of correlation analysis to filter trading systems helps us accomplish this. We will use Pearson correlation analysis to work on this problem. THE SCENT OF CHANGE Correlation analysis is a way to describe the strength of an association between two variables. An association between variables implies the

value of one variable can be used to some extent to predict the other. The Pearson correlation is a special kind of association because it only shows a linear relation between the values of the variables. A non-linear relationship must be transformed into a linear one before the correlation is calculated or the correlation calculation is useless. Well explain this process without the math. Its available in any statistics text. Points X and Y, which in our case are the two related market prices, are plotted throughout a given window of days. A line is drawn that minimizes the distance between all points. The standard distance between the points and the line provides information on how predictive X is of Y. If the line is sloping up, the correlation is positive. If the line is sloping down, the correlation is negative. This entire relationship can be summed up by one number: the Pearson correlation coefficient. Bound by bonds (page 56) shows a Pearson correlation coefficient in a moving 40-day window plotted as a line below the price chart. The correlation calculation is for S&P 500 and T-bond prices during 2002 and 2003. Even during the early years when the system performed well, the correlation bounced up and down but did not necessarily create major problems. Random noise in the correlation does not affect the general results of the relationship. It is a long-term change that affects how

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Technology & Trading continued


BOUND BY BONDS
When our correlation coefficient is high, our system does well. When the figure is low, the methodology absolutely hemorrhages cash. We need to build a switch that turns our system off during the bad times.
1141.54 1089.68 1037.81 985.95 934.09 882.23 830.36 106.12 98.02 89.91 0.60 0.38 0.16 -0.06 -0.28 -0.49 -0.71 Dec 02 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 03 Feb Mar Apr May Jun Jul Aug Sep
Source: TradersStudio

$1,628.23 per trade with a maximum intrabar drawdown of $35,250. The filter greatly improved the 1998 results. Instead of losing more than $80,000 at $250 a point, the system lost only $29,000. In 2001 when the original model produced a loss of more than $80,000, the improved version with correlation analysis actually made $20,000. The intermarket system did lose money in 2002 but the losses were less than half of those unfiltered. The improvement caused by correlation analysis is less dramatic, normally to 50% from 20%. NOT ALWAYS PREDICTIVE We have seen how correlation analysis can help a systems performance, but current correlation does not always tell the complete story. Predictive correlation is a methodology that can be applied to intermarket analysis and other forms of technical analysis. Heres how it works. The idea behind predictive correlation requires taking a correlation between the independent series n bars ago and the change in the market throughout the last n bars. For example, we could take the correlation between Tbonds[5] Tbonds[10] and the SP500 SP500[5]. In this case, this correlation tells us how predictive a simple momentum of T-bonds has been throughout the length of the correlation to future five-day price changes in the S&P 500. The predictive correlation curve is much different than the curve generated by standard correlation, but the curves trend in the same direction. Research shows that predictive correlation is better for shorter-term trading signals. Its possible to create a short-term S&P 500 trading model using predictive correlation. In it, we will use a 12- and 26-day moving average pair and create a day trading system for the S&P 500. We will use intermarket divergence com-

the system performs. In essence, it is a type of integration of the area above and below zero. Thankfully, there is a simple way to deal with this problem. We can double smooth the correlation value by taking a moving average of it equal to the correlation length. Here is this simple change written into the trading system code: Sub ClassicPosCorInterCorrel(TrLen,I nterLen,CorLen,Lev) Dim InterAve Dim TrAve Dim CurCor As BarArray InterAve=Average(Close Of independent1,InterLen) TrAve=Average(Close,TrLen) CurCor=Average(Corel(Close,Cl ose Of independent1,CorLen,0),CorLen) If CurCor>-1*Lev Then If Close>TrAve And Close Of independent1<InterAve Then Sell(BuyEnt,1,0,Market,Day) End If If Close<TrAve And Close Of

independent1>InterAve Then Buy(BuyEnt,1,0,Market,Day) End If Else ExitLong(,,1,0,Market,Day) ExitShort(,,1,0,Market,Day) End If End Sub Two parameters are added to the original system a correlation length and a correlation level. Notice that we are working with positive triggers in the range of 0 to 0.7, which means the system is turned off between -0.70 and 0. If the correlation drops below the trigger level, trades are exited and new ones are not taken. Optimized for the period studied, all but three combinations did better than the system without a filter. Although it wasnt the absolute best, the most robust results were for a moving average of 45 days and a Lev value of 0.50. This set of parameters made a total net profit of $309,000 on 202 trades, winning on 66% of its trades. It averaged

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bined with the opening range breakout to create our system. Here is the code for this system: Sub ShortTermIntermarkSP502() Dim InterAve As BarArray Dim TrAve As BarArray Dim PredCor As BarArray InterAve=Average(Close Of independent1,26) TrAve=Average(Close,12) If Close<TrAve And Close Of independent1>InterAve And isthursday<>True Then Buy(,1,NextOpen(0)+.3*Range, Stop,Day) If Close>TrAve And Close Of independent1<InterAve And isFriday<>True Then Sell(,1,NextOpen(0).3*Range,Stop,Day) ExitLong(,,1,0,CloseExit,Day) ExitShort(,,1,0,CloseExit,Day) End Sub It is a simple system that gets in at 30% of yesterdays range off the open with the bias being set based on intermarket divergence. A day-of-week filter is used so the system does not buy on a Friday or sell on a Monday. Because the order is for the next day, the system does not buy on a Thursday, the next day being Friday. It exits the close of the same day. Many systems like this were written during the 1990s, but they stopped working when the intermarket relationship decoupled. Theoretical results with no deduction for slippage and commission are shown in Range targets (above). By integrating the concept of predictive correlation into the intermarket system, we can improve our results. The code for doing this is: Sub SPInterDayPredCor(CorLen,Trig)

RANGE TARGETS
This example system makes about $200 per trade not tradable, but not the point. We can make some solid improvements by adding our filter.
PERFORMANCE: ALL TRADES Total Net Profit Gross Profit Total # of trades Number winning trades Largest winning trade Average winning trade Ratio avg win/avg loss Max consecutive winners Avg # bars in winners Max intraday drawdown Profit Factor Account size required
Source: TradersStudio

$182,325.02 $607,750.00 900 505 $13,950.00 $1,203.47 1.08 12 1 ($27,125.00) 1.43 $27,125.00

Open Position P/L Gross Loss Percent Profitable Number Losing Trades Largest Losing Trade Average Losing Trade Average Trade (win & loss) Max consecutive losers Avg # bars in losers

$0.00 ($425,424.98) 56.11% 382 ($7,950.00) ($1,113.68) $202.58 7 1

Max # contracts held Yearly return on account

1 29.36%

Dim InterAve As BarArray Dim TrAve As BarArray Dim PredCor As BarArray InterAve=Average(Close Of independent1,26) TrAve=Average(Close,12) PredCor=Corel(OpenClose,Close[1] Of independent1Open[1] Of independent1,CorLen,0) If PredCor>Trig Then If Close<TrAve And Close Of independent1>InterAve And isthursday<>True Then Buy(,1,NextOpen(0)+.3*Range, Stop,Day) If Close>TrAve And Close Of independent1<InterAve And isFriday<>True Then Sell(,1,NextOpen(0).3*Range,Stop,Day) End If ExitLong(,,1,0,CloseExit,Day) ExitShort(,,1,0,CloseExit,Day) End Sub Because our system is for day-trading, we use correlation to predict

Open - Close using Yesterdays Open - Close of T-bonds. Using a 40-day predictive correlation around zero greatly increases the average trade and cuts the drawdown using these parameters. The system made $141,512.50, which is less in total, but the average trade increased to $289.98. This is about one-third higher, and our drawdown is $15,550 instead of $27,125. Overall, the results are significantly better. Intermarket analysis is a powerful tool when its use is understood. It has many applications ranging from trading system development to complex models, such as those using neural networks. Intermarket-based systems can easily become curve-fitted when they are made too complex or too many different intermarket relationships are included without an understanding of their interaction. FM
Murray A. Ruggiero Jr. is a consultant in East Haven, Conn. His firm, Ruggiero Associates, develops market-timing systems. He is editorin-chief of Inside Advantage Gold Club (www.iagoldclub.com) and is author of Cybernetic Trading Strategies (John Wiley & Sons). E-mail: ruggieroassoc@aol.com.

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Software Review
BY ROB KEENER

NinjaTrader LLC
1236 Clarkson Street Denver, CO 80218 sales@ninjatrader.com support@ninjatrader.com www.ninjatrader.com OVERALL RATING: LEVEL: Novice to professional. PRICE: NinjaTrader standard multibroker edition is $80 per month and $90 per month with charts. RECOMMENDED SYSTEM: Broadband connection, 1 GHz Processor, 512 Mb Ram, Windows 2000/XP.

more important, cuts down on order entry errors. FEATURES: Ninja trader is a clean, user friendly application with features like strong simulation with realistic fills functionality to precise strategy automation that can be driven by a number of popular trading platforms, and it gets better.

RATING SYSTEM:
= Excellent = Good = Adequate = Poor

SUPERDOM

he first sighting of Ninja Trader was a few years back when it was first introduced as a free add-on software to the Interactive Brokers workstation. As the old saying goes, necessity is the mother of invention. The popularity and demand were overwhelming and its not unusual to see something grow like this from humble beginnings to a powerful tool that can be used with multiple brokers. We also should note NinjaTrader recently licensed Trading Technologies (TT) technology platform and connectivity to the exchanges used by TT. Ninja Trader came to fruition when creator Raymond Deux migrated to futures from the equities side and immediately saw a need for a more sophisticated product for executing trades. He developed it for his own use but found there were others seeking the same software for entering orders and exits with the click of a button. This includes allowing the user to place stops and targets with one click, as opposed to only basic order entry. This saves time, but

The most coveted feature is the SuperDOM order entry tool, which does exactly what it is intended to do, and thats make trading easier on a mechanical level. Of course, charts are available, but the real gems lie in the ease of use and overall work flow efficiency that SuperDOM allows. You can program a strategy in eSignal or TradeStation and have the signal passed onto NinjaTrader for autoexecution. The software uses COM, DLL and file interfaces. Anyone who uses trading systems and automation software can figure this out with ease. (See SuperDOM, left.) The SuperDOM window allows traders to enter stops, targets, cancel all orders and flatten everything on one ticket, which are nice tools to have when you need them. NinjaTrader focuses on the mechanics of order placement and management, this fills a void in the strategy automation arena by

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providing capabilities for traders to predefine how they will manage their trades once executed. The SuperDOM order entry ladder, which is not standard fare by any approximation, and the high-end advanced strategy management capabilities are great tools for automating strategies beyond simply passing flat signal via e-mail style dissemination. NinjaTrader also offers charts. These charts visualize all orders and positions in addition to standard market data. All working orders, positions and executions are plotted on the chart with bars and marked labels. With NinjaTrader charts, you can instantly see how far or close your stops and targets are relative to key support and resistance levels. You also can modify and cancel orders directly in a chart; monitor position size, average entry price and real-time profit and loss. NinjaTrader has order placement and strategy execution through charts functionality in the works. ORDER ENTRY: The capability of defining your stop loss and profit target levels and having the trading application auto submit those once an order is partially or completely filled allows the trader to get their orders into the market and protecting their position. Most traders are not used to this type of capability. They can avoid making mistakes and gain the advantage of placing target orders into the exchange order queue faster than they could do it manually. So in effect, the order generator of your choice (TradeStation, eSignal, etc.) passes the order through a DLL call and the software has the ability to monitor the position and enter stops and targets for complex orders. NinjaTraders simulated stop loss technology is also an effective tool.

This allows the user to define a volume trigger (500 contracts for example) that is used to determine when a stop loss is triggered. Instead of triggering when the price trades at the stop loss, it waits until the bid size is less than 500 contracts (support is registered at this price) at which time the stop triggers. This prevents situations where the market comes down to your stop price, takes you out and then bounces right away without you and travels to what was once your profit target. Theres a forum to support the product as well as weekly training sessions via a HotComm room. This is an interactive training session where users can interact with the founder and find tips and hints on using the software. To offer lower subscriber rates, NinjaTrader opted out of phone support and covered this with the forum and e-mail support. This product is bound for growth and it can be added to your broker of choice if there is high demand. The FIX Protocol is used as well as broker specific interfaces on a case by case basis. SUMMARY Overall this is a nice tool for a variety of trading styles. Strategy traders can use the automation features with advanced order control. And theres the one-click order management that will be welcome by traders who enter orders manually. Strategy automation features and a nice order entry ladder with complex order entry make this product a nice tool for professional traders, and NinjaTraders intuitive interface helps new traders take their trading to the next level. As for added bonuses, the simulation features and market replay environment make the free trial a real learning tool.
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FUTURES 101
Heres a look at the different fundamental, technical and seasonal factors when trading agricultural commodities. How should a trader change his focus inside and outside the growing season?

Step-by-step into the ag markets


BY CHRIS MCMAHON
gricultural commodities are changing and despite the fact that they trade in predominantly open-outcry pits, the changes are real. As historically domestic products become exports, suppliers such as Argentina and Brazil gain prominence and hedge funds enter the fray with elbows up. Agricultural markets are entirely different now than they were a year ago, says Richard A. Brock, president of Brock Associates in Milwaukee. Now that Brazil is the largest producer of soybeans, youve got two times of year where youve got to worry about droughts; two times a year youve got to worry about floods; two times of year youve got to worry about Asian Rust. Doug E. Carper, president of DEC Capital, says, The window of one crop season to the next seems to be narrowing all the time because there are so many outside influences and producers. The season seems to be never ending. We have two: ours and the South American growing season, which is exactly opposite our season here in America. Rather than a three or four month growing season to

worry about, now there is twice that. Just a couple of years ago, ag traders could base their expectations on a look at the stock consumption ratio on the United States balance sheet, says David Bell, president of Bell Fundamental Futures in Memphis Tennessee. South America just took whatever price it took to sell. And now with them as the dominant producer, much of that has changed. Now they set the price. INTERNATIONAL VS. DOMESTIC The differences between domestic and international crops are important and multiply the number of fundamental variables influencing prices. And whereas the Argentina, Brazil and the United States are the largest growers and exporters of soybeans, corn is primarily a domestic crop. We are by far the largest producer of corn, and thus the value of the dollar and the price of corn has little or nothing to do with corn exports, Brock says, adding that in the nongrowing season traders are looking at available supplies in the United States and the domestic stock-to-usage ratio.

But in soybeans, the world numbers are extremely important. You are not only looking at the free supplies in the U.S., youre looking at crop progress in Argentina and Brazil and weather patterns in both of those countries. In corn, thats not a factor at all. SUPPLY SEASON During the growing season the markets are preoccupied with supply, outside the growing season traders focus on demand. Supply and demand always determine price, but the variables influencing supply and demand change from season to season. Supply variables, such as weather, draught, disease and pests, have a large impact on price action for a short time, typically no more than a few months. But demand is determined year long, and volatility tends to be greater during the growing season. If weather is the single most important supply variable, the timing of the weather is a very close second. What I like to do is to scan the weather data looking for a change, says Mark Hawkins, president of Commodity Capital Inc., adding that in the very early parts of the growing season,

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which may not be yield determinant, the market is still focused on weather. An example of this is the draught last June in Illinois and Ohio. It was drier than the record draught in 1988 in lots of areas. That was June. And that typically is not a time where you determine corn and bean yields. But can the market just sit still and say, its really dry and hot, but Im not going to rally, or is it more likely to extrapolate the current conditions into the growing period and rally accordingly? And thats what it did, Hawkins explains. When the rains came in July, it took the market some time to get to grips with the change. If you look at the 2005 weather data from the Midwest, the June-August period was essentially normal. And it didnt feel normal to anybody in late June and early July. And what happened was the market saw unusually dry conditions in key area of the growing region. It rationally knew it didnt really matter that it was hot and dry in June, but it projected that weather forward and rallied accordingly, and then we ended up with a record soybean yield. Did soybeans manage to shrug off the June weather? They rallied really hard, Hawkins says. There are also seasonal market phenomena. In August, the speculators typically short the bean complex, Bell says. Farmers dont want to sell any more until theyre sure about the size crop they have, and they have already sold at higher prices and dont want to sell into the hole, so you kind of exhaust your selling. On the other side, the consumers say these are pretty good prices, we dont know how big that crop is, so they do a little bit of buying, and it sort of builds into a short covering rally. DEMAND SEASON The key uncertainty is crop size, which can change dramatically during the season. But once the crops are out of the ground, traders turn their focus to the demand variables simply because there are fewer fundamental

TRADING ROOM
Speculative limits for agricultural commodities changed effective 12/10/05, clearing the way for greater fund participation.
CONTRACT Corn OLD SPEC LIMITS Single Month Limit: 5,500 All-month: 9,000 Soybean Single Month Limit: 3,500 All-month: 5,500 Wheat/Soybean oil & meal Single Month Limit: 3,000 All-month: 4,000 Oats
Source: Chicago Board of Trade

NEW SPEC LIMITS Single Month Limit: 13,500 All-month: 22,000 Single Month Limit: 6,500 All-month: 10,000 Single Month Limit: 5,000 All-month: 6,500 Single Month Limit: 1,400 All-month: 2,000

Single Month Limit: 1,000 All-month: 1,500

factors to consider. Hawkins stresses the importance of adjusting position size in anticipation of the different levels of volatility in the supply versus demand seasons. Your risk in any given position is dramatically greater, lets say, if you are trading corn in July than if you are trading corn in December. The median range for corn futures in July is about 40 a bushel ($2,000 a contract). The median range for corn futures in December is about 17 or 18 a bushel, so your volatility is more than double. And, you dont really know if that is going to happen in a gradual way and you can incrementally adjust, or whether it occurs over night. Your value-to-risk is going to increase substantially for a given contract position size in the growing season. Hawkins says he will watch the 20-day moving standard deviation for a particular market, and when he sees an increase he will factor that into position size. You could have a relatively quiet planting season and the market [volatility] may not increase in May. And then it suddenly increases in June or July, Hawkins says. If the volatility is relatively benign, Hawkins adjusts his position size down anyway, knowing at any stage it could become

explosive. He also watches the implied volatility in the options market to help anticipate increases in volatility and the timing of potential increases. Some people will look at the moving standard deviation of a daily market, some people look at the implied volatility of options, I tend to look at the historical median and mean ranges in a particular month. So I know that in July, my position size will probably have to be half what it is in December, maybe a third just based on the median ranges that I mentioned, Hawkins says. HERE COME THE FUNDS In the past, large fund managers had to curtail their activity in the agricultural markets as their money under management grew because the position limits were too small. Most funds eliminate or severely limit grain positions once they surpass $1 billion under management but that may change as higher position limits went into effect Dec. 10, (see Trading room, above). The Chicago Board of Trade fought for limit increases as more of its business comes from funds. Take something like Eurodollars where there is no limit, Brock says.

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Futures 101 continued


hours. Even orders that are sent electronically are executed on the trading floor. Electronic clerk? Its a joke, Carper says. Nobody seriously thinks thats an alternative. Its kind of like clicking on your mouse to send an order into a pony express rider, adding that open outcry adds to the expense of trading and is inefficient for handling large-scale volume. It is also unlikely to change soon because floor traders, formerly members of the exchanges and now large shareholders in the exchange holding companies, benefit from brokerage fees and income from renting trading privileges and dont want to see floor trading go away. They are not the big players, they are facilitators. The percentage of volume that trades these markets is radically different than what it used to be. My contention is that floor traders are more irrelevant to the price discovery process than ever before, yet they represent an impediment to people who do want to trade, Carper says. I dont think floor trading as we know [it] is indispensable, Bell says, adding that many of the functions that the floor performs could be done better electronically, If the floor is providing a service that cannot be provided in an electronic format, then that would imply that the electronic format is inefficient. If the market creates inefficiencies, then it is also creating an opportunity and someone will figure out how to exploit that inefficiency. Proponents of open outcry say because the agricultural markets are dominated by spread trading, it is unlikely to go away, and that technology is not yet capable of handling the complexities of spread trading, a point Carper acknowledges. Its harder to make those kinds of trades electronically, but the underlying futures would be better served, Carper says, adding that something has got to give. Right now, we cant run any faster, or grow FM our markets any larger.

VOLATILITY (20-DAY MOVING AVERAGE)


Notice the higher volatility during the most important part of the U.S. growing season, and the jump in volatility entering the South American growing season.
%S1! O: 5870 H: 5870 L: 5824 C: 5830 : -174 7600 7400 7200 6800 6600 6400 6200 6000 5800 5600 5400 35.00 25.00 15.00 0.00 Daily

MSD (%S1!, 20)=12.91

May

Jun

16

Jul

Aug

17

Sep

Oct

Nov

Dec

06

Source: CSI Unfair Advantage

They are going to concentrate on the markets where they can expand their position size to match the amount of money they have under management. For example, you take a John Henry or a Campbell, where they are trading in the billions of dollars, 45 million bushels is a pimple on an elephants back. If the market moved a dime, that would only be $4.5 million; when you have $5 billion under management, why waste your time? Carper too has noticed that the order flow and the composition of the order flow has changed dramatically. The amount of hedging pales to what it was when I first started trading, he says, adding that the grain companies were the dominant order flow, with locals playing the role of speculators. Now the CTAs and hedge fund operators are the dominant order flow. The locals on the floor at the Board of Trade are a minor part of the scale volume that once existed. The new alternative investment managers dont have a lot of experience, he says. They are kind of like elephants in a china shop, adding that fund participation occasionally drives ag markets beyond their capability for absorbing volume. The drain is just a little too small to handle

the water that needs to run through it from time to time, Carper says. That is particularly true with the newest entrant in the market: longonly funds benchmarked to indexes like the Goldman Sachs Commodity Index (GSCI). These funds take massive positions on hold the indefinitely (see Dr. Strangefund, September 2005). Hawkins says the markets need to rebalance. There appears a time when the index fund is by far the dominant force on the crop, and prices will probably be higher for some time. One of these days theyll have their boat load and then the market will wait because there wont be anyone other than the funds buying it. Large fund positions can distort markets but they also create opportunities. My basic mode of trading is waiting for market disequilibrium, expecting it to move to equilibrium; and then to be there when it happens. And I believe the funds are pushing the market into greater disequilibrium, Bell says. ELECTRONIC VS. OPEN OUTCRY One of the things that hasnt changed in the ag markets is reliance on open-outcry trading. Ag markets are only electronically available after

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Online Trading
BY YESENIA SALCEDO

Growing options volume electronically


echnology has launched trading up from the pits and into the screen with point-and-click execution producing record volume growth year after year. While futures trading has dominated those records, growth in options both on equities and futures have seen a few records of their own in 2005. The Chicago Board Options Exchange (CBOE) has had a record year, as has the entire options industry, says Edward Tilly, vice chairman of the CBOE. There has been tremendous growth in the options industry, both on screen and off screen. While a lot of the options growth has translated onto the screen, it is more difficult to adapt some of the more complex options strategies to the screen. The growth in single strategies (simple options strategies) has been tremendous on the screen its point, click, receive an instant fill and move onto the next trade, Tilly says, adding that 92% of the CBOEs orders, accounting for almost 60% of the volume, is traded electronically. The remaining 40% is traded in open outcry, most of those trades being complex or multipart orders like spreads. With complex orders, the screen hasnt enjoyed the growth simple options have. Its very difficult to replicate the price discovery process on a complex order on screen, Tilly says. The request-for-quote (RFQ) process is handled very efficiently in open outcry. On a screen, electronic notification is more difficult to service and it becomes a service question. The option exchanges have always had to deal with the problem of quote traffic but it is a new issue for futures exchanges to deal with as they attempt to create a viable electronic options market. The difference with options on the screen versus futures is large. With futures you buy them, you sell them its pretty easy functionality. With options you have so many different strategies that it can get quite complex, says Robert Ray, SVP business development at the Chicago Board of Trade (CBOT). Jonathan Kronstein, CBOT senior economist of the interest rates products group says a larger percentage of financial options trades are the result of complex strategies. People cant think of every single strategys auto quote, so in many cases they have to create the strategy and submit the request for quote to the market place, Kronstein says. He says equity options, being a more retail focused market, do not involve so many complex strategies. You also need the request-forquote functionality for strategies because if someone wants to execute a strategy that isnt currently being auto quoted, they need to create it and then send a RFQ to the market place, Kronstein adds. Another difficulty in trading options electronically is the

amount of data options generate. The options market generates about 78% of all the quotes in North America. The CBOE alone quotes about 180,000 different option strike prices, and each one of those strikes require a bid and an ask and a last sale. And each time the stock price moves, the options price moves, creating new data. With a lot of futures contracts you have very actively traded liquid markets, but with options trading there are hundreds of different strike prices, calls and puts, different expirations that volume, that liquidity gets spread out much more thinly, says Dan ONeil, president of futures and forex broker XpressTrade. SEEING THE GROWTH Both futures and options exchanges have been bringing more market makers to the electronic options world as well as adding functionality to their electronic platforms. Market makers, including specialists and electronic market makers, play a very active role in populating the complex order book at the CBOE. Market makers ultimately will carry the burden of the move to the screen, Tilly says. CBOE began rollout of its Hybrid Trading system in June 2003 and has been working on it since. In 2005 remote market makers were added to Hybrid, which has increased quote traffic. In the summer of 2005 CBOE implemented spread technology, which has increased the number of spread trades being executed electronically. The CBOT and the CME also have experienced growth in options both in open outcry and electronic trading. The most heavily traded electronic options contract at the CBOT is the 10-year Treasury note. The most popularly traded electronic options contract at the CME is the E-mini S&P with a daily average of 25,000. The most popular options contract traded electronically at CBOE is the QQQ. There has been an explosion in options trading overall in the industry, electronically its also taking off, Ray says. If you look at ratios of options to futures volume, some options volume exceeds the futures. The CBOT chose LiffeConnect as its electronic platform at the end of 2003. One of the reasons we decided on that platform was because of the very rich functionality that was embedded in the platform for options trading, Ray says. In August 2005 the CME integrated its enhanced options functionality for trading CME eurodollar options into the Globex platform. Eurodollar options growth year-over-year is up about 40%, pit and screen [combined]. Our average daily volume is around 750,000. It is the most actively traded interest rate options on futures globally, says Robin Ross, managing

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Globex on Sept. 1, 2005. From January through July 2005, director, interest products, CME. the volume of CME Eurodollar option contracts traded rose We came up with a methodology where instead of 40.5% over the same period in 2004. looking at blank order books, people can see indicative quotes in all these different types of strategies...we have over REASONS FOR GROWTH 50,000 indicatively quoted packages for Eurodollars, Ross ONeil says he has definitely seen greater demand for options at says. You can launch an RFQ for the strategy and have our his firm and he attributes that growth to active traders gravitatlead market makers respond quickly with hard quotes that ing toward markets that are volatile and present trading opporcan be transacted upon. tunities. With the stock market mired in a sideways trend and Tina Lemieux, director of CME equity products says elecwith many commodities in the midst of multi-year bull martronic options on the E-mini were up 800% from November kets, weve seen an influx of newcomers to the futures markets, 2004. Average daily volume for E-mini S&P options was 500 ONeil says. Many stock investors, who have become more in the fourth quarter of 2003 and 4,000 for the same period comfortable and familiar with the benefits of options over the in 2004, and in 2005 it jumped to 34,000. Weve seen past several years, have brought this options knowledge with tremendous growth in our electronic options, Lemieux says. them to the futures markets. In general, traders and investors When the enhanced functionality was added in August have become more sophisticated and are willing to branch out 2005 volume increased. At the beginning of January 2005 and try new products. Options are tremendous tools in that Eurodollars traded between 2,000 to 3,000 option contracts a they allow traders to construct positions with practically day electronically and as of November 2005, it was trading any risk/reward about 30,000. Weve profile, any direcseen good growth OPTIONS FOR ELECTRONIC OPTIONS tional bias and there, but its still a any time horizon. small percentage of Heres a screen shot of a typical option order entry screen. Many of the same Ross attributes our total volume. trading tools once available only to futures traders are now being adapted to suit volume growth in Theres still more option traders as well. eurodollar futures room to grow. Out of and options to our average daily the numerous volume of 750,000 interest rate were only trading increases by the 5% electronically (in Federal Reserve. Eurodollar options), We have a prodRoss says. uct that trades primarily complex RECORDS strategies the On Dec. 16, 2005 the Source: XpressTrade majority of the CBOE set a single trades that are day record on the done are structured trades, which normally have four or more S&P 500 Index (SPX) of 884,985 contracts. Total CBOE legs in many cases, you have call ratio spreads, butterflys, year-to-date volume in 2005 set a record as more than 427 condors, different expiries, all sorts of strategies, Ross says. million contracts traded through November, which was an ONeil says traders want fair, transparent and liquid increase of 29% over 2004, which was also a record year. options markets and they will trade where the liquidity is Options on CME Eurodollar futures have a year-to-date greatest. Electronic trading is faster, more accurate and less average daily volume of 740,000 as of November 2005. In expensive for both traders and brokers. From the exchanges July 2005, average daily volume for options on CME side too, electronic trading is more efficient, he says. Eurodollar futures traded on the enhanced option system The process of moving more complex option strategies to totaled more than 25,000 contracts. This is an increase from the screen will take time and require improved technology to 5,000 contracts per day in January 2005. The volume in handle quote traffic, but exchanges and firms will continue to Eurodollar options has increased by 42% in the first half of work towards reaching that goal as options volume in general 2005 versus the same period in 2004. continues to grow. A total of 98,253 CME Eurodollar options were traded on

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MANAGED MONEY
These days, top rated CTAs are as likely to come from Europe as from the United States. A disproportionate number of Europeans are making their names in discretionary currency trading, while others are carving out niches unique to their part of the world but a new wave of algorithmic traders also are hitting the markets.

The Great Divide(s)


BY STEVE ZWICK
aolo di Montorio-Veronese runs a company called PdMV Capital. The letters come from his aristocratic name, and the fund of funds he just launched, the PhD Fund, boasts an impressive 16.6% proforma return, with volatility of just 5.1% and a Sharpe ratio of 3.1. To assemble it, he reviewed scores of traders across Europe, and he says the trading pool he went fishing in wasnt much different from the pool of talent youd find in the United States. Whether based in Chicago or London, every commodity trading advisor (CTA) follows his own model, and those models vary more depending on the individual than on where he is located, he says. We have commodity traders in London who are trading primarily in Chicago, and they use the same methods any would use to analyze markets and identify trends. He adds, however, that he specifically sought out traders who were active in the worlds most deep and liquid markets and used automated systems. These people have trading desks that are manned 24 hours a day, but the actual trades are on autopilot, he says.

WORLD'S TIME ZONE While algorithmic traders can be in all time zones, discretionary traders need to be on top of their markets. Several discretionary currency traders like Michael Hecht (see Trader Profile, January 2006) and Mikkel Thorup say the consistent high numbers posted by European currency traders grow from a combination of world view and time zone positioning. There are distinct advantages to being a currency trader in the European time zone, Hecht says. First, there's the cultural element: We all grew up changing currencies every time we traveled in one direction or the other. And then we have a time zone that enables us to get the meat of Asia, Europe and North America, which you won't find in Chicago, and definitely not in California. Thorup, who runs Zurich-based CTA Capricorn Group, agrees. We get coverage of several time zones, he says. We get the late part of the Far East, Sydney, all of Europe and the full open when the U.S. guys come in around 1 p.m. European time. Plus, he adds, they grew up keeping

track of fluctuating currency crosses the way Americans keep track of box scores. Both men shy away from algorithmic trading and focus instead on discretionary approaches. Im not sure we are looking at anything differently than what people look at in the U.S., Thorup says. We take our signals from a 24-hour trading day rather than, say, the International Monetary Market in Chicago. But that is the norm around the world these days. NATIONAL NICHES But perhaps the most particularly, if not typically, European players are those like Michael Rothman, who specializes in Danish Mortgage Bonds (see Nordic Niche, right). Most of the people who trade like we do aren't CTAs, he says. As a result, the global funds took a while to find us. Similar niche markets exist in most European member states, including Germany, Italy and France. There is a tendency for European traders to look for the smaller, inefficient, niche market, where they can achieve large basis-point gains on

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smaller trades, says Simon Rostron, a media consultant for hedge funds. In the United States, the emphasis is on larger trades with smaller basispoint gains. But if di Montorio-Veronese's experience is any indication of the future, growth among European traders will come among those in the deepest, most liquid markets employing algorithmic programs. The new wave of traders making their name in Europe are coming out of American banks with a presence here, he explains. They don't trust illiquid markets. STRUCTURAL DRIVERS Both the European love of niche trading and the tendency of American-trained traders to pursue pan-European strategies flow from the evolving structure of European markets, which are harmonizing slowly (see Hitchhikers guide to the EU, July 2005) and still have local markets dominated by local banks. American banks, on the other hand, have been the greatest believers in a unified market and have been the biggest players in pan-European products. It makes sense that European traders who learned their trade at American banks will be attracted to international markets, like currencies, di Montorio-Veronese says, a veteran of Goldman Sachs himself who did a stint with Morgan Stanley before heading Man Groups European sales operation. But it also makes sense they will develop systems that can be adapted to the most deep and liquid markets worldwide. The differences in the trading rooms reflect a variety of differences in the structure of markets themselves. Even as cross-border clearing and settlement becomes more practicable, cross-border marketing of retail products remains a sticky issue. One result: the prevalence of guaranteed funds in Europe. Investors in such funds are guaranteed a certain return if they stay in the program long enough (see Guaranteed profits: Pipe dream or reality, December 2002). The guarantee is usu-

ally ensured by putting most of the money into zero coupon bonds that mature at the same time as the guarantee runs out. In the United States, such funds are generally perceived as little more than marketing sleight of hand, but in Europe, where Man Group has been offering such programs since

1983, guaranteed funds are considered a bona fide value-added product. Rostron offers a reason. There is a tendency of people in the U.S. to dismiss guaranteed funds, because they figure they can just go out and buy the bonds themselves, concedes Rostron. But if you're sitting in

Nordic Niche: Danish mortgage bonds L

ike the United States, Europe is a land of deep, broad liquidity pools, but it also a land of niche markets, such as Danish callable mortgage bonds, which have become hugely popular among traders both inside and outside of Denmark throughout the past decade. Add to that the surging demand for managed investment products of all stripes in Denmark (see Thats a lot of shoes), and you can see why money managers like Michael Rothman have chosen to inhabit the niche. His company has generated a smooth 12% to 15% annually trading in the secondary market, using mainly cash and forward contracts/repos in bonds maturing in the next one to five years.

THATS A LOT OF SHOES


Funds aimed at both retail and institutional investors have grown rapidly in Denmark.
2000 TYPES OF FUNDS RETAIL INSTITUTIONAL FOREIGN TOTAL 177.957 72.117 7.127 257.201 177.722 98.184 6.429 282.335 188.028 91.203 5.256 284.487 249.505 108.669 6.098 364.272 297.56 215.5 6.136 519.196 2001 2002 2003 2004 2005 YTD
(through Nov.)

374.271 323.262 10.331 707.864

The total assets under management in retail funds, institutional funds and funds marketed abroad in millions DKK.
Source: The Federation of Danish Investment Associates

The Copenhagen Stock Exchange does not list bond futures, but Danish banks do administer an OTC trading platform that can be accessed by high net-worth individuals via member banks. Rothman, however, warns of low liquidity. If you want to cover a position using futures, you are best using the German Schatz or Bund, he says, adding that an active spread market has developed between Danish mortgage bonds and Bund futures. Since 1986, Rothman's niche within the niche has been finding opportunities in less-actively traded series, so-called off-the-run bonds. Rothman says Danish pension funds and institutional investors are not active in the sector. This lack of market participation and the illiquidity it creates, coupled with the inherent valuation complexity resulting from the redemption

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Managed Money continued


Bahrain, buying the bonds is easy in concept but less easy in fact. And, lacking a home market the size of the United States, European hedge funds are marketing themselves aggressively in multiple jurisdictions. HARMONIZATION Switzerland is second only to the United Kingdom in the number of hedge funds servicing continental institutions. But, since Switzerland is outside the European Union, Switzerland stands to lose out on the retail boom as the European Union moves towards harmonizing financial services. Laws regarding brokerages based in one member state but with branches in another have come more clearly into focus since we visited the subject in July. On Jan. 1, several countries came into compliance with the passport requirements of the E.U.'s Markets in Financial Instruments Directive. As of that date, for example, brokerages based in, say, Lichtenstein could open branch offices in other member states without being licensed locally. Instead, Lichtensteins Financial Supervisory Authority will keep tabs on the activities of companies based there and send reports to regulators in other countries. But there are still plenty of issues to be resolved in terms of hedge funds, which often fall into a no-regulators land between institutional and retail. The European Fund and Asset Management Association has come up with two proposals for harmonizing and streamlining hedge fund laws across the European Union. One focuses on the structure of supply, or how funds are structured, perhaps through amendments to the existing UCITS Directive. The other focuses on the structure of demand, or who is allowed to invest in hedge funds. However, with retail brokerages across the continent gearing up to sell the things to private investors, you can bet which proposal will get the biggest industry push. FM

profile of mortgage bonds (the call feature found in mortgage bonds), has led to an inefficient market in this niche sector and a consequent yield arbitrage opportunity. The strategy relies on long-standing relationships with institutional participants, to maintain its unique market-making position. Our ability to provide market liquidity in an otherwise illiquid market enables us to earn higher spreads than might normally be expected, he explains. It has been a good business for years but suddenly, over the past few years, we are getting a lot of money from abroad, although not much yet from the United States. The market has a fascinating history and predates the securitization of U.S. mortgages by 180 years, having been launched by a consortium of issuers in 1796 to dilute the risk of default on masses of mortgages issued after a fire destroyed one quarter of Denmark one year earlier. The bonds have been a cornerstone of the nation's real estate apparatus since, but foreigners didn't take to them in large numbers until after the Danish government implemented a fixed exchange and interest rate policy with the euro. This is the seventh-largest mortgage bond market worldwide, explains Rothman. That's not just because it has been around so long, but also because Danes can mortgage up to 80% of the value of their homes. Plus, we've never had a failure, and they're rated AAA. The market began taking its current form in the 1950s, when old mutual credit associations gave way to independent mortgage banks that offered easy credit. In 1970, the government simplified loan structures and gave the Minister of Housing authority to deny licenses for new institutions. The result was a gradual drop in the number of lenders from 24 to seven as existing entities merged and new ones stopped popping up. The market benefited with fewer, but deeper and more liquid bond series. The Danish bond market continued its simplification and in the 1980s, they started allowing loans based on a property's cash value and raised the loan-to-value rate to its current 80% of a property's total value. Whether or not the growth in participants will cause Rothman to lose the inefficiencies that he has been able to exploit is yet to be seen.

ECB: Hedge funds off the hook T

he European hedge fund industry breathed a collective sigh of relief in early December when the European Central Bank published a 54-page paper stating banks had learned from past disruptions, and that hedge funds were not destabilizing EU banks. The report did, however, find areas of concern: poor stress-testing, poor aggregation of risk and poor disclosure in some cases, for example, as well as huge differences from bank to bank.

Futures readers interested in learning more about the structure of the European hedge fund industry will find the report and excellent backgrounder available for download at: http://www.ecb.int/pub/pub/prud/html/index.en.html.

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New For Traders


including new synthetic order types Send new product information to: like stop market and stop limits with Dow Jones Indexes (DJI) has launched Futures, 833 W. Jackson Blvd. 7th Floor trigger quantities, timed orders, market the Dow Jones EPAC Select Dividend Chicago, Ill. 60607, Fax: (312) 846-4638 Attn: Chris McMahon on open and market if touched. Index, which tracks the top 100 yieldE-mail: cmcmahon@futuresmag.com www.tradingtechnologies.com. ing stocks in Europe, Asia and Canada. Components were selected from the Numerator has launched its flagship service, nuFed, which Dow Jones World Developed-Ex. U.S. Index, representing delivers Federal Reserve data on Americas largest 150 95% of free-float market capitalization for developed counbanks, reflecting more than $1.2 trillion of market cap, or tries excluding the U.S. DJI also launched the Dow Jones more than 9% of the entire U.S. market. Users can generCanada Select Dividend Index, which tracks the countrys ate and download a single bank analysis or reports compartop 30 yielding stocks. The 30 components were selected ing 150 banks across line items. Important features are total from the Dow Jones Canada Total Market Index, representanonymity and security for customers and no up-front costs ing 95% of the countrys float-adjusted market capitalizaor minimums. www.nuFed.com. tion. The index is weighted by indicated annual dividend, and the weight of any one component is capped at 10%. www.djindexes.com. FUTURES The Chicago Mercantile Exchange (CME) plans to launch SOFTWARE a futures contract based on the MSCI EAFE Index on Dynamic Trend Inc.s Dynamic Trend Profile, a technical March 20, which will trade exclusively on Globex. The analysis program, will be powered by eSignals real-time contract is designed to help investors participate in internadata. The combination brings eSignals technical charts tional equity markets. The MSCI EAFE Index comprises 21 and indicators together with Dynamic Trend Profiles speMSCI country indices, representing the developed markets cialized market scans to help traders identify market trends outside of North America. The EAFE Index is the basis for the second largest exchange traded fund in the world, with approximately $1.5 trillion is benchmarked to it. www.cme.com/mscieafe. The Chicago Board of Trade (CBOT) has launched two new market maker programs designed to support options trading on Two-year U.S. Treasury note futures. Participants in the electronic market marker program will provide continuous two-sided quotes and respond to requests-for-quote for options on Two-year U.S. Treasury note futures traded on eCBOT, its electronic trading platform. Participants include Capstone Fixed Income LLC, Citigroup Corporate and Investment Banking, Consolidated Trading LLC, DRW Investments LLC and Optiver US LLC. Participants in the primary market marker program will do the same on the open auction platform. www.cbot.com.

INDEX FUNDS

Dynamic Trend Profile is now powered by eSignals real-time data. in real time and allows traders to scan thousands of stocks, forex and futures using color-coded graphical windows to help determine trading opportunities. Traders then may use the Matrix function to generate trade setups, automatically perform analysis and locate opportunities based on user-defined criteria. (800) 833-1228, www.esignal.com. (330) 645-0800, www.dynamictrend.com. Trading Technologies (TT) has released X_Trader 7 trading software. The enhancement to its platform includes new exchange connections and more powerful tools. X_ Trader 7 is built on a new API and incorporates a new messaging layer. X_Trader 7 platform is faster than X_Trader 6 and provides increased functionality to further optimize trading performance. Price updates are more rapid, automated tools get orders into the market quicker and overall order send time has been improved. X_Trader 7 also supports more order types

CLEARING
Fortis has acquired OConnor & Company and will combine its Chicago clearing operations with OConnor, more than tripling its size. The combined organization will operate as OConnor until the integration is completed, when it will assume the Fortis name. Fortis Clearing is one of the largest independent third-party clearers in Europe, Asia/Pacific and the U.S. and offers clearing services for the derivatives, equities, bonds and commodities markets. Fortis Clearing has offices in Amsterdam, Frankfurt, Hong Kong, London, Singapore and Sydney and has general clearing memberships in 21 exchanges and access to other major exchanges through third party relationships. www.fortis.com.

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www.futuresmag.com | February 2006

69

Funds Review

2005 public funds returns


Name of fund Trading advisor(s) Date started Starting Unit value Change unit through for value 12-31-05 2005 Name of fund

(through December)
Starting Unit value Change unit through for value 12-31-05 2005

Trading advisor(s)

Date started

U.S. Closed
Dean Witter Cornerstone Fund II Dean Witter Cornerstone Fund III Dean Witter Cornerstone Fund IV Dean Witter Diversified Futures Fund II LP Dean Witter Diversified Futures Fund III LP Northfield Trading; J.W. Henry Sunrise; Graham J.W. Henry; Sunrise Morgan Stanley Morgan Stanley Jan-85 Jan-85 May-87 Jan-89 Nov-90 Apr-88 Mar-92 Aug-88 Feb-91 Feb-90 Apr-93 Jul-87 Feb-91 Jan-92 Jan-90 Jan-94 975 975 975 1000 1000 1000 1000 1000 1000 1000 1000 1000 100 100 100 100 3753 -19.43% 3961 -6.09% 5880 -19.31% 2693 -21.51% 1673 -21.93% 1001 -22.16%

Smith Barney AAA Energy Smith Barney Diversified Futures Smith Barney Diversified Futures II Smith Barney Global Markets Futures Fund Smith Barney Mid-West Futures II SSB Fairfield Futures Fund L.P.

AAA Capital Management Multiple managers Multiple managers Multiple managers J.W. Henry Multiple Managers

Mar-98 Jan-94 Jan-96 Aug-93 Jan-96

1000 1000 1000 1000 1000

5337.09 91.10% 1611.36 -7.73% 1516.78 1.74% 2712.37 -3.14% 1552.78 -24.32%

Jun-02 1,000 1389.59 -21.23%

Dean Witter Diversified Futures Fund LP DW Futures/Currency Mgmt. Dean Witter Global Perspective Portfolio Dean Witter Multi-Market Portfolio L.P Dean Witter Portfolio Strategy Fund Dean Witter Principal Plus Fund EMC; Millburn Ridgefield Morgan Stanley J.W. Henry SSARIS

U.S. Open
1132 -0.18% Campbell Strategic Allocation Fund LP 1191 -21.77% Citigroup Diversified Futures Fund 2727 -24.25% Citigroup Emerging CTA Portfolio 1895 -3.81% Citigroup Fairfield Futures Fund II Dean Witter World Currency Fund LP J.W. Henry; Millburn Ridgefield Hutton Investors Futures Fund II JWH/Millburn (B) JWH/Millburn (C) JWH/Millburn LP ML Global Horizons LP Salomon Smith Barney Diversified 2000 Futures Fund Salomon Smith Barney Global Diversified SB AAA Energy Fund L.P. II Shearson Mid-West Futures Fund Shearson Select Advisors Futures Fund J.W. Henry; Trendlogic J.W. Henry; Millburn Ridgefield J.W. Henry; Millburn Ridgefield J.W. Henry; Millburn Ridgefield Athena; Chesapeake 1132 -14.63% IDS Managed Futures I 8178.21 -18.68% JWH Global Trust 290.32 -7.38% Marathon Currency & Financials (CFE) Portfolio Multiple Advisors 226.29 -7.38% Marathon Diversified Portfolio 357.74 -7.37% Marathon FX Portfolio 221.81 -3.47% Marathon Macro Strategic Portfolio Multiple managers Multiple managers AAA Capital Management J.W. Henry J.W. Henry Jun-00 Feb-99 Jul-02 Dec-91 Jul-87 1000 1000 1284.36 -4.68% 1480.68 10.94% Marathon Plus Portfolio Marathon System Financial Portfolio Millburn World Resource Trust MS Charter Campbell MSDW Charter Graham LP Multiple Advisors Multiple Advisors Multiple Advisors Millburn Ridgefield Campbell & Co. Graham Cap. Mgmt. Jul-98 Apr-98 Mar-95 Sep-95 Oct-02 Mar-99 1000 1000 1000 1000 10 10 1368.64 -6.49% 2501.93 -9.29% 2891.39 -10.35% 1095.15 1.22% 12.71 9.66% Multiple Advisors Jan-98 1000 2051.7 -3.12% Multiple Advisors Mar-95 1000 2787.7 -6.77% Jan-01 1000 4088.43 -3.67% J.W. Henry Jun-97 100 142.15 -4.30% J.W. Henry; Welton Invst. Jun-87 75 366 -21.52% Graham Capital Management Mar-04 1000 798.1 -12.12% Multiple Managers Jan-04 100 1078 10.39% Multiple managers May-03 1000 930.98 -4.46% Campbell & Co. Apr-94 1000 3007.37 9.54%

1,000 2171.92 88.91% 1000 1000 2373.6 -24.17% 3045.05 -23.92%

18.59 -16.11%

These funds have the following cash distributions, which should be added to the funds current value to get a true picture of the funds actual returns since beginning trading. Fund J.W. Henry/Millburn LP Total $20 Fund Hutton Investors II Total $200

See page 18 for top CTA performance rankings.


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FUTURES | February 2006

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Name of fund

Trading advisor(s)

Date started

Starting Unit value Change unit through for value 12-31-05 2005

Name of fund

Trading advisor(s)

Date started

Starting Unit value Change unit through for value 12-31-05 2005

MSDW Charter Millburn LP MSDW Charter MSFCM MSDW Spectrum Global Balanced Fund MSDW Spectrum Select L.P. MSDW Spectrum Strategic Fund MSDW Spectrum Technical Fund Quadriga Superfund, L.P. Series A Quadriga Superfund, L.P. Series B

Millburn Ridgefield Morgan Stanley SSARIS Multiple Advisors Blenheim Capital; Eclipse Capital Multiple Advisors Quadriga Capital Mgmt. Quadriga Capital Mgmt.

Mar-99 Mar-94 Nov-94 Aug-91 Nov-94 Nov-94 Nov-02 Nov-02 Jun-99 Oct-97 Jul-95 Aug-97 Nov-94 Jan-04 Jul-02 Feb-03 Feb-04 Jul-00

10 10 10 10 10 10 1000 1000 1000 1000 1000 1000 1000 1000 1000 100 100 1000

10.45 -0.67% 15.73 -19.62% 15.23 4.32%

Blue Danube Fund - Futures Select FTC Futures Fund Balanced FTC Futures Fund Classic FTC Futures Fund Dynamic Global Futures Fund IX Ltd. Global Futures Fund VI Ltd. (DM) Global Futures Fund VII Ltd. (DM) Global Futures Fund VIII Ltd. Global Futures Fund X Ltd. Global Futures Fund XI Ltd. Global Futures Fund XII Ltd. GSL-JWH Financial & Metals GSL-JWH Strategic Allocation Hasenbichler Commodities AG Man AHL Alpha plc Man AHL Diversified plc MAN-IP 220 Fusion Ltd. Northfield International

Multiple managers FTC Asset Mgmt.

Oct-95 Apr-03

1000 1000

1310.12 6.76% 1138 2.25%

FTC Asset Mgmt.; Pomeranz & Prtnr. May-98 1000 FTC Asset Mgmt. Man Investments Man Investments Man Investments Man Investments Man Investments Man Investments Man Investments J.W. Henry J.W. Henry Hasenbichler Trading Services Man Investments Man Investments Man Investments Northfield Trading May-02 1000

1246.47 -0.05% 1250.06 15.99%

28.46 -1.45% 14.17 -2.68% 22.36 -5.45% 1328.33 -9.43% 1521.61 -12.06% 1613.81 17.94% 1817.4 6.92% 2150.06 -2.92% 1262.39 -22.82% 7226.3 74.81% 1132.25 9.74% 1120.25 3.97% 148.14 12.69% 98.83 -7.58% 1426.33 4.43%

Jan-02 1,000 10230.17 6.15% Nov-96 10000 14780.14 7.30% Apr-97 10000 13548.17 7.33% Jun-04 10,000 12530.07 7.19% Jan-02 1,000 9080.12 7.17% Jan-02 1,000 1559.74 8.90% Jan-02 1,000 1656.77 9.49% Jan-93 Oct-02 Jul-90 Oct-95 Mar-96 Apr-98 Mar-91 100 100 493.89 -13.97% 106.79 -9.25%

Salomon Smith Barney Orion Futures Fund Multiple managers Smith Barney Potomac Futures Smith Barney Tidewater Futures Fund Smith Barney Westport Futures Fund Triad Trading Fund LP TriFex Trading Fund LP Campbell & Co. Chesapeake Capital Corp. J.W. Henry AAA Capital Management Treasury Management Service Inc.

1000 13186.93 0.26% 100 10 1 10 530.17 9.98% 40.17 -23.21% 2.32 19.17 10.48% 6.56%

Wimbledon Alternative Diversified Strategies III Multiple Advisors Wimbledon HDN Fund LP Wimbledon Marathon LP Multiple Advisors Multiple Advisors

Wimbledon Sand Spring Fund Class L Shares Multiple Advisors

Offshore
AHL Capital Markets Ltd AHL Currency Fund AHL Diversified Guaranteed II Alternative Opportunities Fund Athena Gtd. Futures Man Investment Prod. Ltd. Man Investment Prod. Ltd. Man Investments Karin Kisling Adam, Harding & Lueck Aug-93 Aug-93 Aug-96 Mar-04 Dec-90 10 10 10 100 10 74 60.1 40 114.5 82.12 22.94% -9.23% -1.09% 9.31% 7.64%

SMN Alternative Investment Fund Class ASMN Investment Services Ltd. SMN Diversified Futures Fund Wimbledon Fund Ltd. Class A Shares Wimbledon Fund Ltd. Class B Shares Wimbledon Fund Ltd. Class C Shares Wimbledon Fund Ltd. Class M Shares Wimbledon Fund Ltd. Class TT Shares Wimbledon HDN Fund Ltd. Offshore Wimbledon Multi-Strategy Fund Ltd. SMN Investment Services Ltd. Multiple Advisors Multiple Advisors Multiple Advisors Multiple Advisors Multiple Advisors Multiple Advisors Multiple Advisors

Mar-97 100.03 143.31 -1.77% Oct-96 Jan-97 Sep-96 Jun-96 Apr-96 Jan-99 Jan-03 Apr-01 72.67 1000 1000 1000 1000 1000 1000 100 158.52 -3.66% 1749.99 -0.31% 2334.49 2.28% 7142.05 18.68% 2508.62 2.52% 2129.51 9.54% 1505.11 14.63% 115.84 4.87%

Blue Danube Fund - Currency Opportunity Multiple managers Blue Danube Fund - Futures Aeneas Blue Danube Fund - Futures Dynamic Multiple Advisors Multiple managers

May-99 1000 Jul-03 1000

1226.05 4.09% 715.95 -12.18% 1127.81 0.94%

May-02 1000

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71

TRADE TRENDS
The move to for-profit status accelerated in earnest in 2005 as three exchanges and one futures firm went public and others were targets for capital raising firms eager to cash in. While equity volatility continued to wane, futures and options exchanges set records. Here is an offbeat look at some of the events of last year.

Tops & bottoms of 2005


BY DANIEL P. COLLINS

Tops
IPO-MANIA The successful IPOs of 2005 ran the gamut in terms of market models: The Chicago Board of Trade (CBOT), the oldest futures exchange in the United States, finally took the plunge after years of fighting legal battles that delayed the offering; the International Securities Exchange (ISE), one of the newest exchanges, launched in 2000, and the first all-electronic options exchange; and the Intercontinental Exchange (ICE), which is actually an OTC bilateral trading platform that is also the parent of ICE Futures, the former International Petroleum Exchange. Chicago Board of Trade CBOTs IPO was actually more successful than everyones exchange IPO model, the Chicago Mercantile Exchange. CBOT opened trading above $80 despite an offering price of $54, which was raised twice in months preceding the offering, and quickly rallied above $100. However, questions regarding its growth potential led some analysts to downgrade the stock leading to a dip as the year closed out. International Securities Exchange The most successful launch of a new exchange, ISE in a few short years went from start-up to volume leader in individual options and challenges the Chicago Board Options Exchange for overall leadership.

CBOT STOCK PRICE


130.00 120.00 110.00 100.00 90.00 80.00 70.00 60.00 21 28 5 12 Dec 19 27

IPO offering price


24
Source: eSignal

31 7 Nov

14

ISE STOCK PRICE


32.50 30.00 27.50 25.00 22.50

IPO offering price


21 4 18 2 9 23 6 20 5 18 226 19 3 10 24 7 21 5 12 27 Apr May Jun Jul Aug Sep Oct Nov Dec
Source: eSignal

20.00

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FUTURES | February 2006

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Intercontinental Exchange The Intercontinental Exchange (ICE) benefited from energy exemptions in the Commodity Futures Modernization Act of 2000 and established itself as a platform for OTC energy trading. The fall of Enron created an opportunity for the creation of cleared OTC products and ICE has been battling the New York Mercantile Exchange (Nymex) to fill that space. EXCHANGE SEAT PRICES Chicago Board Options Exchange. CBOE announced plans early in 2005 to explore demutualization and a possible IPO. While issues relating to CBOT exercise rights holders continues to be a drag on its value, the possibility of another Chicago exchange IPO has helped CBOE seat prices nearly triple during the course of the year (see Chartview, Trendlines page 14). New York Mercantile Exchange. Seemed liked everyone wanted to get a piece of the energy exchange as Nymex took bids from multiple suitors. They apparently settled on a $135 million bid from General Atlantic for a 10% stake in the exchange. The interest pushed seat prices to a record $3.1 million. While many New York Stock Exchange specialists talked about the NYSE getting the short end of the NYSE/Archipelago Holdings merger, in the end they voted by a 95% margin to approve the deal. And why not, seat prices exploded as the year wore on.

ICE STOCK PRICE


37.50 35.00 32.50 30.00

IPO offering price


21
Source: eSignal

27.50 5 12 19 27

28

Dec

NYSE YEARLY SEAT PRICES


$4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 1994 High Low

Seat prices

1996

1998

2000

2001

2002

2004

2006

Source: NYSE

Bottoms
KATRINA In 2005 Mother Nature once again proved to be a cruel mistress. Hurricane Katrina ravaged the Gulf coast and breached the New Orleans levy system flooding virtually all of the Big Easy. Oil rigs broke from moorings, natural gas distribution was all but stopped, the Port of New Orleans was closed for business. The human toll was worse. HEDGE FUND TIMING: BAYOU In a year that saw a hurricane destroy the levy system protecting the City of New Orleans causing massive flooding, multiple deaths and destroying much of the Crescent City, it was bound to be a bad year for a hedge fund named Bayou. REFCO IMPLOSION People in the trading business understand how quickly fortunes can turn, but even hardened traders had to be shocked at this reversal. If ousted Refco CEO Phillip Bennett took care of his outstanding debt, perhaps with the money awarded him prior to the Refco IPO, this Refco story could have been a top. Instead, the largest independent futures commission merchant fell into bankruptcy and many dedicated employees where left with worthless stock, and clients with an uncertain future.

REFCO STOCK PRICE


30.00 25.00 20.00 15.00 10.00 22
Source: eSignal

29

6 Sep

12

19

26

3 10 Oct

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73

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Trade Trends continued

Fights of the year


DEUTSCHE BORSE VS. TCI

Off the charts


MYSTERY SOLVED! On June 9 the CBOT rededicated two 12-foot 5.5 ton statues representing agriculture and industry that had been missing for years at a 75th anniversary celebration of the CBOT building. The statues disappeared in 1929 after demolition of the original 1885 CBOT building. They were discovered in 1978 in a suburban forest preserve, which curiously enough used to be the estate of Arthur Cutten, a prominent CBOT trader in the early 1900s. The CBOT noted it does not know how the 5.5 ton statues got from LaSalle Street to the Cutten Estate more than 30 miles away. LOVE/HATE TRIANGLE The year started out with speculation as to who would win the battle to purchase the London Stock Exchange: Deutsche Borse or Euronext. A shareholder revolt pushed DB out of the game and then Euronext appeared to get cold feet. The hot rumor as we move into 2006 is of a DB/Euronext merger. Maybe then the LSE will have a buyer. NO QUIB(BL)ING, THATS A LOT OF COPPER A scare was averted as China appears to have honored the large (approximately 220,000 metric ton) short copper position accumulated by Liu Qibing, a trader for Chinas State Regulation Center of Supply Reserve (SRB). SRB initially distanced itself from Qibings trades, saying Qibing acted on his own. FAT FINGERS Tokyo Stock Exchange President and CEO Takuo Tsurushima resigned along with two TSE directors after what has been described as a fat finger error by a Mizuho Securities broker caused a 40 billion yen ($345 million) loss. According to the TSE, the fat fingered broker mistakenly placed a sell order for 610,000 shares of JCOM at 1 yen instead of one share at 610,000 yen. The error could not be canceled due to a system irregularity. ETHANOL WARS? On March 15 the CBOT moved up the launch of its much-ballyhooed ethanol futures contract to March 23 from April 8 after the CME announced earlier in the week they would launch an all-electronic ethanol contract. FOREX FOREVER Has the growth in retail forex gotten out of hand? Were not sure but an indication may be when brokers start using approaches usually reserved for college students offering study help or trying to unload old furniture. This ad was posted in the entrance of a super market in suburban Chicago. Regulation of retail forex may become more structured as legislation reauthorizing the Commodity Futures Trading Commission will close some loopholes.

s 2005 began Deutsche Borse was preparing for another go at the London Stock Exchange after it rejected a $2.6 billion DB bid to purchase it. But one of DBs newer shareholders, a hedge fund called The Childrens Investment Fund (TCI) had other ideas. A very public letter-writing campaign ensued when TCI Managing Partner Christopher Hohn asked for an extraordinary shareholder meeting to debate the LSE bid and replace the entire supervisory board. DB CEO Werner Seifert claimed Hohns actions were damaging the board and that TCI had ulterior financial motives. The German exchange pulled its LSE bid and announced it would use the capital for a 10% share buy-back and a dividend to shareholders. Hohn was not yet satisfied though, and in May Seifert and three other supervisory board members resigned. TT VS. RCG In defending its software patents, independent software vendor Trading Technologies (TT) agreed to out of court settlements with more than a dozen firms. But there are still holdouts: Rosenthal Collins Group (RCG), apparently under the belief the best defense is a good offense, countersued TT for numerous Sherman Act violations. An Illinois court on Dec. 26 dismissed most of RCGs claims.

Learn how to trade the foreign exchange market (Forex)... The potential is huge!

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Signs of the times

Records
CBOT: More than 674 million contracts traded at the CBOT in 2005, a 12.9% increase over 2004 and the fourth consecutive year of record volume. CBOE: More than 468 million contracts traded on CBOE in 2005, a 30% increase over 2004s record year.

NOT SO FAST! Two things are clear at Nymex: They want to become a public company and they need help getting there. For a while it looked like they settled on where CME: The CME traded 1.05 billion that help would come from, General Atlantic. But recently they appeared to contracts in 2005, a 34% increase reopen the bidding and the new hot contender is the CME. The CME knows a from 2004 and the sixth consecuthing or two about a successful IPO and will be free to compete directly with tive year of record volume. Nymex by the middle of the year, giving Nymex added incentive to cut in the Average daily volume was nearly CME. (See Trendlines, page 14.) 4.2 million. EVERYONE SHOUT! Eurex set a record turnover of That loud noise was a shout for joy from business 1.25 billion contracts in 2005, a journalists as the Securities and Exchange 17% increase from 2004. Commission in June unanimously agreed to eliminate initial public offering quiet periods. OneChicago: The security futures product exchange completed its third full year of existence in 2005 and traded 5.53 million contracts, a 188% increase from 2004. In December OneChicago set an Phillip Bennett. Revelations of the open interest record of 1.6 milformer Refco CEO hiding $430 million contracts. lion in bad debt led to the Refco Minneapolis Grain Exchange: The bankruptcy. While segregated MGEX set a volume record of futures accounts remained safe, 1.422 million contracts in 2005, retail forex customers had to wait the majority of which came from two months before they learned its Hard Red Spring Wheat conthat they would be made whole and tract, which traded a record 1.39 retail investors in the Roger Raw million contracts. Materials Fund are still in limbo. NYSE Specialists. On April 17 Sam Israel III. The slick CEO of former NYSE specialists were New York Board of Trade: Nybot traded 37.9 million futures and hedge fund Bayou Management charged by the NYSE enforceoptions contracts, which was 20% LLC with the Wall Street pedigree ment division with securities more than 2004 and the third proved to be much more style than fraud. The specialists were straight record volume year. substance. Israel created a false alleged to have violated their fundamental obligation to prioraccounting firm to mask a massive New York Mercantile Exchange: fraud in the $440 million hedge itize public customers orders Explosive volatility in the energy fund. It was discovered and Israel over the proprietary interests of complex led to record volume at their specialist firms. was charged with fraud. Nymex.

Rogues Gallery

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75

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Trade Trends continued

Just deserts
On March 15 Bernie Ebbers, the former CEO of Worldcom, was convicted on charges of conspiracy, securities fraud and false regulatory filings in connection with the $11 billion fraud which brought down the telecommunication company. Ebbers was later sentenced to 25 years in prison. Many other of the corporate crooks of recent years finally faced retribution. Joe Nacchio, former Qwest Communications CEO, was indicted on 42 counts of insider trading. Adelphia Communications founder John Rigas, in June, was sentenced to 15 years in prison for defrauding customers. His son Timothy was sentenced to 20 years. Former Tyco CEO Dennis Kozlowski was found guilty by a New York court of fraud, conspiracy and grand larceny.

Ch-ch-changes
Reserve Board Chairman Alan Greenspan, the maestro, steps aside. Greenspan could have been the inspiration behind the old E.F. Hutton add, When E.F. Hutton talks, people listen. Trading floors grew quiet when Greenspan gave testimony and traders and brokers attempted to discern Fed policy through the maestros careful word selection.

IN MEMORIAM Fred Arditti, who passed away in October, was responsible for developing the process for cash settlement of Eurodollar futures at the Chicago Mercantile Exchange. The CME has named its annual innovation award in his honor.

INNOVATION AWARD

CME

Boca Beat

he Futures Industry Association celebrated its 50th anniversary this past March during its annual conference in Boca Raton and used that occasion to announce its inductees into its Futures Hall of Fame. Long time FIA President John Damgard, said, It is important that the people who lead this industry today understand the contributions made by those who came before them. We are benefiting from the ground they broke and the programs and policies they put in place. Here are the inductees:

FUTURES HALL OF FAME


Fred D. Arditti John F. Benjamin Lloyd C. Blankfein D. Keith Campbell Max C. Chapman Jr. John J. Conheeney Michael C. Dawley Thomas H. Dittmer Barbara S. Dixon Senator Robert J. Dole Thomas R. Donovan Marcy Engel Robert B. Feduniak W. Robert Felker David R. Ganis John T. Geldermann John F. Gilmore, Jr. Alan Greenspan Hal T. Hansen, John W. Henry Ronald M. Hersch Dr. Henry Jarecki Michael N. Jenkins Paul Tudor Jones II Peter F. Karpen George D. F. Lamborn Jack H. Lehman III Barry J. Lind Arthur R. Marcus Leo Melamed Laurence E. Mollner Dennis M. Murray Charles P. Nastro Michael G. Philipp Dr. Susan M. Phillips Ivers W. Riley Leslie Rosenthal Thomas A. Russo Dr. Richard L. Sandor Mary L. Schapiro John P. Sievwright Craig F. Smithson Steven D. Spence John H. Stassen Olof Stenhammar Howard A. Stotler Dennis A. Suskind Paula A. Tosini Kenneth G. Tropin Frederick G. Uhlmann David J. Vogel F. Helmut Weymar Robert K. Wilmouth John A. Wing Benjamin Wolkowitz

FM

76

FUTURES | February 2006

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Dateline
FEBRUARY
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

30
Japan Production index

31
Crop summary. Japan Employment, Merchandise trade. France Unemployment, PPI

1 8

2 9
Cotton ginnings, Crop production. U.K. Merchandise trade. Australia Employment

3
COT report, Employment

6 13
Japan Balance of payments. German Balance of payments

7
Crop summary. Germany Production index

10
COT report, Merchandise trade. Japan PPI. France Production index, Merchandise trade

U.K. Production index. Germany Merchandise trade

14
Crop summary. U.K. CPI. Germany National accounts, CPI Holiday: U.S.

15
Production index

16
Australia Merchandise trade

17
COT report, PPI. Japan National accounts. France Balance of payments

20 27

21
France CPI

22
Crop summary, CPI. Canada CPI

23 2

24
COT report

Germany PPI

28
Canada Balance of payments

Crop summary. Japan Production index, Merchandise trade. Germany Employment. France Employment, PPI

3
COT report

C O N T R A C T D AT E S
1 LTD: BM&F Alcohol OF, iBrX 50 F, Euronext-Liffe Mar White sugar OF. 2 Equities (Den, Fin, Fra, Ger, Gre, Ire, Net, Spa, Swe, Swz, UK, USA) F, Equities O, FTSE 100 O, FTSEurofirst O, Euronext-Paris Cac 40 F, KCBT Value Line OF. 20 LTD: BM&F Mar IGP-M F. 21 FND: BM&F Live cattle F, Feeder cattle F, Schatz OF, Nymex Mar Crude oil F. 22 LTD: BM&F Mar IGP-M F. 23 LTD: CME Jan Frozen Pork Bellies F, Pork bellies, frozen F, Nymex Mar Heating oil OF, Mar Natural gas OF, Mar Unleaded gas OF, Mar Aluminum OF, Mar Copper OF, Mar Gold OF, TGE Azuki F, Non-GMO soybeans F. 24 LTD: BM&F Live cattle F, Feeder cattle F, Mar Ei bond F, Mar Euro F, Mar Gold F, Mar IDI O, Mar Soybeans F, Mar US dollar F,O,OF, CBOT Gold F, Mar Tbonds/10-,5-,2-yr. T-notes/inflation-indexed Treasuries OF, Mar Grains and oilseeds OF, Mar Soybeans OF, Mar Soybean meal OF, Mar Soybean oil OF, Mar Wheat OF, Mar Corn OF, Mar Oats OF, Mar Rice OF, KCBT Mar Wheat OF, MGEX Mar Wheat OF, Nymex Aluminum F, Gold F, Silver F, Palladium F, Platinum F, Copper F, Mar Aluminum F, Mar Silver F, WCE Mar Agricultural OF. 27 LTD: Euronext-Liffe Mar Long gilt/bund OF. 28 FND: KCBT Mar Wheat F, MGEX Mar Wheat F, LTD: BM&F Mar 1-day deposits F, Mar US dollar F,O,OF, Mar IDxUS dollar F, Mar Ei bond F, Mar Euro F, Mar IDI O, Mar Gold F, CBOT Fed funds OF, CME Mar Ethanol F, Live cattle F, Mar Real F,OF, Mar Real F,OF, Mar Ethanol F, Mar Lumber OF, Eurex Eonia F, Euronext-Liffe Eonia F, Mar Cocoa OF, Mar Cocoa OF, MGEX HWI/NCI/NSI F,OF, Nybot Mar Sugar #11 F, Nymex Mar Heating oil F, Mar Natural gas F, Mar Unleaded gas F, Mar Propane F

FND: BM&F Alcohol F, Sugar F, LTD: CME Jan Mid-sized milk OF, Jan Milk LTD: CME Jan Frozen Pork Bellies OF, Live cattle OF, Pork bellies, frozen OF,

F,OF, Jan Weather OF, Safex Bonds F. 3

LTD: Eurex Bobl OF, Bund OF,

Rand OF. 8 LTD: BM&F Alcohol F, Sugar F, Nybot Mar Sugar #14 F. 9 FND: BM&F Mar Soybeans F, LTD: Euronext-Liffe Mar Feed wheat OF. 10

LTD: BM&F Mar Arabica coffee OF, Mar Conillon coffee OF, Mar Arabica

coffee OF, Mar Conillon coffee OF, CBOE, Amex, PCX, Phlx, ISE, OneChicago Currency O, Nybot Mar Cotton OF, Mar Sugar OF. 13 LTD: BM&F Mar Cotton F, CME Eurodollar F, Libor F,OF, Peso F, Rand F, Eurex 3-mo. euribor F, Nymex Mar Brent Crude oil F, Safex Rand F. 14 LTD: CBOT Ethanol F, CFE Vix F, CME Lean hogs F,OF, Mexican Cetes F. 15 LTD: BM&F Live cattle OF, Feeder cattle OF, Ibovespa F,OF, CME Mexican TIIE F, Euronext-Liffe Mar Robusta coffee OF, Nymex Mar Crude oil OF, Safex Jibar F, TGE Soybeans F. 16

LTD: BM&F Mar Soybeans F, CBOE, Amex, PCX, Phlx, ISE, OneChicago A.M.

settled index O, Eurex SMI OF, Euronext-Liffe Equities (Italy, Nor) F. 17 LTD: CBOE, Amex, PCX, Phlx, ISE, OneChicago P.M. settled index O, CBOT DJIA OF, Eurex Dax OF, Dutch equity O, Finnish equity O, French equity O, German equity O, Italian equity O, Swiss equity O, Stoxx 50 OF, Titans OF, Euronext-Liffe

www.futuresmag.com | February 2006

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77

Dateline continued

MARCH
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

27
Canada Balance of payments

28 7

Crop summary. Japan Production index, Merchandise trade. Germany Employment. France Employment, PPI

1
Canada PPI. Australia National accounts

2 9

COT report, Annual Livestock slaughter. Japan Employment, CPI. Australia Merchandise trade COT report, Crop production, Employment. Canada Employment. Japan PPI. France Production index, Merchandise trade

6 13
U.K. PPI. Japan Balance of payments

8
Crop summary

Merchandise trade. Canada Merchandise trade. U.K. Production index, Merchandise trade. Germany Production index

10

14
Crop summary. Germany CPI. France CPI

15
U.K. Employment

16
CPI. Canada CPI. Germany Balance of payments

17
COT report, Production index. France Balance of payments

20
Germany PPI

21
Crop summary, PPI

22
Cotton ginnings

23 30
Japan Production index Germany Employment

24
COT report, Livestock slaughter

27
Japan Merchandise trade

28
Crop summary, National accounts

29
U.K. National accounts, Balance of payments

31
COT report, Grain stocks, Quarterly Hogs and pigs. Canada Production index. France Employment

ABOUT THE CALENDAR Dates are believed to be correct but sometimes do change. Holidays may affect government offices or banks but not trading. Check with your broker or the exchange. Reports are U.S. reports unless indicated otherwise. Contracts traded are for current month unless indicated. Abbreviations used with contracts: F futures. OF options on futures. O options. LTD last trading day. FND first notice day. LND last notice day.

Last trading day Contract month FEB MAR CBOE, Amex, PCX, Phlx, ISE, OneChicago A.M. settled index O........2/16........3/16 Currency O ......................2/10........3/10 P.M. settled index O........2/17........3/17

Last trading day FEB MAR Soybean oil F........................-........3/14 Soybean oil OF......................-........2/24 Soybeans F ..........................-........3/14 Soybeans OF ........................-........2/24 Swaps F ................................-........3/13 T-bonds/10-,5-,2-yr. T-notes/inflation-indexed Treasuries OF..................1/27........2/24 T-bonds/10-,5-yr. T-notes/inflation-indexed Treasuries F..........................-........3/22 Wheat F ................................-........3/14 Wheat OF ..............................-........2/24

Last trading day FEB MAR 2-yr. Swap F ........................-........3/13 5-yr. Swap F ........................-........3/13 Agencies F............................-........3/22 Butter F ................................-........3/22 Butter OF ..............................-..........3/3 Canadian dollar F ................-........3/14 Canadian dollar F,OF............-..........3/3 Currencies F ........................-........3/13 Currencies OF ......................-..........3/3 Diammonium phosphate F..-........3/15 Ethanol F..........................1/31........2/28 Euro F....................................-........3/13 Euro OF..................................-..........3/3 Eurodollar F ....................2/13 ............Eurodollar F,OF ....................-........3/13 Euroyen F,OF ........................-........3/10 Euroyen Libor F....................-........3/10 Feeder Cattle F,OF................-........3/30 GSCI F,OF ............................-........3/16 JGB F ....................................-........3/10 Lean hogs F,OF ..............2/14 ............Libor F,OF ........................2/13........3/13 Live cattle F ....................2/28 ............Live Cattle F..........................-........3/31 Live cattle OF ....................2/3 ............Lumber F ..............................-........3/14

Last trading day FEB MAR Lumber OF............................-........2/28 Mexican Cetes F..............2/14........3/14 Mexican TIIE F ................2/15..........3/1 Mid-sized milk OF ............3/2........3/30 Midcurve eurodollar OF ......-........3/10 Milk F,OF............................3/2..........3/2 Peso F..............................2/13 ............Pork bellies, frozen F ....2/23........3/28 Pork bellies, frozen OF ....2/3..........3/3 Pound F,OF ..........................-........3/13 Pound OF ..............................-..........3/3 Rand F..............................2/13........3/13 Rand OF ............................2/3 ............Real F,OF..........................1/31........2/28 Ruble F,OF ............................-........3/15 Urea ammonium nitrate F ..-........3/16 Weather F ..........................3/2 ............Weather F,OF........................-..........4/3

Last trading day FEB MAR E-mini Russell 2000 F,OF....-........3/17 E-mini S&P 400 F ................-........3/17 E-mini S&P 500 F,OF ..........-........3/14 Nasdaq 100 F,OF ..................-........3/16 Nikkei 225 F,OF ....................-........3/10 Russell 1000 F......................-........3/17 Russell 2000 F,OF ................-........3/16 S&P 400 F,OF........................-........3/16 S&P 500 Barra Growth F,OF-........3/16 S&P 500 Barra Value F,OF ..-........3/16 S&P 500 F,OF........................-........3/16 S&P 600 F ............................-........3/17

Last trading day FEB MAR

CBOT 2-yr. T-notes F ....................-........3/31 Corn F....................................-........3/14 Corn OF ................................-........2/24 DJIA F....................................-........3/16 DJIA OF ............................2/17........3/16 Ethanol F..........................2/14........3/14 Fed funds F ..........................-........3/31 Fed funds OF ..................2/28 ............Gold F ..............................2/24 ............Grains and oilseeds OF ..1/21........2/24 Oats F ....................................-........3/14 Oats OF..................................-........2/24 Rice F ....................................-........3/22 Rice OF..................................-........2/24 S.A. Soybeans F....................-........3/24 Silver F..................................-........3/29 Soybean meal F....................-........3/14 Soybean meal OF ................-........2/24

CFE China Index F........................-........3/17 Variance F ............................-........3/18 Vix F ................................2/14 ............-

KCBT Value Line F..........................-........3/16 Value Line OF ..................2/17........3/16 Wheat F ................................-........3/14 Wheat OF ..............................-........2/24

Nybot Cocoa F ................................-........3/16 Coffee F ................................-........3/21 Cotton F ................................-..........3/9 Cotton OF ..............................-........2/10 Currencies F ........................-........3/13 Currencies OF ......................-..........3/3 Dollar index F ......................-........3/13 Dollar index OF ....................-..........3/3 Forint F..................................-........3/10 Orange juice F......................-........3/13 Orange juice OF....................-........3/17 Rand F ..................................-........3/13 Reuters CRB Index F.OF ......-........3/10 Stock Index F,OF ..................-........3/16 Sugar #11 F ..........................-........2/28 Sugar #14 F ..........................-..........2/8 Sugar OF ..............................-........2/10

CME 10-yr. Swap F ......................-........3/13 10-yr. Swap OF....................-........3/13 13-wk. T-Bills F,OF ............-........3/13 13-wk. T-Bills OF ..........1/27 ............-

Indexes CME $ Index F ......................-........3/13 CME $ Index OF ....................-..........3/3 CPI F......................................-........3/16 E-mini Nasdaq 100 F,OF......-........3/17 E-mini Russell 1000 F ........-........3/17

MGEX HWI/NCI/NSI F,OF............2/28........3/31 Wheat F ................................-........3/14 Wheat OF ........................1/27........2/24

Nymex Aluminum F ....................2/24........2/24 Aluminum OF ..................1/26........2/23 Brent Crude oil F ..................-........2/13

78

FUTURES | February 2006

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The stock market has meandered directionless in 2004 and 2005. Are we in for another flat period in 2006 or will the market finally pick a direction? Our analysts answer that and other questions regarding equities.

Top traders of 2005


It was another difficult year for CTAs. We feature several managers who were able to navigate TOP the tough waters in 2005 TRADERS and discuss the main OF 2005 trends of last year. Who did better? Diversified or niche traders? Systematic of discretionary?

EVENTS COMING UP
Call the numbers listed for more information. For other seminars, see the classifieds on pages 80-85.
Managed Funds Associations Network 2006. FEB. 5-7. The Ritz-Carlton. Key Biscayne, Fla. www.mfainfo.org. (202) 367-1140. International Traders Expo. FEB 18-21. Marriot Marquis, New York. www.tradersexpo.com. (941) 955-0323. Nybot Futures and Options for Kids Dinner Dance 2006. FEB. 23. The Ritz Carlton. Battery Park, New York. www.futuresandoptionsforkids.org. FIAs 31st Annual International Futures Industry Conference. MAR. 15-18. Marriott Boca Raton Resort and Club. Boca Raton, Fla. www.futuresindustry.org. (202) 466-5460. Advanced Options Class. MAR. 27-28. 12:30 p.m. to 5 p.m. National Futures Association, Chicago. www.theifm.org. (202) 223-1528. Foreign Exchange & Commodity Summit. APRIL 2-4. Marriott Beach & Gold Resort. Hilton Head, S.C. www.opalgroup.net. (212) 532-9898.

Statistical analysis
We look at the time-proven tool of linear regression analysis and how it can give you a solid idea of where prices are likely to move based on widely available fundamental data.

Trading rectangles
Trading setups can be geometrical and technical. We examine the notion of trading rectangles and how they can be interpreted for possible profit.

Last trading day Contract month FEB MAR Copper F ..........................2/24........3/29 Copper OF........................1/26........2/23 Crude oil F ......................1/20........2/21 Crude oil OF ....................1/17........2/15 Gold F ..............................2/24........3/29 Gold OF ............................1/26........2/23 Heating oil F ....................1/31........2/28 Heating oil OF..................1/26........2/23 Natural gas F ..................1/27........2/28 Natural gas OF ................1/26........2/23 Palladium F ....................2/24........3/29 Platinum F ......................2/24........3/29 Propane F ........................1/31........2/28 Silver F ............................2/24........2/24 Silver OF ..........................1/26........3/29 Unleaded gas F ..............1/31........2/28 Unleaded gas OF ............1/26........2/23

Last trading day FEB MAR Arabica coffee OF ..........1/14........2/10 Conillion coffee F ................-........3/31 Conillon coffee OF ..........1/13........2/10 Corn F....................................-........3/22 Cotton F ................................-........2/13 Ei bond F..........................1/31........2/24 Euro F ..............................1/31........2/24 Feeder cattle F ................2/24........3/31 Feeder cattle OF..............2/15........3/15 Gold F ..............................1/31........2/24 Gold O....................................-........3/18 Ibovespa F,OF..................2/15 ............iBrX 50 F ............................2/1 ............IDI O..................................1/31........2/24 IDxUS dollar F ......................-........2/28 IGP-M F ..........................1/24........2/20 Live cattle F ....................2/24........3/31 Live cattle OF ..................2/15........3/15 Soybeans F ..........................-........2/24 Sugar F ..............................2/8 ............US dollar F,O,OF ..............1/31........2/24

Last trading day FEB MAR 3-mo. euribor F,OF ..............-........3/13 Bobl F....................................-..........3/8 Bobl OF ............................2/21........3/24 Bund F ..................................-..........3/8 Bund OF ..........................2/21........3/24 Buxl F ....................................-..........3/8 CONF F ..................................-..........3/8 Dax F,OF................................-........3/17 Dax OF..............................2/17 ............Dutch equity O ................2/17........3/17 Eonia F ............................2/28 ............Finnish equity O ..............2/17........3/17 French equity O ..............2/17........3/17 German equity O ............2/17........3/17 Italian equity O ................2/17........3/17 Omxh258 F,OF ......................-........3/17 Schatz OF ........................2/21........3/24 Shatz F ..................................-..........3/8 SMI OF..............................2/16........3/16 Stoxx 50 F,OF........................-........3/17 Stoxx 50 OF......................2/17 ............Swiss equity O ................2/17........3/17 TecDax F ..............................-........3/17 Titans F,OF ............................-........3/17 Titans OF..........................2/17 ............US equity O ..........................-........3/17

Last trading day FEB MAR Euronext-Liffe Bund F ..................................-........3/14 Cocoa F ................................-........3/16 Cocoa OF ..............................-........2/28 Eonia F ............................2/28........3/31 Equities (Den, Fin, Fra, Ger, Gre, Ire, Net, Spa, Swe, Swz, UK, USA) F ....2/17........3/17 Equities (Italy, Nor) F ......2/16........3/16 Equities O ........................2/17........3/17 Euribor F,OF..........................-........3/13 Eurodollar F,OF ....................-........3/13 Euroswiss F,OF ....................-........3/13 Euroyen F..............................-..........3/9 Feed wheat F........................-........3/23 Feed wheat OF......................-..........2/9 FTSE 100 F,O ........................-........3/17 FTSE 100 O ......................2/17 ............FTSE Eurotop F ....................-........3/17 FTSEurofirst F,O....................-........3/17 FTSEurofirst O ................2/17 ............JGB F ....................................-........3/14 Long gilt F ............................-........3/28 Long gilt/bund OF............1/23........2/27 MSCI F ..................................-........3/17

Last trading day FEB MAR Robusta coffee F ..................-........3/31 Robusta coffee OF................-........2/15 Schatz F ................................-........3/14 Short sterling F,OF ..............-........3/15 Swapnote F,O ......................-........3/13 White sugar F ......................-........3/13 White sugar OF ....................-..........2/1

Last trading day FEB MAR Non-GMO soybeans F ....2/23 ............Robusta coffee F ..................-........3/16 Soybean Meal F....................-........3/16 Soybeans F......................2/15 ............Sugar OF..........................1/13 ............-

Euronext-Paris Cac 40 F ..........................2/17........3/17 Rapeseed F......................1/31 ............Rapeseed OF ..................1/13 ............-

WCE Agricultural F........................-........3/14 Agricultural OF ....................-........2/24

BM&F 1-day deposits F..................-........2/28 1-day deposits OF ..........1/31 ............Alcohol F............................2/8..........3/8 Alcohol OF..........................2/1..........3/1 Arabica coffee F ..................-........3/23

Safex Bonds F..............................2/2 ............Equity indexes F ..................-........3/16 Jibar F..............................2/15........3/15 Rand F..............................2/13........3/13

Eurex 3-mo. euribor F ..............2/13 ............-

TGE Arabica coffee F ..................-........3/16 Azuki F ............................2/23........3/28

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FUTURES | February 2006

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FUTURES | February 2006

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85

Trader Profile
BY YESENIA SALCEDO

Bernie Carey Trading is in the blood

ernie Carey measures his success as a trader by the well because it gave his account some early breathing room. 40 years he traded grain futures at the Chicago Board That was a lot to make on a trade at that time for me. of Trade (CBOT). I lived to tell about it, he says. The trade was an indication of Careys penchant for risk The 89-year-old Carey, who resides in Chesterton, Ind., as he points out that wheat was available in 1,000 bushelbegan trading when he was 23 and still puts on a few trades a lots at the time. year. I got to keep the heart pumping, Carey says. When deciding which trades to take, Carey would look at Carey comes from a family of CBOT traders. His father both technical and fundamental factors. My main focus was traded grains at CBOT, mostly wheat, for about 30 years; studying the history of price movement, you look for what his nephew is CBOT Chairman Charlie Carey; and three you think are opportunities, Carey says, adding, I would folof his four children trade at CBOT one has spent 20 low the weather [as well]. If you dont have rain you dont years in the corn pit, leasing Careys membership, and two have crops. So dry weather means higher prices. trade electronically. Carey hadnt been trading much more than a year when he Carey found trading to be very exciting right from the was drafted in 1941. He served in the U.S. Army for four beginning. The tension and excitement and the opportunity years starting out in the infantry before becoming a navigamade it interesting work, he tor. He was based in England says. He traded outrights and and flew on 25 missions. The spreads, but not options Chicago native returned to his because they werent around at south side neighborhood in late that time. He traded the most 1945 and went back to trading liquid grain contracts, concenat the CBOT. He compares trating mostly on soybeans. He each army mission to trading, learned to trade grains watchIts a challenge, to see in each ing his father. case if your judgment is correct Carey worked in a General or not, Carey says. I was sucMotors factory for a year after cessful because I had to be, in graduating from Spring Hill the army and in trading. College in Mobile, Ala., when He attributes his success to his father purchased a meman ability to keep his wits and bership for him at the CBOT discipline no matter what the a membership he still held outcome of a trade is. You when the CBOT went public have to respect your capital in October 2005. Carey, along and your risk. with his nephew Charlie, Carey says the amount of CBOT President and CEO capital a trader has should Bernie Dan and other CBOT determine the type of risk he directors, rang the opening takes on every trade. If your BERNIE CAREY bell at the New York Stock money is low, you trade small, Exchange on that day. Im sure glad I held onto [the memif it isnt you can take bigger and bigger risks, he says. bership] for so many years. As it turns out, it was one of my Carey was not averse to taking on risk. Id say I took big best investments, Carey says. It was a lot easier financially risks in trading. I would take big risks and lose sometimes, back then to get a membership. but thats part of the business. His most memorable trade goes back to 1940, his first year Carey made more money in 1947 than any previous year on the floor, when traders drew charts by hand and people by taking advantage of a bull grain market caused by worldwalked around with erasers updating quotes on chalkboards. wide demand. Europe, still devastated by the war, had just I had only been trading for two or three months and it was survived one of the worst winters on record and the United at the time in Europe when the Germans overran France, and States had to pump money into Europe. It was the time of the the news was very, very bearish and our market went down, Marshall Plan, Carey says. Carey says. Wheat went down the limit one day and the next They werent all good years. In 1960 he briefly left the day it was sure to open lower. My father told me it was going to CBOT to go to the Chicago Mercantile Exchanges floor to open lower and then it was going to bounce up. He suggested I trade eggs because he saw fewer opportunities in grains. He grab something if I could on the lower opening. I grabbed was only there for about three months when the grains mar[5,000 bushels] and sure enough it rallied and I took 4 out of kets picked up and he returned to the CBOT never to leave that trade, Carey says. He remembers that $200 winner very it again for another exchange. After all, roots grow deep.

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FUTURES | February 2006

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