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Energy market's feisty future 26 2005's tops & bottoms 72

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TOP10

TRADINGSYSTEMSOF ALL TIME

www.futuresmag.com February 2006

TOP10

TRADINGSYSTEMSOF ALL TIME

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MARKETS26 Energy markets could find

home in the rangeBy Carla M. BauchSome analysts predict higher crudeprices and others say energy prices will stabilize during the first half of2006. What kind of price range willthis new year bring?

EQUITY TRADING TECHNIQUES34 The versatility of buy-write strategies

By Mike OysterCreating strategies through futuresand options on futures may be moreeffective than using securities.

Contents

TRADING TECHNIQUES38 Understanding the arb trade

By Ben LichtensteinWhile not as viable as it once was, the arb trade still exists. Here’s how it affects markets and possibly your trading.

50 Has technical analysis kept up withthe (Dow) Jones’?By Darrell JobmanTechnology has changed the way youtrade, but has technical analysis kept upwith these changes? We speak with somekey experts about significant indicators ofyesterday and how today’s technologymight have altered them.

FEBRUARY 2006 VOLUME XXXV NUMBER 3

Top ten systemsBy George Pruitt and Joe Bobek

Trading systems come and go but some withstand the tests oftime and market sentiment.Independent system tester FuturesTruth lists the systems that haveperformed well historically.Further, in analysing these systems, our authors breakdowneach and describe the commonelements that are instrumental insuccessful trading systems.

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F E A T U R E S

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 800-458-1734 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 andadditional 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) 458-1734. 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. Noresponsibility 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 responsibilityfor 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, CA94002. 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.

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6 FUTURES | February 2006

PICTURED: JIM ROGERS

TECHNOLOGY & TRADING60 Intermarket analysis:

What works todayBy Murray A. Ruggiero Jr.Intermarket analysis can be a powerful tool if used properly. We show you some of the many applications from simple to complex.

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D E P A R T M E N T S10 Editor’s Note Taking a long view

12 Sound Off!

14 Trendlines CFTC half way home •Chartview: A run on seat prices • NewDB boss joins merger mania • CBOTmoves in on Asia • When is a deal adeal? • International news • MusicalCEOs • Oil giant charged with violating CEA

18 Managed Money Review

20 Trading Places Webber to headPatsystems

22 Hot Commodities 10-year T-notes,corn and E-mini S&P

24 Market Strategy How to benefit from an inverted yield curve

32 Forex Trader The gift of the break-even trade

58 Software Review NinjaTrader

64 Online Trading Growing optionsvolume electronically

69 New for Traders

70 Funds Review

77 Dateline February and March

79 Ad Index

86 Trader Profile Bernie Carey — It’s in the blood

group publisher / editorial director Ginger Szala

managing editor Daniel P. Collinsassociate editor Yesenia Salcedoassociate editor Chris McMahon

editor at large Steve Zwick

contributing editors James T. Holter

Murray A. Ruggiero Jr., Carla M. Bauch

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F E A T U R E S

Contents continued

FUTURES 10160 Step-by-step into the ag markets

By Chris McMahonTrading opportunities in the agricultural markets don’t only present themselves during thegrowing season. We show you what to look for year-round.

MANAGED MONEY66 The Great Divide(s)

By Steve ZwickSuccessful CTAs aren’t just from the United States anymore. Europehas ample performance when itcomes to running hedge funds.

TRADE TRENDS72 Tops & bottoms

By Daniel P. CollinsFrom Refco to IPOs to a Chinesecopper trader, there was alwayssomething to talk about in 2005 in the derivatives industry. In ourannual tongue-in-cheek review, we look back with some bows and yes, many arrows.

page 72

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


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Last November during a conversa-tion with Chicago Board ofTrade Chairman Charlie Carey,

we discussed the successful initial publicoffering launched by the CBOT. Hementioned Bernie Carey, his uncle anda CBOT trader of long ago, rang thebell at the New York Stock Exchange(NYSE) the day the Chicago exchange

went public. Of course we got to talking about changes in the indus-try, and it made me think that if I feel there has been seismic changein the industry since I began covering it in the 1980s, what mustBernie Carey think? So we asked him, and as a result he’s our profilethis month in “Bernie Carey — It’s in the blood,” page 89, byAssociate Editor Yesenia Salcedo.

This month the CBOT also is celebrating the 30-year anniversaryof the contract that started it all for interest rates, the Ginnie Mae.It’s not that the contract is still being traded, but the chain of con-tracts it preceded, from the 30-year Treasury to 10-year note toEurodollars, Eurobunds and all other present and past interest ratecontracts, has made the world’s economic pulse healthier.

That anniversary reminded me that Futures magazine turns 34 yearsold this month and that’s a milestone of success in both publishing andtrading. The changes in the business have been breathtaking. To illus-trate part of this, we asked the original Futures editor Darrell Jobmanto take a look at how technical analysis, especially key indicators, havesurvived 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 thattraders across the world use and finds out if those tools have withstoodthe 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. Weasked the independent system testing group Futures Truth, started byicon John Hill, to update our readers on the best 10 systems of alltime. (See “Top 10 systems,” by George Pruitt and Joe Bobek, page42.) Although many traders, especially today’s professional trader,build their own proprietary systems, people can still buy some solidoff-the-shelf black box and open systems. Futures Truth analyzes thesesystems by paper trading every signal to test performance. The articlealso analyzes what seems to work and what doesn’t, and that informa-tion can be used by all traders.

While putting together this “look back” issue, I’ve thought aboutsome of the icons of today I’ve interviewed, long before they becameicons. Traders such as John W. Henry, Paul Tudor Jones, LouisBacon; 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 haveaffected 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 andCBOT stock would be traded on the NYSE?

Recently John Geldermann, an industry icon, died. John wasalways helpful, always straightforward. Several years ago I interviewedJohn and his brother Tom while aboard their fishing boat on LakeMichigan. It was a rough day. Not feeling well, I went inside whereJohn was steering. He took one look at me and said, “Get outsidequick and keep your eyes on thehorizon!” He was right of course,and it seems the industry fol-lowed that advice as well.

C U S T O M E R S E R V I C E C E N T E R

E-mail me at [email protected]


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Special issues are published three times a year; the Sourcebook, a directo-ry of futures and options industry businesses, in January; the Guide toComputerized Trading, which provides a list of software database,Internet and computerized services, in July; and a trading issue inSeptember. 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-4:30pmCST. Single special issue copies vary from $10-$20 each.

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traders. For information, call (800) 221-4352 (outside U.S., the numberis (312) 846-4618).

Article reprint orders of 100 copies or more can be made throughClaudia 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 writer’s guidelines.

Questions about an article can be sent to the editors ([email protected]). Questions are welcome, but due to time, wemay not respond to everyone. For outside, by-lined articles, we providethe author’s 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 magazinewith 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.

Taking the long viewEDITOR’S NOTE

MORE ALTERNATIVE INVESTMENTSI read your managed money piece“Alternatives abound,” January 2006.Nicely done.

Steve Lamb, via e-mail

Thank you. Futures will soon expand ourperformance reporting of the alternativeinvestment arena in the Managed MoneyReview section of the magazine. In additionto commodity trading advisors, Futures willpresent the recent performance history of several of the most popular hedgefund strategies based on the Barclay/GlobalHedgeSource indexes.

— Ed

TOP 50 BROKERS?Every year we get questions about how we collect data for our annualDecember Top 50 Brokers story.

Futures faxes a questionnaire to the top70 or so futures commissions merchantsbased on current segregated fund data pro-

vided by the Commodity Futures TradingCommission (CFTC). We compile the listbased on those responses.

Because the Refco bankruptcy occurredafter the most recent CFTC data wasreleased, our Top 50 Story did not reflect themost current information. Futures has subse-quently posted on our Web site, atwww.futuresmag.com/mid_month_update/images/Mid-month_spread.xls, an updated ranking based on October num-bers. That, however, did not include the fullscope of change including Man Financial’sacquisition of Refco. We will post anotherupdated ranking when data is available.

— Ed

JOHN GELDERMANNJohn Geldermann, founder ofGeldermann Inc., passed away in earlyJanuary. Geldermann, 80, was longknown in the futures industry as an inno-vator. Not only did he and his brotherTom start a clearing business in the

1950s on the Chicago Board of Trade forrenowned locals such as Henry Shatkinand Dave Goldberg, John and a partnerlaunched Computer Information Systems(CIS) in 1967, the first computerizedback office system for accounting and onestill used today by industry professionals.John was active in industry governance, having just been inducted into the FuturesIndustry Association’s Hall of Fame, aswell as serving for years on the ChicagoMercantile Exchange board. He is sur-vived by his wife, children and a largeextended family, including all those in thefutures industry who will miss him dearly.

— Ed

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

E-mail: [email protected] letters to 250 words. We reserve the

right to edit for grammar, space and taste.

Sound Off!



ONE CHAMBER DOWN...

CFTC half way homeBefore its Christmas break, the Houseof Representatives passed legislationreauthorizing the Commodity FuturesTrading Commission (CFTC), whichalso granted the Chicago exchangecommunity many of the items on itswish list. But one item in the bill — anenergy amendment giving the CFTCexpanded authority — could cause adelay that may push reauthorizationinto the next holiday season.

“It passed with the energy legisla-tion, which has a lot of people con-cerned that this is beyond the purviewof the CFTC’s expertise,” says JohnDamgard, president of the FuturesIndustry Association.

The Chicago exchange community,

the Chicago Mercantile Exchange(CME) in particular, likes the billbecause of three things, none of themrelated to energy. The bill closes loopholes related to retail forex trad-ing, mandates a structure to allow riskbased margining for security futuresproducts (SFP) and equity options and authorizes the trading of certaindebt and foreign security indexes byJune 30, 2006.

CME Chairman Emeritus LeoMelamed says the exchange workedwith the Congress to correct somesmall problems in the last reauthoriza-tion. “It is fixing some of the thingsthat were wrong with the [CommodityFutures Modernization Act of 2000].We are looking for the Senate to passsubstantially 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 unfor-tunate that we are not getting theCFTC reauthorized. The reason we arenot is that they are amending the act torequire the CFTC to do stuff that isbeyond its mission.” Damgard is joinedby several trade organizations andmembers of the President’s WorkingGroup (PWG) who are unhappy withthe amendment.

In a Dec. 12 letter to MichaelOxley, R-Ohio, chairman of the HouseCommittee on Financial Services,Department of Treasury (DOT) UnderSecretary Randal Quarles expressesconcern about the energy amendmenton behalf of DOT Secretary JohnSnow. The letter points out theTreasury and other PWG members areconcerned about provisions that couldaffect OTC derivatives markets,including energy and natural gas.Quarles calls the scope of the amend-ment broad. “These provisions couldresult in unintended adverse conse-quences and undermine the regulatoryrelief and legal certainty that were socarefully crafted through the [CFMA],”the letter states.

The PWG worked on several ofthe fixes in the reauthorization butthe energy amendment was somewhatof a late surprise and may simply beprotection for some in Congress fromthe wrath of their constituents overthe expected high energy costs thiswinter. “In a way it is a little bit of acruel hoax on the consumer to makethem think that somehow the CFTCrequiring a lot of reporting is going toprevent prices from going up,”Damgard says.

BENEFITSThe CFMA attempted to give theCFTC authority on all retail forextrading but that was challenged by anIllinois court decision in the Zelenercase. “That had to be fixed and that iswhat this act does,” Melamed says.

The other fixes relate more to the

TrendlinesNews, trends and insights for traders

Source: eSignal


CHARTVIEW: A RUN ON SEAT PRICESAs 2005 came to a close the Chicago Board Options Exchange (CBOE) established a progression ofrecord seat sales, the top being $875,000. That is not bad considering that the first seat sold in 2005went 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 recordvolume, 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

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05/0

1/00

08/18

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12/0

6/00

01/0

2/01

04/18

/01

11/01

/01

02/2

1/02

03/0

6/02

04/0

1/02

05/0

2/02

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07/16

/02

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9/02

11/13

/02

12/17

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04/2

2/03

07/18

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12/0

9/05

CBOE SEAT PRICES (IN THOUSANDS)

jurisdictional problems stemming fromthe 20 plus year Shad/Johnson agree-ment that was repealed as part of theCFMA. The Securities and ExchangeCommission (SEC) failed to meetcommitments to create a risk basedmargining scheme for SFPs, now theywill be required to. Many insidersblame the lack of success of SFPs tonot having futures style margining.

Perhaps the item with the mostpotential for exchanges will be the ability to trade certain debt andforeign security indexes. This will beaccomplished through a new definitionfor what constitutes broad-based for-eign indexes. Melamed says the worldhas changed a great deal sinceShad/Johnson and the U.S. investorneeds to be able to hedge many ofthese non-U.S. indexes.

“We are talking 20 years later, thewhole world has changed many timesand many of these Asian countries areimportant geographical centers ofinvestment and we need these instru-ments of finance. By changing thatdefinition, it opens up a whole newvista of risk management and that isimportant,” Melamed says.

By Daniel P. Collins

NEWYEX AND EUROPA BOERSE?

New DB boss joins merger maniaReto Francioni has certainly shaken upthe exchange landscape. Since histenure as head of Deutsche Boersebegan in September, not only hasEurex boss Rudi Ferscha departed, butthe exchange has begun talks to forgejoint ventures with cross-continentalrival Euronext. Francioni also has beentalking to several U.S. exchangesabout turning Eurex US into a jointventure with a local partner.

The most likely candidate is theNew York Stock Exchange (NYSE),which has made no secret of its desireto get into the derivatives game, whileEurex has made no secret of its desire

to offer stock options. The long-awaited global clearing

link, which would allow Germantraders to execute trades in the UnitedStates, and visa versa, has been on icesince CFTC Chairman Reuben Jefferytook over in July, 2005. His predeces-sor, Sharon Brown-Hruska, had giventhe setup a provisional nod in late2004, and sources close to theDeutsche Boerse management boardtell Futures the CFTC’s backtrackingdrove the decision to seek a strategicpartner in the United States.

Within Europe, continental pressreports at one time had Francioni talk-ing of merging Deutsche Boerse andEuronext, but competition concernsquickly put the kibosh on that.

Whether or not those talks tookplace, sources close to DeutscheBoerse’s supervisory board tell Futuresno such concerns would prevent theexchanges from forming a joint ven-

ture to distribute prices or cooperateon clearing and settlement.

The E.U. Commission has longadvocated consolidation of continentalclearing and settlement for use by allexchanges, but Deutsche Boerse was byfar the largest advocate of “one-stop”vertical silos, where all trades are exe-cuted, cleared and settled through oneentity. Italy and Spain are amongother countries also offering verticalsilos, but Germany’s sheer mass gavethe model credibility.

Euronext, under the leadership ofJean-François Théodore, has advocat-ed a central clearing and settlemententity for all continental securities andderivatives products, with exchangesfocusing on product development andmanaging initial public offerings(IPOs). If Francioni holds a similarvision, the entire competitive land-scape of the continent could change.

Meanwhile, at press time, both

JADE FUTURES?

CBOT moves in on AsiaMost memorandums of understanding (MOU) are vague and do not result innear-term action, but the Chicago Board of Trade (CBOT) and the SingaporeExchange (SGX) made a bold move a few short months after their August MOU,announcing they will establish a regional commodity derivatives market calledthe Joint Asian Derivatives Exchange (JADE).

The all-electronic market, half-owned by each partner, is expected to launchin 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, seniorVP, business development at the CBOT.

CBOT’s electronic platform, built on LiffeConnect technology will be the trad-ing backbone of JADE. The CBOT will be responsible for straight-through pro-cessing into SGX Clearing Corp. “We will bring eCBOT customers direct access toSGX and JADE, and we’re bringing to SGX 25,000 independent software vendorscreens and 140,000 quote vendor boxes,” Ray adds.

Former SGX head Tom Kloet, now COO at Fimat, says both exchanges shouldbenefit. “SGX is locked into financials and this allows them to expand into anasset group they had no exposure in. For the CBOT, this continues their interestin Asian commodities in general,” Kloet says. “The CBOT is a great distributionchannel and SGX is a strong clearing structure, so the exchanges are very compli-mentary to each other. The challenge will be to sift through products and pickthe right ones. And while the volume created will not be a panacea, there’s a lotof potential for this to be good,” Kloet adds.

By Yesenia Salcedo

www.futuresmag.com | February 2006 15Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.

Copyright 2006 by Futures Magazine Group, 833 W. Jackson Blvd., 7th Floor, Chicago, IL 60607

Euronext and Australia’s MacquarieBank Ltd were preparing their offersfor the London Stock Exchange(LSE). Although it was DeutscheBoerse’s bid for LSE that broughtFrancioni to the helm of DeutscheBoerse, he has said nothing to indi-cate he won’t lead the exchange intomerger talks with the LSE.

Meanwhile, the LSE has taken apage from Deutsche Boerse’s book,offering to return £250 million toinvestors if it stays independentthrough 2006.

Whatever the exchange bossesdecide, 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 productscleared via Eurex Clearing, Euroclear,and LCH.Clearnet?

By Steve Zwick

COMPLEX IN THE CITY

When is a deal a deal?Last we heard, the New YorkMercantile Exchange (Nymex) hadsigned a definitive agreement with venture capital firm GeneralAtlantic LLC (GA) to sell 10% of the exchange for $135 million. Astreamlined board of directors and an IPO were to follow. Now the wordis the exchange is in talks with theCME who would like a piece ofNymex. CME share prices increased $9on the day news of the talks hit thewire services.

This comes on the heels of NymexChairman Mitchell Steinhause’s openletter to shareholders, members andstaff explaining changes to be made tothe GA deal after some of the mem-bers objected to details as described inthe preliminary proxy filed with theSEC. Changes include decreasing thetotal number of shares to be authorizedto 89 million from 220 million, anddetails regarding the ability of theshareholders to call special meetings,

Trendlines continued

DEUTSCHE CDO TRADER BURIES LOSSESWhile auditing its trading accounts foryear-end bonuses in December,Deutsche Bank’s London office uncov-ered a little discrepancy — if you consider £30 million little. In January,the bank told the Financial ServicesAuthority it had zeroed in on the problem: collateralized debt obligation(CDO) trader Anshul Rustagi had beencovering up his losses. At press time, it’s not clear whether Rustagi will face criminal charges, but he certainlywon’t be qualifying for bonuses anytime soon.

STEAK WELL DONEJapan has opened its door to some U.S. and Canadian beef. The ban relating to North American cases ofmad cow disease has been in effectsince 2003. Japan lifted the ban onbeef from cows younger than 21months, if the heads and spinal cordshave been removed. In addition, Koreaand the United States are scheduled toopen talks about reopening SouthKorea to boneless U.S. beef in mid-January.

NFA KEEPS CLEANING UP THE INDUSTRYThe National Futures Association (NFA)continues to crack down on “bad practice” offenders by permanentlybarring Wallstreet Financial TradingInc. (Wallstreet), a former futures intro-ducing 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 permanentlybarred Andre C. Mitchell, an associatedperson 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

by an NFA hearing panel, is a result of an NFA complaint issued on May 26,2005, and reflects a settlement offersubmitted by Wallstreet and DiCrisci.

The NFA complaint chargedWallstreet, 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 diligentlysupervise 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. DiCrisciacted more as a manager whileMitchell was the one making deceptive solicitations.

“The common bad practices in the industry remain the same, it’s just the topics that change, like right now its all about commoditiesaffected by the hurricanes,” says Larry Dykeman, NFA director of communications and education. “The underlying message is the same in terms of the unrealistic gainsand not disclosing the risks. In theWallstreet case 100% of the customerslost their money.”

The NFA also ordered PlatinumTrading Group Inc., a former IB andcommodity trading advisor located inBoca Raton, Florida, not to apply forNFA membership for ten years.

The NFA Complaint chargedPlatinum with making deceptive andmisleading solicitations encouragingindividuals to open accounts to tradeOTC forex.

BEING PREPAREDCBOE has completed implementationof systems and testing of an off-siteback-up facility which is now opera-tional. The back-up facility will notinclude a trading floor, operating completely electronically.

International News

16 FUTURES | February 2006Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.



amend the bylaws and elect directors.The GA deal is subject to a vote bythe Nymex shareholders. Any changeswould have to be agreed to by GA andthere is no penalty for either partykilling the deal.

Cataldo J. Capozza, owner of threeauthorized Nymex trading shares, fileda lawsuit against Nymex demandingrecords to investigate whether the GAdeal is fair, protects open outcry,undervalues Nymex, and whether theboard seriously considered other offers.It also includes the assertion that thereis “adequate reason to believe that thebidding process was rigged to ensurethat the bids would be identical, ornearly identical, in value and that theBoard would accept the GA proposal.”

Nymex has so far denied Capozza’sentitlement to the documents. In a press release, Steinhause declinedthe request, characterizing it as a dis-ruptive and costly effort to confuse

shareholders as the board tries to closethe GA deal.

A petition to call a special meetingto elect a new 25-member board atNymex has been temporarily shelved,giving the board breathing room toforge a deal with the CME. Typically,only a third of board seats are open toelection in a single year.

“Nymex has asked for a period of amonth or so, give or take, for theopportunity to try to renegotiate somedeal. And they have said that theywould like the opportunity to negoti-ate a deal with the CME,” says MarkRifkin, Capozza’s lawyer. “Mr. Capozzawould like to work with the exchangeto facilitate an appropriate agreementwith the CME, one that’s in the bestinterest of Nymex and all its share-holders,” Rifkin adds. Representativesof the CME, Nymex and GA declinedto comment on the record.

Ironically, Nymex’s plans continue

to be stymied by parochial concernsdespite that they have been demutual-ized for a number of years.

By Chris McMahon

REFCO ROUND UP

Musical CEOs• Refco Inc. named Harrison J.Goodin CEO, replacing interim chiefRobert Dangremond. Goodin wassenior managing director of GoodinAssociates LLC and the fourth CEOnamed since the implosion. UnsecuredRefco creditors filed a lawsuit inresponse, this one to block theappointment of a bankruptcy trustee,citing Goodin’s expertise and a desireto limit expenses and maximize apotential return to burnt customers.

• The bankruptcy court hasapproved the sale of Refco’s retail FX

www.futuresmag.com | February 2006 17

Trendlines continued, page 19


After a testy exchange betweenlawyers for Man Financial andU.S. District Court Judge

Michael Baylson at a Dec. 16 hearing,Lee A. Rosengard, attorney for receiverC. Clark Hodgson, withdrew thereceivers contempt motion against Manafter Man agreed to release all of therequested information related to its roleas broker to the defunct hedge fundPhiladelphia Alternative AssetManagement (PAAM).

In June the Commodity FuturesTrading Commission obtained a motionto freeze the assets of PAAM as part of afraud action against the $230 millioncommodity pool and appoint a receiverto obtain custody of all the assets of

PAAM and its affiliates. Judge Baylson also requested Thomas

Gilmartin, Man Financial SVP, who ison leave from Man and was a sharehold-er in PAAM, be deposed. Much of theinformation requested is related to e-mails and audiotapes of conversationsbetween Gilmartin and PAAM officials.

In response to the motion, Manclaimed they had complied with theirobligations and that the receiver hadgone beyond its mandate.

WHO’S HOLDING THE BAG?In December, Cargill Inc. filed an objection in U.S. Bankruptcy Court tothe notice to assume and assign to Man Financial exclusive agreements

between Refco Group Ltd. and Cargill.The objection argues the notice to holdCargill to a five-year exclusive agree-ment with Refco and its affiliate entities should not be enforced withoutassigning to Refco obligations related toits purchase of Cargill’s futures commis-sion merchant business. Under the pur-chase and sales agreement, Refco agreed to a post closing “earnout” of$67 million to $192 million based onperformance. Cargill claims Refco owesan additional $59.5 as well.

In a reply to Cargill’s objection, Refco’sattorney claimed the exclusivity agree-ment stands alone and should be assigned“without reference to other agreementsand without Cargill’s consent.”

Top performers in 2005Fund Trading advisor(s) December Return YTDSmith 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%AHL Capital Markets Ltd* . . . . . . . . . . . . . .Man Investment Prod. Ltd. . . . . . . . . . . . . . . . . .0.27% . . . . . .22.94%Wimbledon Fund Ltd. Class C Shares* . . . .Multiple Advisors . . . . . . . . . . . . . . . . . . . . . . . .1.33% . . . . . .18.68%

Worst performers in 2005Smith 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%

public funds summaryNumber reporting: 96Average performance for the month: -1.37%Funds up: 33 Down: 62 Unchanged: 1

December 2005

Number reporting: 96Average performance for the year: -0.26%Funds up: 42 Down: 54 Unchanged: 0

2005 results (through Dec. 31)

Note: Listed return may not be fully attributable to listed advisor(s). * Offshore fund.

Top performers in DecemberFund Trading advisor(s) December Return YTDSmith 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 DecemberDean 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%

Man agrees to release info

BY DANIEL P . COLL INS


Comparing index returns

November’s top CTAs

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

November YTDBarclay CTA Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+2.82% . . .+2.11%Barclay Sub-Indexes:Agricultural Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . .+1.61% . . .+4.37%Currency Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+1.42% . . .+0.07%Diversified Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+3.94% . . .+0.98%Financials and Metals Traders . . . . . . . . . . . . . . . . . . . .+1.39% . . .+2.03%Discretionary Traders . . . . . . . . . . . . . . . . . . . . . . . . . . .+0.33% . . .+5.79%Systematic Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+3.22% . . .+1.87%

More than $10 million under management

1. Hasenbichler DRC AG . . . . . . . . . . . . . . . . . . . . . . .+29.96% . . .+5.29%2. Meyer Capital Mgmt. . . . . . . . . . . . . . . . . . . . . . . . .+19.51% . . . .-7.69%3. TradeCom CTA Pool XXL . . . . . . . . . . . . . . . . . . . . .+17.98% . . .-22.78%4. Beach Capital Mgmt. Ltd. (Discret.) . . . . . . . . . . . . .+17.89% . .+10.25%5. Quadriga Trading Mgmt. (Superfund) . . . . . . . . . . .+17.29% . . .-19.34%

Less than $10 million under management

1. BAM Asset Mgmt. (Program 1) . . . . . . . . . . . . . . . .+25.88% . . .+8.80%2. Calaveras Trading (Standard 2X) . . . . . . . . . . . . . . .+22.99% . . .+2.88%3. Marshall-Weins Trading (Version #2) . . . . . . . . . . . +22.88% . . . .-0.38%4. SMI Management . . . . . . . . . . . . . . . . . . . . . . . . . . .+21.12% . . . .-4.73%5. Fort Orange Capital Mgmt. (Gl. Strat.) . . . . . . . . . . .+19.00% . .+30.75%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

Managed Money Review


business and the 35% interest inFXCM owned by Refco CapitalMarkets (RCM). The likely buyer isFXCM. RCM claims to owe customers$4.16 billion. Refco Inc. still owes$16.8 billion to unsecured creditors.

• Refco Securities LLC now facesliquidation after a bankruptcy judgeordered the company to return $117million that was already transferredto RCM.

• Thomas H. Lee, founder of the‘friendly takeover’ firm that bears hisname, has resigned. Thomas H. LeePartners owned a 35% equity stakein Refco.

• Investors in BeelandManagement Co.’s Rogers RawMaterials funds have filed suit against

the company, alleging a breach of fidu-ciary responsibility. Beeland has $374million tied up in the Refco bankrupt-cy and has filed suit against Refco,alleging the company improperlymoved the funds from secured to unse-cured business units just prior toRefco’s collapse.

By Chris McMahon

SHELL GAME

Oil giant charged with violating CEA

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

on Nymex, a violation of theCommodity Exchange Act.

The order assesses a $200,000 fineagainst Stasco and a $100,000 fineagainst Catteral. Royal Dutch Shellis the parent of both firms.

According to the order, traders forStasco and Stusco prearranged andexecuted non-competitive crude oilfutures trades on five occasionsbetween November 2003 and March2004. Traders for the two relatedfirms agreed to take the opposite sideof crude oil trades with the quantityand contract month predetermined.

Catteral, Stusco and Stasco con-sented to the order, which foundthey violated the CEA withoutadmitting or denying its findings.

They are directed to cease anddesist from further violations.

By Daniel P. Collins

Trendlines continued

Trendlines Continued, page 17


David Webber replaces KevinAshby as CEO of PatsystemsPLC as of Jan. 03, 2006.

Previously, Webber was managingdirector of software compa-ny AttentiV, where heworked for 10 years. “Patshas built itself up into a bigplatform made up of bluechip customers,” Webbersays. “They have a verystrong, capable managementteam and a very strong cus-tomer base; I am going tohave the benefit of buildingoff that foundation and creating somereal growth. That’s what I’m about,getting them through the next phase.”

Prior to AttentiV, Webber was anaccountant with Price Waterhouse.

Edward T. Tilly will serve as vicechairman of the ChicagoBoard Options Exchange for athird and final term. The vicechairmanship is the highestmember-elected position atthe exchange. Tilly has been aCBOE member since 1989.

Gary R. King has beenappointed to the board ofdirectors of the DubaiMercantile Exchange (DME),

the joint venture between the NewYork Mercantile Exchange Inc. andDubai Holding.

Russ Rausch will rejoin TradingTechnologies Inc. as executive vicepresident global support and chief infor-mation officer after a short stint as headof Calyon Financial’s electronic broker-age for North America.

The Chicago Mercantile Exchangehas named C.F. Wong managing direc-tor, Asia. Wong has more than 25 yearsexperience in international futures mar-kets. He previously served as CEO atABN-AMRO Asia Futures.

Send news of personnel moves to:Futures, 833 W. Jackson Blvd., 7th FloorChicago, Ill. 60607, Fax: (312) 846-4638

Attn: Chris McMahonE-mail: [email protected]

Webber to head PatsystemsBY CHRIS MCMAHON

Trading Places

DAVID WEBBER


Notes stuck in rangeHolly 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 at110-13, 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. CraigElder, SVP of fixed incomeresearch at Robert W. Baird& Co. Inc. “Something’s gotto give,” he says, but he’s notexpecting any surprises from new Fed Chair BenBernanke, whom he expectsto be very conservative inQ1 and Q2 and to tighteninterest rates in the fall.

The key is a 4.42% yield— which the notes havebeen hovering just below inearly 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 above4.42% due to less refinancing. “I view this as a shock absorber for the economy. Ifthe economy is strong, yields go above 4.42%; [if it] is too soft, they go below 4.42.”

Hot CommoditiesBY CHRIS MCMAHON

Sideways corn Analysts are bearish on corn despite an impressive December rally, particularlyafter the March contract failed to take out October’s highs. Daniel W. Basse,president of AgResource Company, attributes the rally to short covering byindex funds and expects the large supplies to drive the market sideways untilnews breaks on the next growing season. He pegs the March contract to a rangebetween $2.10 and $1.90 per bu. and doesn’t see any help on the demand side asincreased production from bio-genetics has absorbed any increase in worlddemand. “Although the grains look cheap in the context of the CRB index, the

fundamentals just aren’tthere yet,” Basse says.

Bob J. Wiedeman, princi-pal at Strategic Ag Trading,is only slightly more opti-mistic. He cites directionaltrades that get kicked in bymoving averages as a bearishfactor. “The dryness inSouth America, coupledwith the short positions incorn in the last month or so,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.


Source: eSignal

Corn (March ‘06) daily

Source: eSignal

10-year T-note (March ‘06) daily

Minis looking largeThe early 2006 equity rally has tradersbullish even with bearish technicals.Independent trader Stephen Hallmansays the E-mini S&P 500’s breakout

of an upward sloping wedge pattern isusually a sign of an imminent sell-off,but Hallman is not selling. He says that by breaching the upperline, the way could be clearing for ahigher move. As a result, he’s lookingto go long.

The main factors influencing priceaction in equities has been the Fed’sinterest rate increases, which the Fedhas hinted are nearing the end. “Weknow they are going to raise the rate,that’s already baked in. If they are ator near the end, then that opens thedoor for more upside,” Hallman says.He expects March S&Ps to rally 3%,to about 1325. He sees support ataround 1250. “I like the 1250 area tobuy it.”

Stewart DeSoto, president ofDeSoto Capital Management LLC,says seasonal factors indicate a strong rally in the index. “Despitehigh oil prices, and gold prices goingthrough the roof, I just don’t see anything holding the marketback,” DeSoto says. He says there isa lot of pent up demand given thetight trading ranges that equityindexes have been stuck in, particu-larly in the Dow. DeSoto expects theMarch contract to hit 1360 inFebruary, a 6% rally from the start ofthe year. He sees 1280 as a likelynear-term low.

Source: eSignal

E-mini S&P (Mar ‘06) daily

$ per bu.



BY MICHAEL BENHAMOU

The end of the year 2005 rally was affected after thetwo-year Treasury note yielded more than the 10-yearTreasury note for the first time in five years. Some

investors interpret an inverted curve as an indication thatthe economy will soon experience a slowdown, which caus-es future interest rates to give even lower yields. Before aslowdown, it is betterto lock money intolong-term invest-ments at present pre-vailing yields becausefuture yields will beeven lower.

These yield curveinversions are rare, andthey form duringextraordinary marketconditions wherein the expectations ofinvestors are complete-ly the inverse of thosedemonstrated by thenormal yield curve. Insuch abnormal marketenvironments, bondswith maturity dates fur-ther into the future are expected to offer lower yields thanbonds with shorter maturities. The inverted yield curve indi-cates the market currently expects interest rates to decline astime moves further into the future, which in turn means themarket expects yields of long-term bonds to decline.Remember that as interest rates decrease, bond prices increaseand yields decline.

That the inversion has been somewhat limited does not dis-qualify its importance. Even though yields between the twoyear and 10-year have moved back and forth in positive andnegative territory, the fact remains that it has inverted.

Previous yield curve inversions took place in 1998 and thenagain in 2000, just before two economic downturns, but notealso that the 1996 inversion was followed by an economicboom, so it does not always work! No less an expert than out-going Federal Reserve Board Chairman Alan Greenspan hasdiscounted the connection between a yield curve inversionand recession. While Greenspan acknowledges that the con-nection has existed in the past, he has noted growing econom-ic complexity has altered that connection.

Therefore, if it’s hard to predict the future of the economy,it is easier to understand that the immediate consequence is anegative for banks, as they can not conduct their carry trade asa profit: borrow short, lend long-term and capture the spread.

While an inverted yield curve is a general bearish indicatorfor equities, its negative implications to the banking sector makes that sector a prime target to short. The RegionalBank Holders Trust (RKH) is an exchange trade fund (ETF)traded on the New York Stock Exchange. There are currently19 companies included in this ETF, among the largest

and most liquid U.Straded stock involvedin the regionalBanking industry. In2003 the RKH wentup 33%, 10.46% in2004 and 4.3% in2005 (as of Dec. 28)after a rally of 10% inthe last three monthsof the year. If the yieldcurve remains invert-ed for a while, theRKH will most likelygive back a large partof its gain.

A good way to playa downside move onthe RKH is the follow-ing option strategy:

Date: Dec. 28, 2005

RKH last price is $142.75

Historical high 144.70 (Dec. 27, 2005)

Historical low since 2003 is $91.20 (March 11, 2003)Note that RKH was trading at 126.70 in October 2005

Buy a RKH May 130 put (debit $1.80) Sell a RKH May 145/150 bull spread ($4.40 credit and $2.60 debit) Total cost is zero excluding brokerage and margin

Risk/ reward analysisMax risk is $5 (or 3.3% of nominal) if the RKH is > 150 as of May 20, 2006You are short RKH > 145 (with a natural stop loss at 150)No exposure if RKH is between 130 and 145 as of May 20 2006 “Unlimited” profit if RKH is < 130 at as of May 20, 2006.

Michael Benhamou is co-managing partner of Louis Capital Markets(LCM). Prior to founding LCM, he was head of sales & investment strategyin foreign exchange at Credit Lyonnais Securities in New York after havingworked at Smith Barney Inc.

How to benefit from an inverted yield curve


Source: TradeStation

INVERSION TRADEBy using options you can profit from inversion opportunities with limited risk.

Market Strategy

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J F M A M J J A S O N DJ 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 MN D2003 2004 2005 20062002


While a few experts predictwe will revisit $70 perbarrel crude oil in 2006,many analysts expect

energy prices to stabilize during thefirst half of the year. Predictions ofcrude oil prices in the mid to high$50s are the norm as analysts call forrange-like markets instead of thetrending markets energy traders havecame to know so well.

Vikram Patel, senior technical ana-lyst for Informa Global Markets,explains, “A top is in place and we arenot going back to these levels any timesoon.” Patel reminds us the largest gainis often at the end of a bull market.From approximately May to August oflast year, the price of crude oil rallied$25.00. “This is the largest dollarincrease in the shortest time frame,”Patel says. He points out the retrace-ment levels of $46.20 and $70.85 — thelater reached in August 2005 afterKatrina hit the Gulf of Mexico — leadto a 61.8% retracement of $55.40. Afterseeing two solid Fibonacci levels inter-secting at the same point, Patel forecaststhe price of crude will hold above$55.00 through June of this year, but

not head north of $70. “We are not in atrending environment. We expect tosee range trading up to May or June ofthis year,” Patel says. (See “Less volatili-ty for crude,” below).

Jamal Qureshi, lead analyst of PFCEnergy’s oil market group agrees crudewill settle into a trading range the firsthalf of this year. “We see significant

changes due to the fact that we havereached a multiyear high in prices,”Qureshi says. As an average for theyear, Qureshi expects crude to trade inthe upper $50s. More specifically, hesees price ranges between $57 to $59during the first half of this year andaround $54 during the second half.Qureshi points to hedge fund activity as

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.

BY CARLA M. BAUCH


Energy markets couldfind home in the range

MARKETS

LESS VOLATILITY FOR CRUDE Most analysts predict crude will experience less volatility in the first half of 2006 andprices will range from the mid to high $50s per barrel.

Source: eSignal

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

70.00

65.00

60.00

55.00

50.00

45.00

40.00

35.00

30.00Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2004 2005

$/bbl.

a telling tale of crude’s sentiment.“Hedge funds are not automaticallybullish. They are now inclined to playboth sides,” he says.

This year instead of focusing on howhigh crude will climb, analysts aredebating what the low for the year willbe. “The mission in 2006 is to find whatthe floor price is,” explains Tim Evans,senior energy analyst, IFRMarkets.com.Evans explains there is inherent tensionin the relationship between high stockprices and high energy prices. “Theydon’t normally go together and this is aserious bearish fundamental risk for thecrude oil market,” Evans says.

Tom Bentz, energy analyst with BNPParibas Commodity Futures, Inc., seescrude oil’s drop as a correction thatcould make its way to $45. Prior tocrude seeing a bit of a topping actionin mid December, Bentz would havepredicted crude to retest recent lows of$55, but after the commodity spiked abit Bentz sees $45 to $47 as a downsidetarget area. However, Bentz explains,“The long term trend is still up. Wecould see a correction down to $45 andthen we are probably looking for thebeginning of the next leg up that couldlast for two to three years.”

DEMAND’S INFLUENCE A bigger question than where the pricewill fall to is how much will demandgrow in 2006. In mid December theInternational Energy Agency (IEA) saidglobal demand for oil would amount to83.4 million barrels per day in 2005 and85.2 million barrels per day in 2006,adding that world demand growth for2005 would end up at 1.4% and estimat-ed demand growth for 2006 at 2.2%. In2004, the market experienced a muchlarger demand growth of 3.8%, with ademand of 82.2 million barrels per day.(See “World oil demand growth,” page28). “Somehow we take 3.8% demandgrowth in oil consumption as if theworld is coming to an end, when really itis not that much of a stress on the sys-tem,” Evans says. However, Evans notesthis year’s high prices may very welldampen growth. Evans expects the mar-

ket to be the final judge. “I don’t thinkwe are going to see 3% demand growthunless we see $30 per barrel crude. If theprice stays up here we won’t see stronggrowth. The price has to go to a lowerprice level to get demand growth back.”

Bentz explains while we have read

numerous reports about “demanddestruction,” if you look closely at thenumbers there has not been a tremen-dous drop in demand since Katrina andRita struck the gulf coast. “Forinstance, [demand of] gasoline over 9million barrels a day is good and gaso-

Tech Talk: Crude projectionsBY JOHN RAWLINS

The first chart is a projec-tion of crude oil made

on Dec. 23, 2004, projectedout one year. It is not a pro-jection of price but pricemomentum. The price issmoothed so we are able toextract a more constantcyclical behavior and thenproprietary filters extractand combine those cycles togive a future projection.

The second chart is acrude oil weekly chart. Youcan see the relative strengthindex (RSI) under the chartwith a vertical line indicatingwhere the crude forecastwas made from Dec. 23,2004. Compare the Dec. 23,2004 forecast with the RSI tonote the close correlation.The strength of this programis its ability to project thetiming of the next high orlow. However, like all pro-grams that are using histori-cal data to project futureprice behavior, they are sub-ject to unforeseen eventslike wars and hurricanes thatcan disrupt the analysis.

The last chart is the cur-rent weekly projection ofcrude and indicates momen-tum moving higher intoMarch 2006 with a declineinto May 2006.

John Rawlins is a trader and private researcher.

8/6 10/15 12/23 3/11 5/20 7/29 10/7 12/23

84.4

75.5

66.1

56.8

47.4

38.0

CRUDE OIL, 12-23-04


2004 2005

Oct Jan Apr Jul Oct

70

60

50

40

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80

70

70

60

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5/13 7/6 9/2 10/28 12/23 2/10 4/7 6/2

76.1

68.8

61.5

54.2

46.8

39.5

CRUDE OIL, 12-28-05

2005 2006


line is still running at 9.2 million bar-rels a day,” he says.

XpressTrade LLC futures analystMike Zarembski poses the same ques-tion as Evans: “Can growth estimatescontinue if prices remain this high?”Zarembski, who expects to see crudeoil between $58 and $64 in the firstquarter range, reminds us that whileChina imports a large amount of oil,the country is serious about the conser-vation of energy. The ChinaPetroleum and Chemical IndustryAssociation predicts the country’scrude oil import will total 130 milliontons this year. Kevin Harris, chiefeconomist with Informa GlobalMarkets, expects the pace of Chinesegrowth to slow. “China will continueto grow, but they will get more out ofevery BTU,” he says. Added efficiencycould also temper Chinese demand.“This is the year that China will man-age its bottlenecks,” Harris says.“Before the country did not have thecapacity to properly unload its barges.China is going to manage its importsbetter this year after realizing what astrain this put on world markets.”

OPEC TO ACT Lower prices, forecasts for lower globaldemand growth and seasonal demand

drop all lead the Organization of Petroleum Exporting Countries(OPEC) in the direction of makingcuts to its quota. Most analysts predictthese cuts will come in the secondquarter 2006. OPEC agreed on Dec. 12 to keep output quotasunchanged at 28 million barrels a day.Also in mid December, the IEA statedOPEC would have to pump 28.5 mil-lion barrels a day in 2006 to meetdemand. Some say OPEC’s magicnumber is around $53 and if pricesreach this level cuts would alreadyhave been acted on at its Jan. 31meeting. “The decision to meet againthis early after the December meetingis saying OPEC is going to be proac-tive,” Qureshi says, adding OPEC willhave to react by second quarter 2006.

In mid December, OPEC also agreedto withdraw a previous offer to use asmuch of its 2 million barrels a day ofspare capacity as needed, which wasmade available after hurricanes Katrinaand Rita hit. While prices have leveledoff since the hurricanes struck theUnited States, oil and natural gas pro-duction is still struggling in the Gulf.“We still haven’t got full capacity backsince the hurricanes,” Zarembskiexplains. “It will be about mid 2006before that happens.” According to the


Markets continued

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.

Source: Energy Information Administration

2003–2004 2004–2005 2005–2006

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

Mill

ion

barre

ls pe

r day

CHANGE FROM PREVIOUS YEAR

Forecast

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

*Countries belonging to Organization of Economic Cooperation and Development**Former Soviet UnionShort-Term Energy Outlook, December 2005


EIA, as of the beginning of December,some 36% of normal daily federal Gulf of Mexico oil production andapproximately 29% of federal Gulf ofMexico natural gas production remainshut-in due to Hurricanes Katrina andRita. In Louisiana, shut-in onshore oil and natural gas production is down to about 40% of prehurricane capacityand is projected to be fully restored bythe end of March 2006. However, as ofDec. 22, shut-in oil status in the Gulfwas down to 412,687 barrels a day — amore than 126,000 barrel improvementfrom early December. (See “Hurricanerecovery,” below.)

NATURAL GAS FOLLOWS SUITNatural gas appears set for a calmer firsthalf of 2006 as well. Traders and analystsare predicting less volatility and a range

bound market for the first six months ofthe year. (See “Natural gas due to stabi-lize,” page 30.) Patel, sees natural gas inFebruary and March trading around $10to $12 per mBtu, but later in the yearexpects to see ranges around $12 to $14.

Evans notes natural gas recentlygapped 20% above the cost of heatingoil. “If we see a drift down in crude oil itwill help shape the sentiment for naturalgas prices. We can’t sustain a 20% pre-mium over heating oil prices,” Evanssays. He blames the unprecedented highnatural gas prices on reaction to the hur-ricanes. “We priced in a shortage,” hesays. And while analysts’ opinions differon their view of the supply situation ofnatural gas and other energies, statisticsfrom the Energy Department tell us thatU.S. supplies of crude, heating oil andnatural gas as of the week of Dec. 16


HURRICANE RECOVERYGulf crude oil production has improved at a slower pace than natural gas. Some hurricaneaffected facilities will remain out of service through the second quarter of 2006.

Source: EIA

8/22 9/11 10/1 10/21 11/10 11/30

2,000

1,600

1,200

800

400

0

SHUT-IN FEDERAL OFFSHORE GULF CRUDE OIL PRODUCTION

Shut-in Production(left axis)

Dec Jan Feb Mar

72

66

60

54

48

42

ForecastWTI Crude Oil Price(right axis)

60.0061.75 62.50 63.00

504392 331 297

$/bbl.Mbd

8/22 9/11 10/1 10/21 11/10 11/30

10

8

6

4

2

0

SHUT-IN FEDERAL OFFSHORE GULF NATURAL GAS PRODUCTIONShut in Production

(left axis)

Dec Jan Feb Mar

20

16

12

8

4

0

ForecastHenry Hub Price*(right axis)

2.41.5 1.0 0.7

$/Mcf.Bcf/d

Mbd=Thousand barrels per day, $/bbl.=Dollars per barrel Short-Term Energy Outlook, Dec. 2005

*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

12.34 12.51 12.029.93


were above the five-year average. “Evenwith the upside potential that it stayscold, there is not a shortage in naturalgas. The supply situation is not in badshape,” Evans says. On Dec.13, naturalgas reached an all-time high of $15.78,after a cold wave moved across theUnited States. In late December, naturalgas prices were more than 70% aboveprices form a year ago at that time. Inaddition, gasoline futures as of lateDecember were up close to 50% fromthe previous year at that time and heat-ing oil experienced more than a 30%gain over the past year.

Even though it appears crude oil andnatural gas will not be as volatile thisyear as in 2005, traders participating inthe energy markets are still looking forways to manage the risk that goes handin hand with energies. Take forinstance, natural gas. “A lot of cus-tomers are trading natural gas,”XpressTrade’s Zarembski says.However, he explains because marginsare so high, traders are looking atoptions. “By trading options, traderscan play the market [without] takingquite as high of a risk in their outrightposition,” he says.

It is not only traders, though, takingnotice of natural gas. On Dec. 14, 2005,Congress also has a closer eye on themarket. The House of Representativesapproved legislation to reauthorize theCommodity Futures Trading

Commission (CFTC) for another fiveyears, which included a controversialamendment aimed at providing moretransparency to the natural gas markets.According to the House Committee onAgriculture, the amendment chargesthe CFTC with preventing and detect-ing manipulation of the natural gas mar-kets, outlines increased record keepingrequirements for large traders operatingon the exchanges and increases the civiland criminal penalties for violations ofCFTC antimanipulation rules.

The amendment has received oppo-sition from several groups includingthe Treasury Department, the FederalReserve and industry associations suchas the Futures Industry Association. Ina Dec. 13 letter to Congress FederalReserve Chairman Alan Greenspanreferred to the language in the amend-ment as “rather vague” and explainedit could be read to require the CFTC tobroaden record-keeping and reportingrequirements beyond futures. TheSenate must still approve the bill andwhile the Senate AgricultureCommittee approved a version of thebill in July, the Committee is stillworking out details with the SenateBanking Committee. As of lateDecember, the bill was not yet on theSenate’s schedule.

Carla M. Bauch is a freelance writer in Chicago.


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.

Source: eSignal

FM

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

16.0015.0014.0013.0012.0011.0010.009.008.007.006.005.004.00

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2004 2005

$/mBtu.



Understanding your experience in forex tradingdepends on what measures are used. A straightforwardapproach often applied is quantifying our results in

terms of profit vs. losses. Being profitable is where all of usdesire to be. Yet, this measure cannot be, by itself, sufficientto sustain our motivation. All traders have periods of lossesen route to profits. As a result, a single-minded desire forprofits may itself be a factor in furthering losses and actuallyreduce the potential for success.

Once a person desires profits, resulting losses turn intodisappointments. The experience of disappointment maythen unleash a host of destructive emotions. The problembecomes how we handle the losses and not the fact thatthey occur. How can a trader overcome becoming obsessedwith profits and being emotionally unprepared for the reali-ties of losses?

The solution isto step outside the conventionalprofit and lossparadigm thatdominates us and realize thatbetween the realmof profits and loss-es is a neutral zonethat allows thetrader to pause.From a mathemat-ical perspectivethe neutral zone isrepresented by thenumber 0. Obviously one moves from the negative numbersof losing trades to the positive column of winning trades. But having trades that are break-even, or 0 on the profit andloss register or reasonably near that range, is actually a verygood outcome. Foremost among its benefits is it allows one tokeep intact the capital at risk for another and perhaps better trade. Breaking even may not elicit the praise of othersbut it is a sustaining event. How you get to break even is also important.

If the 0 entry on the trading log is the result of a profitabletrade turning into a loss, it may represent an astute observa-tion by the trader that conditions have changed and gettingout is preferable to seeing negative numbers. On the otherhand, a break-even trade may be the outcome of a quick exitby the trader fearing a loss. A frequent number of thesebreak-even trades in one’s account may reveal the trader isbecoming overwhelmed by the setting in of destructive emo-

tions such as anxiety, guilt, fear or greed. We all know thatthis is not an uncommon experience.

However, the break-even trade also can become a hugeopportunity to evolve into a mature trader by going beyondan obsession for profits. Many of us approach each trade inan arrogant fashion, as the chance to grab profits, to scalp ortake pips from the market. This concept reflects a commonheld view that trading is a zero-sum battle between the traderand the market, where the trader wins or loses against themarket. But some of the best trading programs produce a winratio just above 50% (see “Waiting on a winner”). Themajority of trades are roughly break-even. Every flat or smalllosing trade keep us in the game. Traders get in trouble whenthey stubbornly hold onto a trade refusing to believe theirhunch, system or simply their timing, is wrong.

Yet, there is abetter and ulti-mately more effec-tive approach.What if we humblyreconfigure ourmindset and viewthe forex market as a magnificentlycomplex place fullof opportunity, that when properlyunderstood pro-vides valuabletrades? We wouldexperience a shiftin our entire men-

tal and emotional focus. The market then becomes not ourenemy, but a field of opportunities that when understood canproduce profits. Those who take this approach do notdemand nor expect pips to be handed over as if they belongto us. Instead we aspire to obtain a great trade by recognizinga winning pattern. Pips become what we earn by applyingour knowledge. The market becomes our partner, it is areciprocal relationship. The ability to trade each day by emp-tying ourselves first of ego satisfaction may not be easy, but itis the distinguishing characteristic of traders in the process oftransforming and evolving themselves from frenetic begin-nings to a level of competence. If your next trade is neither aprofit nor a loss, pause and relax, because in the case of forextrading, the result of 0 is a positive number.

Abe Cofnas is president of learn4x.com LLC. E-mail: [email protected].

The gift of the break-even trade

BY ABE COFNAS


Forex Trader

Note: Top 10 programs based on compound annual return. Most have a 2/1 upside/downside standard deviation.Source: Barclay Map

WAITING ON A WINNERThe top technical currency programs throughout the last three years.

Manager % Winning Avg. Winning % Losing Avg. Losing Up Dev / CompoundMonths ROR Months ROR Down Dev Annual Return

1 Monarch Capital Mgmt. 58.82 8.74 41.18 -3.12 3.62 50.062 Spot Forex Mgmt. (Zurich) 61.76 7.02 38.24 -3.76 2.61 37.493 MIGFX Inc. (Managed) 76.47 3.47 23.53 -2.73 2.31 26.24 Pacific Asset Mgmt. (Alpha) 41.18 17.16 58.82 -7.12 2.34 25.145 Alterama Inc. (Trendoscil FX) 50 10.93 50 -6.06 2.19 24.126 Grossman Asset Mgmt. (IPS Currency) 55.88 4.61 44.12 -2.33 2 197 Wallwood Consultants (Forex) 64.71 5.23 35.29 -4.97 1.4 18.738 Spot Forex Mgmt. (Geneva) 61.76 3.06 38.24 -1.31 2.9 17.519 DKR Capital (DKR Strat. Currency) 70.59 3.35 29.41 -3.17 1.9 17.4410 EChange Capital 58.82 5.05 41.18 -3.87 1.4 15.64


Last month we outlined thetheory behind the buy-writetrading strategy. Buy-write,also called covered call writ-

ing, programs have experienced strato-spheric growth recently and nowinclude more than $18 billion in assets.Although the growth has been impres-sive, the concept remains in its infancyas virtually all the assets are managedwith the same general philosophy. Theidea can, however, be stretched andmolded to form different investmentsto meet different needs.

Most investments fall into one oftwo distinct categories: those that seekcapital appreciation and those thatgenerate income. Although exceptionsexist, stocks are expected to providecapital appreciation and bonds are usedfor generating income.

Being able to classify an investmentas one or the other is an importantaspect of effective portfolio construc-tion, but most buy-write programs arenot easily classified as stock-like orbond-like. They may still merit consid-eration, but the concept could provemore effective if implemented with amore focused performance agenda.

The most significant growth forcovered call writing came after theChicago Board Options Exchange(CBOE) commissioned the develop-ment of a passive buy-write index.This index, the BXM, showed the per-formance of a completely decision-free foray into covered call writing.

Most buy-write strategies today aresimilar to the BXM, which behavesuniquely relative to both stocks andbonds. In other words, BXM-like pro-grams can be expected to grow assetsmodestly and generate income, but nota tremendous amount of either. Thus,we can bend the BXM’s rules a little tocreate some different investments thattarget more specific goals.

GROWING PRINCIPALAs a capital appreciation tool, theBXM has good potential. The princi-pal inhibitors to the BXM’s assetgrowth qualities are the call optionswritten barely out-of-the-money (atthe strike price just above the currentindex’s price).

Upward moves in the market arecapped at that strike because any addi-tional appreciation is offset by an equal

liability to buy back the call. But whatif a call option was written a bit furtherout-of-the-money? It wouldn’t provideas much income, but would allow forgreater capital appreciation. An exam-ple can illustrate how that might work.

On Nov. 21, the S&P 500 indexfutures closed at 1257.00. The BXM’sphilosophy, if used in the futures mar-ket, would dictate selling a call at thenext highest strike with one monthuntil expiration — in this case, theDecember 1260 call.

Selling this call at 10.3 would have generated $2,575, but cappedcapital appreciation at only 0.2% until the options expired the thirdFriday in December.

Let’s loosen the cap a little and writea call approximately 1% out-of-the-money so we can capture 1% permonth in capital appreciation if themarket advanced that much or more.Selling the December 1270 would dothe trick and would also generate$1,450 in income.

So, we have an unleveraged positionthat is on pace to generate 5.5% in income — $1,450 times 12 dividedby $314,250 (1257 x $250) — and

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.

BY MIKE OYSTER


Versatility of buy-write strategies

EQUITY TRADING TECHNIQUES


allows for 1% per month in capitalappreciation. This can be particularlycompelling if future stock marketreturns are, as many expect, below historical averages, because givingaway the upside will be far less painfulthan it would be if the market posts20% returns.

Certainly the stock market will notgo up 1% every month, but even if wecaptured just 5% of the upside during agiven year, combining that with the5.5% in income could result in greatercapital appreciation than the stockmarket in general.

MONEY FLOWTo create a fixed-income generatingvehicle, we sell a higher-priced optionat a lower strike price. This will produce more cash, but we don’t want to just spend all of the income immediately.

Monte Carlo simulations indicatethat if all the income from a coveredcall writing program was spent, thetotal value of the investment wouldsoon deteriorate to zero because itendures all the downside moves of thestock market and enjoys none of the upside.

A better idea is to kick out theincome you need and reinvest the rest.Unlike a bond, which will return theprincipal to the bondholder at maturi-ty, the “principal” of a covered callwriting strategy is the cash used forinvesting in S&P 500 futures, whichmust be replenished after negativestock market performance.

Looking again at Nov. 21, we see the1250 call could have been sold for16.5, which would have generated$4,125 in income — a 15.8% annual-ized yield on an unleveraged invest-ment of $314,250. Spending that muchincome without reinvesting anythingwould lead to total depletion of assets.So some of the income should be rein-vested back into the program in orderto maintain the “principal” value of the investment.

How much should be reinvested?That depends, and requires some com-

promise. The more income spent, thegreater the risk of principal loss. Somestudies show if 10% of covered callwriting income is spent and theremainder reinvested, the principalvalue of the investment could be main-tained. Even if only 8% was generatedin income, such a yield would prove farsuperior to most fixed income strate-gies in use today.

However, it should be noted thatcertain market environments couldmake even that much income difficultto generate while still preserving principal. Transaction costs and taxesshould be considered as well.

OPEN THE TOOLBOXNow that we can see how a buy-writestrategy can be created to achieve morespecific investment goals, we can dis-

cuss the specific financial tools forimplementation. Our examples usedfutures and futures options, but mostbuy-write programs are constructedwith S&P 500 index (SPX) options.

The problem with using SPX optionsis that there is no underlying securitythat can be delivered if the writtencalls 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 require-ments that would lessen the efficiencyof the program.

One potential solution may be foundin an entirely different derivative:exchange traded funds (ETFs). Thereare ETFs that have options connecteddirectly to them. Using ETFs mightallow a buy-write program to be con-


The problem with using SPX options is thatthere is no underlying security that can bedelivered if the written calls are exercised.

Source: CBOE

OPTIONS FOR ETFSWhile many of the options on ETFs lack liquidity, some of those listed by the ChicagoBoard 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 areAmerican 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 ETFhave 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 GlobalFund 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 perfor-mance 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 Americanstyle expiration.


structed without excessive marginrequirements, but doing so brings abouta new set of problems.

Of the ETFs that have options connected to them, most are relativelyilliquid, with wider bid-ask spreads.Also, most ETF options have a limited

number of strike prices, inhibitingopportunities to build precise strategies.

Finally, there is the tax issue. Aninvestor who generates short-termoption income while holding theunderling ETF for the long term maybe forced to pay income tax on a posi-

tion that actually lost value. However,having the investment completelycontained within a futures programmay allow more favorable tax treat-ment of profits and the opportunity tooffset losses.

The greater awareness of covered callwriting has increased the averageinvestor’s comfort with this terrificinvestment tool. Additionally, creatingstrategies through the use of futures andfutures options may prove more efficientand effective than using securities. Asthe concept becomes more widelyunderstood, we can say with a highdegree of confidence that various formsof covered call writing strategies will bedesigned and offered to fulfill far morespecific investment needs.

Michael J. Oyster is a CFA, CTA and is theauthor of Mission Possible, AchievingOutperformance in a Low Return World.www.AchievingOutperformance.com.


Equity Trading Techniques continued

FM

AMPLE OPPORTUNITYWhile 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.

Source: CME.com

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

Strike Open High Low Last Settle Change Volume Open Int. Strike Open High Low Last Settle Change VolumeOpen Int.

1260 15.3 16.0 15.3 16.0 15.5 UNCH 80 588 1225 3.0 3.0 2.5 2.8 2.8 -70 55 3010

1265 12.7 14.0 12.7 14.0 12.6 UNCH 30 53 1230 3.4 3.4 3.3 3.3 3.4 -70 830 1727

1270 9.5 10.3 9.5 10.3 10.0 -10 345 846 1240 5.0 5.2 4.7 4.7 4.9 -90 190 7335

1275 8.8 8.8 8.2 8.2 7.8 -10 55 3842 1250 7.1 7.3 6.5 6.5 7.1 -100 75 3846

1280 6.7 6.7 5.7 6.7 5.9 -20 111 4506 1255 8.3 8.3 8.3 8.3 8.6 -110 25 46

1285 4.5 4.7 4.3 4.3 4.3 -30 45 559 1260 11.0 11.0 9.4 10.2 10.3 -120 31 3488

1290 3.3 3.7 2.8 3.5 3.1 -20 236 6587 1265 12.5 12.5 12.4 12.4 12.4 -120 540 263

1295 2.2 2.4 2.2 2.4 2.2 -20 56 5092 1270 15.2 15.2 14.4 14.4 14.8 -130 330 229


Arbitrage is one of the mostinfluential but commonlymisunderstood factors thatdrive price activity in mod-

ern futures markets. Understandinghow arb trades work can give you an edge regardless of your trading approach.

A successful arb, in the simplest ofterms, is the instantaneous, or nearinstantaneous, purchase of one productand 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-by-side open outcry and electronic trading provide some of the best opportunities to execute arb tradestoday. Floor traders frequently are inposition to take advantage of price discrepancies that occur regularly inthe two separate marketplaces.

These regular discrepancies createarb opportunities throughout the trad-ing day. With a basic knowledge ofthe simple terms and procedures usedwe can break down this trade, showhow it affects prices, and broaden ourunderstanding of a major influence onthese markets.

MANY FACESArb opportunities can present them-selves in many different forms. There arearb situations that occur because themarket is slow and situations that areavailable only because the market isextremely busy and moving fast.

One arbitrage opportunity that waspopular recently was the spreadbetween cash currencies and futures.Back in the 1980s and early 1990s,banks and institutional traders wouldarb the interbank cash markets and thefutures traded in the pit. As pricesdiverged, traders would buy the cashand sell the futures for instant profit.While this type of arb certainly was thepredecessor to the arb of today, the twoare different in many ways.

However, before we get into thespecifics of modern arb trades and theinfluence on the markets, we need tounderstand the basics.

First, we have the trading pit. Thetrading pit is the arena where all openoutcry orders are executed, or filled.The pit has three types of participants,filling brokers, locals and arb locals.Filling brokers execute trades for cus-tomers. Locals attempt to scalp the

middle out of each trade by buying thebid and selling the offer. Arb localsonly trade when an arb opportunity ispresent. Arb locals rarely hold a posi-tion for more than a second, if thatlong. They are in constant communi-cation via wireless headset to anotherlocal who is sitting in front of a Globexterminal located around the perimeterof the pit.

The bid and offer are commonly mis-understood. A bid is not any buyer,and an offer is not any seller. A bidrepresents a buy order of a certainquantity at a certain price. An offerrepresents a sell order of a certainquantity at a certain price. The currentbid/offer represents the narrowestspread between buyers and sellers. Thedifference between the bid and theoffer is the spread. Trade occurs whenthe bid and the offer find a price with-in the spread they both agree upon orwhen a third party enters the equationand executes a trade at the standingbid or offer.

Differences in prices and tick valuesare necessary for the arb to occur. Forinstance in the S&P 500 futures, pit-traded contract prices change in 0.10

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.

BY BEN L ICHTENSTE IN


Understandingthe arb trade

TRADING TECHNIQUES


increments, such as 1192.20 to1192.30. The cash value of this change(tick) is $25.00. The E-mini contract isone-fifth the value of the pit-tradedcontract and it ticks in 0.25 incre-ments such as 1192.00 to 1192.25 (see“Different ticks,” page 40). Eventhough the move is bigger, the con-tract value is smaller, so the cash valueof this one-tick move in the E-mini is$12.50, or half the value of a one-tickmove in the pit-traded contract. It'sprimarily contract size and tick sizethat create the opportunities.

SLOW AND STEADYArb groups are usually made up of justtwo traders. One trader stands in the pit,being constantly fed bids and offers onwhere the E-mini is trading. When theE-mini contract is showing a 1249.25bid, the arb locals in the pit are all showing a 1249.20 bid. If paper comes tothe pit to sell at the market, the fillingbroker will sell to the locals showing the1249.20 bid.

Immediately after buying the1149.20s in the pit, the second mem-ber of the team, who sits in front of anE-mini terminal, sells the 1149.25s inthe E-mini on the screen. Because theratio is five E-mini's to every one S&P,he needs to sell five mini’s for everyone contract his partner bought in thepit. If an arb local buys 20s in the pitand sells 25s on the screen, he hasmade 0.05 per contract, which is atotal profit of $12.50 for that trade.

Arb locals would also try to buy at1249.70 when the market in the E-mini is showing a 1249.75 bid. Or onthe sell side they would try to sell at1249.80 when it is offered in the E-mini at 1249.75.

In theory, the arb is a guaranteedmoneymaker. In reality, the traderequires a great deal of discipline, skill,patience and the ability to adapt toconstantly changing market condi-tions. These examples are simple but itdoesn't always work out that way.

Arb locals are not without risk. Afterbuying the pit contract at 1249.20,they need to sell at 1249.25 to make

the tick. If they miss the 25s and endup selling the 1249.00s, they go from aprofit of $12.50 per contract to a loss of$50.00 per contract. To be a successfularb local, you need to be in constantcommunication with your partner,who's watching the E-mini screen andcan immediately execute the other legof the spread for a profit or minimalloss. The speed in the communicationbetween the two is essential to avoidmissing the second leg of the trade.This coordination occurs hundreds oftimes a day and has in many waysadded liquidity to the pit.

FAST AND FURIOUSThe basic or slow arb trade is just one ofmany that arb locals capitalize on regu-larly. Another type of arb, the fast arb,presents itself when the market makes asudden 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 offering1249.80. Why are they offering the80s? The most likely reason should beclear: 1249.75 is probably the offer in

the E-mini.But what if something causes the

E-mini market to drop abruptly, whichis often the case when a large sell orderhits the screen or the pit? Say the E-mini drops to 1249.50. The arb localsnow have a chance to sell to the limitorder in the pit at 1249.60 and buy thenew offer on the screen at 1249.50. Inthis case, the arb local has to be aggres-sive to get the filling broker to tradewith him. If he does, he has completelyexploited the arb; this is the closestanyone will ever get to free money.

OVERFLOW EFFECTSWhile the arb affects price activity inmany ways, there are two specific resultsare worth examining. The first is the arbslows a very fast moving market, reduc-ing volatility. The second is thoughmany traders believe the electronic mar-kets lead the floor, the arb creates thisillusion that the E-mini contract leadsthe pit when the opposite is true.

To demonstrate, assume that thespread in the pit is 1249.50 bid at1250.00 offer.


MARKET TERMINOLOGYUnderstanding 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. Theytypically stand on the top step.

Locals: So-called “scalpers,” locals are the open outcry participants who are the middlemen to the majority oftrades. 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 pricein 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 electronical-ly-traded markets is one of the main reasons arb opportunities exist.


Five years ago when most S&P 500orders were still executed in the pit, if alarger firm such as Morgan Stanley hadlarge quantities to sell, say 500 con-tracts, the order almost always wouldpush the price dramatically lower. Thisis called slippage. Depending on themarket conditions and the size of thelarge order, slippage could be anywherefrom one to three full points, or from1250.00 down to 1247.00, before allcontracts were sold.

But now that the E-mini hasachieved a critical level of liquidityslippage has been reduced dramatically,sometimes to as little as half a point fora 500 lot order. This can be attributedto the arb locals in the pit havingaccess to the E-mini contracts, whichallow them to take a profit on a trade

that without the E-mini would havebeen a loss.

Before, many locals were forced tostep aside when such orders came intothe pit or risk getting run over. No onewants to be the first buyer of a large sellorder. As the order is laid off into themarket, it eats up all the currentdemand. The game was anticipatingthe last chunk of the big order, antici-pating the eventual surge higher.

Now, when a large firm has a big order it tends to have much lessimpact on the market. Instead of hav-ing to get out of the way, locals canprovide a bid that is just below that ofthe existing bid in the E-mini. If theseller gives to their bid, the arb localsimmediately sell the E-mini to lock ina small profit. The arb trade, in turn,

provides a market for the market mak-ers. It enables locals to create a win-ning trade for a very small profit out ofa trade that in the past would havebeen an immediate loser.

The illusion this creates to traders offthe floor is that the E-mini contractleads the pit, but the opposite is true.When a large sell order hits the pit it isthe arb locals selling the E-mini con-tract to lock in small profits that youfirst see on the screen. Traders off thefloor see the bids getting hit in the E-mini and then prices moving lowerin the pit. This also creates the illusionthat it is initiative action in the E-minicontract when it is actually responsive.

HISTORY LESSONThe markets have gone through manychanges since the introduction of electronic trading. The arb has becomeincreasingly popular and will continueto grow in popularity as the depths of the market increase on the electronicplatforms. The changes the market has gone through as a result of electronictrading are not always obvious to many day-traders and the effects the arbhas on price activity within markets thatoffer side-by-side trading often similarlygo unnoticed.

It's important that these tradersunderstand the influence this type oftrading has to recognize potential pit-falls as well as profitable opportunities.No matter what product you trade, youneed to obtain all the information pos-sible that affects it.

With new derivatives products com-ing online all the time — futures,options, ETFs, options on ETFs, futureson ETFs, etc. — based on the same orsimilar underlying, it creates more arbi-trage opportunities. By understandingthe fundamentals of the arb trade in theS&P 500, even if that trade is not asviable as before, traders can equip them-selves to take advantage of these newopportunities as they appear.

Ben Lichtenstein is the president ofTradersAudio.com and a member of theChicago Mercantile Exchange.


Trading Techniques continued

FM

Source: CME

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

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

E-mini (RHS)

Pit contract (LHS)

DIFFERENT TICKSThe 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. Thisdiscrepancy creates arb opportunities.

8:30

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Finding a good trading

system takes the

one resource that

nobody can buy:

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

today’s top 10 trading systems

have on their side.

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.


TODAY’STOP 10TRADINGSYSTEMS

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.

TODAY’STOP 10TRADINGSYSTEMS

BY GEORGE PRUITT AND JOE BOBEK



This is the fourth long-term reviewof the top 10 trading systems. Theprevious three were published in1993, 1997 and 2001. As before, thiscurrent list was not solely determinedby profitability. The following criteriawere used to pick 10 systems from auniverse of more than 200:

1. A minimum of four years of real-time simulated results.

2. Consistency of returns; minimumdrawdowns relative to profits.

3. Minimum amount of curve fittingto past data.

4. Consistent parameters for all mar-kets traded.

“Top 10 through time” (above) liststoday's top 10 trading systems alphabetically. It also alphabeti-cally lists the top 10 trading systems ofpast years.

There wasn't any one system thatstood head and shoulders above the rest.While we hoped we would produce alist that included a mix of markets andstrategies, the performance figures oftrend following and S&P 500 day-trad-ing systems rose to the top of the heap.Seven systems on our list are trend fol-lowers and the other three are S&P 500day-trading systems.

WHAT'S GOOD?In our selection process, long termviability was more important forinclusion than recent performance;we looked at the big picture.

For example, many day-traders havemigrated from the S&P (mini and full-size contracts) to the mini contracts ofthe Russell 2000 and Mid Cap 400. Theonce highflying mini Nasdaq has fallenout of favor altogether. The year 2005will go down in history as one of theworst performing years for day-trading.Volatility, the fuel for day-trading prof-its, has sunk to levels last seen in themid-1990s. However, the latter part ofthe year did show an up-tick in volatili-ty and system performance.

Like the day-traders, trend followersalso have been beaten down by 2005.

The year 2004 ended on a sour note andthe first few months of this year pushedmany commodity trading advisors(CTA) and trend traders into the cellar.Many of them have yet to climb out.There are exceptions; many of the advi-sors that focus on the energy marketshave had spectacular results. Novemberproduced good trending markets andmany trend traders were able to capitalizeand pull their year-to-date numbers up torespectability. This is evident in the equi-ty curves of the trend-following systemsthat we have included in our list.

It was tough compiling this list, andwe were limited to those systems thatwe currently track. This top 10 list maybe biased toward systems with longerreal-time results (only results obtainedwith data after the system’s release tothe public are included).

Do note, however, all of the systemperformance numbers presented arehypothetical. They only traded in theworld of the computer. Real-life tradingand simulated trading can be quite different, and this difference can be further magnified by a higher frequencyof trading. Of the 10 systems, two, R-Mesa 3 and Checkmate, are “blackbox” systems (trading logic is encrypt-ed). The rest disclose their rules to customers and researchers.

Obviously, the top 10 list has changedthrough time. Some of the systems natu-rally fell off because they were no longeravailable. Others fell off because their

performance diminished with time. Thisraises the question that all system devel-opers and traders struggle with: Do allgood systems eventually fail? The answeris not a simple yes or no.

The accompanying tables and graphsdemonstrate that these 10 systems,despite being on this list, have gonethrough some gut-wrenching draw-downs. Many of the results may suggestthese systems have failed. However, it'simportant to view the results with anopen mind. The markets as a wholehave exhibited a less-than-friendly trad-ing environment through the past threeyears, with 2005 leading the way. Trendfollowers have had it especially tough inthis period with only a handful of mar-kets providing profitable trends.

Nonetheless, these 10 systems haveperformed in the past and are doing soright now in these difficult market con-ditions and should do so in the future.After all, the one constant of systemtrading is there is no perfect system:There is no Holy Grail.

TESTED MARKETSWhere applicable, we have tested the sys-tems on a portfolio of 16 different markets:U.S. Treasury bonds,Treasury notes,British pound, Japanese yen, Swissfranc, euro FX/Deutsche Mark, soy-beans, cotton, live cattle, copper,sugar, orange juice, heating oil, crudeoil, natural gas and silver.

Markets were chosen based on liquidi-

Source: Futures Truth Inc.

TOP 10 THROUGH TIMEThere are a few constants on this list of the top 10 commercially available trading systems(listed alphabetically).1993 1997 2001 2005Black or White Aberration Aberration AbberationCuller Currency CatScan 1 Basis II Basis IIDCS-II Combo Advantage DCS II CheckmateDollar Trader Culler Currency Dollar Trader Dollar TraderPilot Trader DCS II Dynamic Break Out Golden SXQuad Level Trend Dollar Trader Golden SX R-BreakerTime Trend III Grand Cayman Grand Cayman R-MesaUltimate II R-Breaker R-Breaker ReadySetGoVolpat Time Trend III STC S&P Day Trade STC S&P DaytradeWilder's Volatility Universal LT TrendChannel TrendChannel




TOP 10 SYSTEMS: JUST THE FACTSThe 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 reali-ties of actual trading. The systems are listed in alphabetical order. Some systems have limited data available due to artifacts of their tradingapproach or black-box nature.

$667,000

$592,000

$517,000

$442,000

$367,000

$292,000

$217,000

$142,000

$67,000

$0,000

AFTERRELEASE

BEFORERELEASE

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

AFTERRELEASEBEFORE

RELEASE

$826,000

$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

ABERRATIONTYPE: Longer-term trend followingDeveloper: Keith FitschenWeb site: www.trade-system.comCost of system: $2,295

Total Avg Max P/L DrawDn Trds Wins TIM W:L Gain$PL $PL/Yr DrawDn (Last 12 mo) (Last 12 mo) /Yr (%) (%) ratio /Mr+DD

T-bonds 25660 1288 25590 -3980 8280 5 47.8 58 1.3 4.6T-note 20840 1046 25590 -7780 8570 4 46.1 5 1.3 3.9British Pd. 37644 1890 29725 -2588 5744 5 40.7 57 1.3 6.1Japanese Yen 124588 6255 19113 7475 6350 5 50.0 65 2.3 29.4Swiss Franc 56625 2843 16588 -1375 5188 5 51.0 63 1.5 15.4Euro (DM) 106088 5349 26900 225 9750 5 46.4 62 1.7 18.2Soybeans 335 17 45390 5000 5000 7 34.8 61 1.0 0.0Cotton 61360 3081 15990 -6290 10730 6 44.6 64 1.6 18.1Live Cattle -8044 -404 17892 -1996 4616 8 36.1 65 0.9 -2.2Copper 21450 1077 26338 14288 3525 6 40.7 61 1.3 3.8Sugar -739 -37 13563 1680 1243 6 39.6 61 1.0 -0.3Orange Juice -4155 -209 32505 -3053 5273 7 39.8 64 0.9 -0.6Heating Oil 58048 2915 21357 -979 19043 7 47.0 68 1.4 12.5Crude Oil 62620 3144 16980 -8440 13490 7 54.8 71 1.7 15.4Natural Gas 109100 7001 42000 24740 31740 7 47.8 71 1.7 14.6Silver -26090 -1310 46265 -4315 10030 5 36.8 56 0.7 -2.7

BASIS IIType: Intermediate-term trend following with oscillator-based indicatorDeveloper: Alfaranda CTAWeb site: www.alfanetsys.comCost of system: $2,500


T-bonds 72960 3663 14460 -3650 8600 9 44.0 86 1.5 21.3T-note 60530 3039 18200 -6850 7870 11 45.1 92 1.5 15.4British Pd. 53350 2679 29263 -1788 7581 10 41.5 90 1.3 8.7Japanese Yen 146988 7380 24775 15700 4413 10 41.2 86 1.8 27.4Swiss Franc 127500 6402 14250 11213 4463 10 44.8 89 1.8 39.8Euro (DM) 114238 5760 31800 -4163 14225 7 43.2 56 1.7 16.8Soybeans -9385 -471 35720 -2390 8540 13 36.6 95 0.9 -1.3Cotton 71630 3596 24620 -1900 6005 11 46.1 92 1.5 14.0Live Cattle -4608 -231 20760 -576 5080 12 39.9 98 1.0 -1.1Copper 30163 1514 22825 12938 4938 11 38.6 92 1.2 6.1Sugar 2274 114 14661 3562 1019 11 41.4 98 1.0 0.7Orange Juice 1463 73 20138 1350 1980 13 38.1 97 1.0 0.3Heating Oil 42332 2125 22915 0 0 11 47.0 81 1.3 8.5Crude Oil 40820 2050 20060 -5100 5100 11 42.8 91 1.3 8.7Natural Gas 87600 5621 25620 0 0 9 43.7 65 1.8 17.7Silver -12650 -635 38550 -6365 12565 13 34.5 93 0.9 -1.5



CHECKMATEType: Longer-term trend following black box systemDeveloper: Dean HoffmanWeb site: www.traderstech.netCost of system: $1,695

Total Avg Max Wins W:L$PL $PL/Yr DrawDn (%) ratio

T-bonds 48575 2429 6863 51.85 2.11T-note 3622 181 8941 35.19 2.01British Pd. 55631 2782 19038 38.46 3.19Japanese Yen 102088 5104 6113 50.00 3.24Swiss Franc 38663 1933 8813 37.93 2.86Euro (DM) 146013 7300 6300 52.73 3.44Soybeans 11400 570 10425 40.00 2.05Cotton 28925 1446 8050 44.00 2.57Live Cattle -6746 -337 13065 19.35 3.28Copper -75 -3.75 13425 29.31 2.41Sugar 651 32.55 7285 28.57 2.58Orange Juice 2948 147 10665 33.33 2.20Heating Oil 31804 1590 12917 35.59 2.91Crude Oil 30575 1529 5475 47.17 2.49Natural Gas 110365 5518 21025 48.89 3.41Silver -28185 -1409 41115 22.73 1.80

DOLLAR TRADERType: Longer-term trend followingDeveloper: Dave FoxWeb site: www.dollartrader.comCost of system: $1,050

Total Avg Max P/L DrawDn Trds Wins TIM W:L Gain

$PL $PL/Yr DrawDn (Last 12 mo) (Last 12 mo) /Yr (%) (%) ratio /Mr+DD

Euro 52325 2627 19100 -4050 14850 4 41.7 88 1.6 12.2

Japanese yen 155425 7804 17175 9163 7713 9 51.4 83 2.0 39.5

GOLDEN SXType: Longer-term trend followingDeveloper: Randy StuckeyWeb site: www.mindfire-systems.comCost of system: $1,475


T-bonds 29320 1472 19250 -2650 6600 7 38.4 66 1.2 6.7T-note 41910 2104 18420 -3390 5820 7 47.4 72 1.4 10.6British Pd. 22975 1154 52769 -4500 8575 8 31.8 62 1.1 2.1Japanese Yen 109313 5489 26038 6650 5150 7 42.9 68 1.8 19.5Swiss Franc 49188 2470 24725 -5200 7388 8 39.5 68 1.3 9.3Euro (DM) 91250 4601 32450 275 9338 8 36.0 58 1.5 13.2Soybeans -9435 -474 47810 -410 6115 9 37.6 74 0.9 -1.0Cotton 51475 2585 28595 -11135 12555 8 43.2 70 1.4 8.7Live Cattle 6576 330 19440 760 3928 9 42.2 85 1.1 1.7Copper 18413 925 23788 12138 5388 8 38.6 77 1.2 3.6Sugar -10293 -517 20821 1579 2766 8 40.1 88 0.9 -2.4Orange Juice 12540 630 28898 2093 2715 9 42.6 84 1.2 2.1Heating Oil 7510 377 33256 4145 19286 9 34.4 70 1.0 1.1Crude Oil 64040 3215 19490 4670 10060 9 47.8 79 1.5 14.1Natural Gas 135180 8675 45610 22850 26940 10 44.4 76 1.8 16.8Silver -43845 -2201 64060 -7895 13610 8 34.0 70 0.7 -3.3

AFTERRELEASE

BEFORERELEASE

$500,000

$450,000

$400,000

$350,000

$300,000

$250,000

$200,000

$150,000

$100,000

$50,000

$0,0001990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

AFTERRELEASE

BEFORERELEASE

$215,000

$190,000

$165,000

$140,000

$115,000

$90,000

$40,000

$15,000

$0,0001988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

AFTERRELEASE

BEFORERELEASE

$596,000

$528,000

$460,000

$392,000

$324,000

$256,000

$188,000

$120,000

$52,000

$0,0001987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005


ty and diversification. Diversification isprobably the most important cog in yourtrading machine and your best ally infighting drawdowns. A portfolio of non-correlated markets should have draw-downs at different times and thereforehelp reduce the overall maximum draw-down, which would be more severewhen trading overly correlated markets.

Some systems on the list weren’tdesigned to trade a basket of marketsand their results are shown only onthose markets recommended by the ven-dor. R-Breaker, STC-VB and R-Mesa 3were tested on the S&P only. DollarTrader for Currencies was tested on the

Japanese yen and euro. TrendChannelwas tested on the euro, 10-year Treasurynotes and Japanese yen.

The performance of each trading sys-tem consists of a hypothetical backtestand a walk-forward test. (Due to datarequirements, R-Mesa 3 does notinclude a backtest.) The two testingperiods are identified on the equitycurve charts that accompany the data.

Although not valid for predictingfuture performance, it is helpful toinclude the hypothetical backtest datawith the walk-forward test data to giveinsight into a 20-year performance win-dow. Also, it's intriguing to see how a

system's walk-forward test compareswith its backtest.

Performance results are based on aone-contract basis. This allows us tocompare apples to apples. Each round-turn trade was levied a $75 ($100 forS&P) commission/slippage charge. Inaddition to the equity curves of each sys-tem, a composite analysis, contact infor-mation and a brief summary are provid-ed. The composite analysis consists oftotal profit, maximum draw down, per-centage wins and win-to-loss ratio.

DIFFERENT STROKESThe top 10 trading systems do not use



READY-SET-GOType: Longer-term trend followingDeveloper: Alan PryorWeb site: www.longtermtrading.comCost of system: $995

Total Avg Max Wins W:L

$PL $PL/Yr DrawDn (%) ratio

T-bonds 10863 543 14456 36.84 1.94

T-note 22000 1100 17934 44.00 1.69

British Pd. 84919 4246 10575 46.15 2.79

Japanese Yen 131375 6569 16550 49.38 2.80

Swiss Franc 84100 4205 13363 44.87 2.50

Euro (DM) 150250 7513 20938 43.82 3.06

Soybeans -6244 -312 21644 41.10 1.31

Cotton 18545 927 23965 39.76 1.89

Live Cattle 4955 248 11933 42.55 1.55

Copper -7413 -371 29400 35.82 1.60

Sugar 8864 443 11611 46.88 1.51

Orange Juice 5378 269 24158 37.33 1.85

Heating Oil -17743 -887 36100 31.03 1.84

Crude Oil 25330 1267 8970 47.44 1.58

Natural Gas 127530 6377 26270 48.33 3.25

Silver 20800 1040 14570 43.33 1.82

R-BREAKERType: Breakout and countertrendDeveloper: Richard SaidenbergWeb site: www.soundviewcapital.comCost of system: $3,000

Total Avg Max P/L DrawDn Trds Wins W:L Gain

$PL $PL/Yr DrawDn (Last 12 mo) (Last 12 mo) /Yr (%) ratio /Mr+DD

S&P 300650 15223 36200 -20800 23025 146 43.80 1.30 36.3

AFTERRELEASE

BEFORERELEASE

$600,000

$500,000

$400,000

$300,000

$200,000

$100,000

$0,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

$336,000

$298,000

$260,000

$222,000

$184,000

$146,000

$108,000

$70,000

$32,000

$0,0001987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

AFTERRELEASE

BEFORERELEASE




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.

R-MESA 3Type: Breakout and countertrend black box system

Developers: John Ehlers and Mike Barna

Web site: www.mesa-systems.com

Cost of system: Contact vendor

Total Avg Max P/L DrawDn Trds Wins W:L

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

S&P 279178 34897 24600 6250 8875 209 37.50 2.11

STC S&P DAYTRADEType: Breakout and countertrend

Developer: Stafford Trading

Web site: www.staffordtrading.com

Cost of system: $1,200 (locked); $1,800 (open)

Total Avg Max P/L DrawDn Trds Wins W:L Gain

$PL $PL/Yr DrawDn (Last 12 mo) (Last 12 mo) /Yr (%) ratio /Mr+DD

S&P 283900 14375 30325 0 12825 113 45.90 1.30 39.8

TRENDCHANNELType: Longer-term trend following

Developer: John Tolan

Web site: www.trendchannel.com

Cost of system: Contact vendor

Total Avg Max P/L DrawDn Trds Wins TIM W:L Gain

$PL $PL/Yr DrawDn (Last 12 mo) (Last 12 mo) /Yr (%) (%) ratio /Mr+DD

Japanese Yen 134663 6761 22450 8088 5300 7 46.4 76 2.1 27.5

Euro (DM) 116400 5869 26138 -2738 15625 7 43.7 74 1.6 20.5

T-note 42560 2137 13240 -5560 6480 7 43.6 74 1.4 14.5

$300,000

$250,000

$200,000

$150,000

$100,000

$50,000

$0,0001997 1998 1999 2000 2001 2002 2003 2004 2005

$294,000

$261,000

$228,000

$195,000

$162,000

$129,000

$96,000

$63,000

$30,000

$0,0001987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

AFTERRELEASE

BEFORERELEASE

$302,000

$267,000

$232,000

$197,000

$162,000

$127,000

$92,000

$57,000

$22,000

$0,0001987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

AFTERRELEASE

BEFORERELEASE


the same analysis techniques to predictthe markets. They fall into four basicapproaches:

Trend following: A system that fol-lows the overall market direction onany time frame.

Break out: A system that capitalizeson market surges after stages of consoli-dation. These can vary from shortintraday to long-term, meaning weeksor months.

Countertrend: This system tries tocapitalize on the contrarian view, takingadvantage of opposite moves against thelonger-term trend.

Oscillator: Incorporates an oscillatingindicator to determine trend changes topick tops and bottoms.

The majority of these systems wouldbe classified as longer-term trend follow-ers. This approach seems to be preva-lent among the systems with the longest

shelf life except S&P systems, whichtend to be shorter. There has been avoid of successful shorter-term systems(other than day-trading).

To create a successful short-term sys-tem, one that trades three- to five-dayswings, the system needs a high percent-age of wins and an average trade figurethat's large enough to cover executioncosts and still build equity. Through theyears, developers have tried to createsuch a system and some have hadenough short-lived success to grab theattention of brokers and the public.Even though many short-term systemscan’t stand on their own as a primarytrading vehicle, they can be used tohelp hedge the bets of long-term trendfollowing. Also our $100 commissionand slippage charge may be overly puni-tive given brokerage competition andthe liquidity of electronic markets.

The two major beefs with trend fol-lowing are drawdowns and leaving too

much money on the table. Marrying theshort- and long-term approaches canalleviate the impact of these drawbacks.

The salient statistics of each of thetop 10 systems are found in "Top 10 sys-tems: Just the facts" (page 43). Ofcourse, there is no guarantee these sys-tems will produce profits like thoseshown here or won't enter into anunbearable drawdown next month.However, a trader who takes the time tocorrectly develop a trading plan with asolid money management overlay, has amuch greater chance of success. Startingwith a trading system that has done wellthroughout time is step one.

George Pruitt is director of research of FuturesTruth magazine and coauthor of BuildingWinning Trading Systems with TradeStationand The Ultimate Trading Guide. George can bereached at [email protected] orwww.futurestruth.com. You can view Pruitt’sprevious top 10 systems features atwww.futuresmag.com/previoustopten .

FM



Technology has revolutionizedthe way business is donearound the world, includingmany aspects of trading during

the last 30 years, but has it really pro-duced any innovations in technicalanalysis for today’s global, 24-hourelectronic markets?

Some new ideas in technical analysishave certainly surfaced throughout theyears, as chronicled in these pages.Welles Wilder introduced the relativestrength index (RSI) in 1978: “RSI: Amomentum oscillator that can help youspot market turns,” (Commodities, June1978); Louis Mendelsohn wrote aboutbacktesting software concepts (threearticles in 1983); Steven Nison intro-duced candlestick charts to the Westernworld in “Learning Japanese-style ‘can-dlesticks’ charting, December 1989; andJohn Murphy advocated the use ofintermarket analysis, to name a fewtechnical analysis developments. (See“Indicating profits,” right.)

But aside from moving conceptsfrom hand-drawn charts to calculatorsto computers that are ubiquitous in trading today, what has technicalanalysis done for traders lately? Where

are today’s Charles Dows, R.N. Elliottsor W.D. Ganns with original analyticalideas? Ask some of the people whohave played prominent roles in themarketplace about the state of techni-cal analysis today and you’ll get a widerange of answers.

SAME OLD THING?“Technical analysis today is not thatmuch different than it was 25 yearsago,” says Mendelsohn, president of Market Technologies LLC anddeveloper of VantagePoint intermarketanalysis software. “The only differenceis that the charts have different dates and the computer’s ability to pro-duce these charts quickly and easily isvastly improved.”

New technical analysis ideas are stillbeing generated by hedge funds andproprietary traders using their exten-sive resources to develop advancedtrading methods, but the institutionaltraders are keeping these proprietarysecrets to themselves. If there is a newtechnical analysis genius or concept,no one will ever hear about it.

But Mendelsohn doesn’t think mostof these sophisticated traders are any

better at analysis than the individualtrader. “You would think that with so much money involved and theincentive that money managers have to produce profits, they wouldhave the best state-of-the-art analysispossible, but that’s not so,” he says,noting the poor performance of manypublic futures funds (47 funds down anaverage of 4.49% through October,according to Futures). However, mostof the high-end system developmenttalent has gravitated to private place-ment hedge funds and commoditytrading advisors.

PLENTY OF TOOLSJohn Bollinger, whose extensive studyof market volatility resulted in the con-cept of Bollinger Bands, believestraders still have “an awfully good setof technical analysis tools available tothem.” However, with the type of mar-ket participants and trading around theclock around the world today, thecharacter of the data has changed.

As part of his ongoing research, he has found it instructive to feed adata series with technical patterns to an indicator to see how it responds,

Markets have taken advantage of technology during the last 30 years, but

where are the advances in analyzing price movement?

BY DARRELL JOBMAN


Has technical analysiskept up with the (Dow) Jones’?

TRADING TECHNIQUES


noting the behavior during steady market moves and during periods ofprice deceleration.

“What traders really need to do isunderstand the response characteristicsof the indicator tools they are usingbetter than they do now,” he says.

What he suggests is not necessarilydiscovering new indicators but usingtoday’s computational power to minethe ideas from analytical work beforethe 1960s more thoroughly.

“Like the automobile, the basicproblem (of analysis) has been solved.Now it’s more about finesse,” Bollingersays. “Look at the old masters and theirtechniques. There’s still a ton of infor-mation there, especially in analyzingthe micro structure of the market.”

MAKING INDICATORS WORKOne analyst who is using techniqueshe developed more than 25 years agoto trade systems successfully is WellesWilder, whose 1978 book, NewConcepts in Technical Trading Systems,introduced the Relative StrengthIndex, Directional Movement Index,Volatility Index, average true rangeand a number of other technical toolsthat are now included in most analyti-cal software.

Wilder spends most of his time inNew Zealand and is also known for hisDelta Society systems, which incorpo-rate several concepts from the book withhis Delta turning point analysis andhave produced profits averaging $50,000a year, he says. One of the techniques,the Volatility System, is mostly over-looked, but he says it may be the beststand-alone system in the book, illustrat-ing that sound analytical techniquesfrom the past do not go out of date.

The Parabolic System also is stand-ing the test of time in helping tradersget out of a position once profits arebuilt up, he adds.

LOTS OF ‘MUMBO-JUMBO’Whatever type of technical analysis isin vogue these days, most of it is“mumbo-jumbo,” contends LarryWilliams, an author/trader whose

accomplishments include turning a$10,000 account into $1 million in ayear and writing a number of populartrading books including The Right Stockat the Right Time and Long-Term Secretsof Short-Term Trading.

“I am not enamored by technicalanalysis and I have probably beaten up

the numbers as much as anyone,” saysWilliams, whose name is often associ-ated with the %R indicator but whosebooks have made a transition from atechnical focus in his early trading daysto mostly fundamental in recent years.

“What has stood the test of time isthat trend matters,” Williams empha-


INDICATING PROFITSInnovations in technical analysis in the 1970s and 1980s included candlesticks showingprice action and three indicators: RSI, DMI and average true range introduced by WellesWilder. Are there more such developments ahead?

Source: eSignal

25 1 8 15 22 29 6 12 19 26 3 10 17 24 31 7 14 21 28 5Aug Sep Oct Nov Dec

10800.00

10600.00

10400.00

10200.00

100

25010050

0

Average True Range(14)

Directional Movement(14, 14)

RSI(14, C)

GETTING A HEADS UPA predicted moving average based on intermarket relationships provides new insight for anold lagging indicator.

Source: www.TraderTech.com

Sep05 Oct05 Nov05 Dec06

108^42

108^05

107^32

106^59

106^22

105^49

105^12

5-yr. U.S. Treasury notes, continuous

Actual 10-daymoving average

Predicted 10-daymoving average


sizes. “If prices move from 10 to 50,it’s due to fundamental conditions.You don’t forecast 50 with an indica-tor. First, you have to see the condi-tion (or trend) of the market, thenyou can use a timing tool like %R tobuy on a pullback or sell on a trend-line breakout. It’s pretty simple. I seeno value in that artsy-craftsy stuff likeElliott Wave or Gann.”

Williams compares markets to a boatride. “You don’t want to be lookingbackward at the (technical indicator)waves to see where the boat went. Youwant to keep your eye on where thepilot (conditions) is steering the mar-ket,” he explains.

Williams, who hasn’t gotten intoelectronic trading but submits orders tohis broker by e-mail, does find value ina couple of old technically related toolsthat are still reliable, the Commitmentof Traders report and seasonal patterns,which he views as market fundamen-tals or conditions. Another old analyti-cal standby, volume, has not kept upwith the times in futures trading, how-ever, because arbitragers, long-termprogram traders and investable indexesare behind huge spikes in volume every90 days at expiration in many markets.

“This volume is not reality. It doesnot reflect the real supply/demand situ-ation,” Williams says. “Volume is deadas an indicator. Or if it’s not dead, it’snot the same as in the past.”

WRONG TARGET?John Murphy, whose books TechnicalAnalysis of the Financial Markets andIntermarket Analysis are among thebibles of modern technical analysis,doesn’t even like the premise of an arti-cle on the status of technical analysis.

“It implies that technical analysishasn’t kept up with the times when theexact opposite is true,” he says. “Whynot write an article asking whyeconomists and fundamental analystsmissed the end of the Nasdaq bubble in2000 when it was clearly seen on thecharts? Or why the fundamental com-munity didn’t see the spectacular risein oil prices over the last couple ofyears when the chartists did? Or whyWall Street has completely missed thesecular bull market in gold and othercommodities over the last three yearswhile chartists didn’t?

“I think a more pertinent articlewould be about how well technicalanalysis has done in the new globalenvironment and why the economicand fundamental communities haven’tkept pace,” he suggests.

ADVANCES TO COMEWhatever the view of current techni-cal analysis, there’s not a lot of incen-tive to come up with innovative ideas,Mendelsohn says.

“The largest numbers of traders arenewcomers to the market and that’sthe way it will be forever,” he notes.“It’s like they are all starting kinder-garten and learning how to read. Theteacher knows how to read, but thestudents have to go through a learningprocess. There’s no incentive for theindustry to innovate as long as it cankeep giving new traders old things.”

Mendelsohn’s VantagePoint soft-ware uses neural network technologyand intermarket analysis to give a newlook to an old indicator. The software,using prices of 10 related markets,attempts to turn a moving averagefrom a lagging to a leading indicator to

produce predicted moving averages fora target market. The predicted movingaverage often turns ahead of simplemoving averages (see “Getting a headsup,” page 51). One issue with this isthat intermarket relationships tend tochange and can actually reverse (see“Intermarket analysis: What workstoday,” page 54). Mendelsohn’s pro-gram’s are able to adapt to this.

Mendelsohn says traders need toblend technical and fundamental anal-ysis into a synergistic approach and thenext analytical advance will comewhen fundamental data is formatted soit can be combined with technical datain one analytical package.

Technical analysis’ low stature todaymay be a victim of a general bull market, according to Bob Prechter, oneof the foremost advocates of ElliottWave theory. He sees a sharp setbackahead for the U.S. stock market. In abear market everyone looks to techni-cians for explanations and the timingof buy signals. In a bull market WallStreet firms apparently decide the market will go up forever so they don’tneed technical analysts, as shown by the downsizing or elimination oftechnical analysis departments inrecent years.

“The firings of technical analysts in2005...is a great big sell signal formoney-center banks and a buy signalfor the field of technical analysis,”Prechter writes in Elliott Wave Theorist.“(Technical analysis’) new uptrend hasa long way to go.”

Darrell Jobman, senior market analyst forwww.TradingEducation.com, is a former editorof Futures magazine and has been writingabout financial markets for more than 35 years.



FM

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– John Murphy, technical analyst

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After reviewing the basics ofintermarket analysis in theDecember 2005 issue, welooked at three trading sys-

tems developed by Ruggiero duringthe 1990s and discussed why theystill work. We also considered a bigweakness of intermarket analysis —the decoupling of market relation-ships, which can cause large losses inintermarket-based trading systems.This weakness is magnified becausethey often occur during periods ofintermarket inversion. Instead of justbreaking down, the relationships flip,causing losses to accelerate.

Our next step is to look closer atthe effect of intermarket decouplingand how it can be dealt with whenusing intermarket analysis in trading.

We’ll start by looking at a classicrelationship that used to be a staplefor many stock index traders: therelationship between Treasury bondsand 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 usingT-bonds to predict the S&P 500 wasexplained. A positive relationshipwas assumed. This is the code forthat system. This and subsequentcodes are written in TradersStudioBasic but the logic can be pro-grammed into other platforms:

SubClassicPosCorIntermark(TrLen,InterLen)

Dim InterAveDim TrAve

InterAve=Average (Close Ofindependent1,InterLen)

TrAve=Average (Close,TrLen)If Close>TrAve And Close Of

independent1<InterAve ThenSell(“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 ondata from April 21, 1982, to Feb. 7,

1996, and showed profits of$344,675. When the analysis simula-tion was rerun for this article, slightlydifferent dates were used, along withdata from a different vendor. A sec-ond test, in an effort to replicate theresults, was run today through thetime period Jan. 1, 1983, throughFeb. 7, 1996, using available datafrom a different vendor and adjustingfor the $500 point value of the time.Results show $334,650. This matchesthe previous results about as closelyas could be expected.

When this system was first pub-lished, it was profitable on about69% of its trades with an intrabardrawdown of about $26,000 and anend-of-day intratrade drawdown ofjust $9,600. This system performedwell until the end of 1997, making$114,125 in pre-split $500 per pointdollars from February 1996 to Dec.31, 1997. This represented aboutone-third of what it made during theprevious 14 years during that first 21months in out-of-sample testing. In1998, the stock market began its“irrational exuberance” rally and theintermarket link broke down with it.

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.

BY MURRAY A. RUGGIERO JR .


Intermarket analysis:What works today

TECHNOLOGY & TRADING


The system subsequently lost morethan $94,000 during 1998 and 1999at $250 per point. Perhaps more rela-tive to our original results, this repre-sents almost $190,000 at $500 apoint — more than half of the profitsthat the system had produced duringthe previous 14 years. The results for2000 were relatively good, but 2001and 2002 show the bottom reallyfalling out, losing almost $142,000 at $250 a point, or $284,000 at $500 a point. The results of thismethodology returned to mediocreduring 2003 and 2004 with 2005being a marginal year.

The system in 2001 had just onewinner in seven trades. In other yearsthe overall yearly winning percent-ages of the methodology wererespectable. The problem, as illustrated in “Fortunes lost” (above),was that there were some very largelosing trades.

These trades produced some bigproblems for the methodology in ashort time. These five trades lostmore than $161,000 at $250 a point($322,000 at $500 a point) in lessthan two years. By studying this rela-tionship closer, we can find out whatreally happened here.

PEARSON KNOWS If we plotted the Pearson correlationcoefficient (calculated through arolling 40-day period) between the30-year T-bond and the S&P 500,the graph will show that fromNovember 2000 to November 2001the relationship was well below zero.Our system performance relies onthis relationship being strongly posi-tive. For example, during 1996 and1997 the correlation coefficient wasabout 0.75 three-quarters of the time.Then the relationship inverted.

To understand what happened, weneed to know why this relationshipexists. When T-bond prices move up,it indicates interest rates are falling.As interest rates move lower, stockprices will rally as investors shiftfunds into stocks for higher returns.

This flow between asset classes andasset allocation exists down to short-term time frames.

One known problem with this rela-tionship is during periods of majormarket disasters, such as the crash of1987, the relationship can totallydecouple as a flight to quality takesplace. The relationship can alsodecouple in latter stages of a bullmarket when the Federal Reserveincreases interest rates in an effort tocombat inflation.

This relationship does not followthe script when the market is at turn-ing points of long-term trends. Insome ways, this may be the cause ofthe weak system performance in 2005because the yield curve is very flat.The long end of the yield curve rela-tionship to the 10-year outlook of astock market investor does not havethe same historical differential. As aresult, the yield curve is flat and therelationship changes.

Of course, we have the help ofhindsight to figure all this out. Thegoal is to be able to determine in thefuture when the relationship willbreak down. The use of correlationanalysis to filter trading systems helpsus accomplish this. We will usePearson correlation analysis to workon this problem.

THE SCENT OF CHANGECorrelation analysis is a way todescribe the strength of an associa-tion between two variables. An asso-ciation between variables implies the

value of one variable can be used tosome extent to predict the other.The Pearson correlation is a specialkind of association because it onlyshows a linear relation between thevalues of the variables. A non-linearrelationship must be transformedinto a linear one before the correla-tion is calculated or the correlationcalculation is useless.

We’ll explain this process withoutthe math. It’s available in any statis-tics text. Points X and Y, which inour case are the two related marketprices, are plotted throughout a givenwindow of days. A line is drawn thatminimizes the distance between allpoints. The standard distancebetween the points and the line pro-vides information on how predictiveX is of Y. If the line is sloping up, thecorrelation is positive. If the line issloping down, the correlation is neg-ative. This entire relationship can besummed up by one number: thePearson correlation coefficient.

“Bound by bonds” (page 56) showsa Pearson correlation coefficient in amoving 40-day window plotted as aline below the price chart. The corre-lation calculation is for S&P 500 andT-bond prices during 2002 and 2003.

Even during the early years whenthe system performed well, the corre-lation bounced up and down but didnot necessarily create major prob-lems. Random noise in the correla-tion does not affect the generalresults of the relationship. It is along-term change that affects how


FORTUNES LOSTSeveral very large losses in 2001 doomed this intermarket analysis based trading system.

ORDER DATE SIZE PRICE DATE ORDER SIZE PRICE LOSSES ($250) LOSSES ($500)

Buy 2/5/2001 1 1398.2 3/28/2001 Sell 1 1206 ($48,050.00) ($96,100.00)

Sell 3/28/2001 1 1206.0 6/4/2001 Buy 1 1298 ($22,875.00) ($45,750.00)

Buy 6/4/2001 1 1297.5 7/2/2001 Sell 1 1256 ($10,400.00) ($20,800.00)

Buy 5/28/2002 1 1098.2 10/14/2002 Sell 1 840 ($64,675.00) ($129,350.00)

Sell 10/14/2002 1 839.5 11/11/2002 Buy 1 901 ($15,375.00) ($30,750.00)

Source: TradersStudio


the system performs. In essence, it isa type of integration of the areaabove and below zero.

Thankfully, there is a simple wayto deal with this problem. We candouble smooth the correlation valueby taking a moving average of itequal to the correlation length. Hereis this simple change written into thetrading system code:

SubClassicPosCorInterCorrel(TrLen,InterLen,CorLen,Lev)

Dim InterAveDim TrAveDim CurCor As BarArrayInterAve=Average(Close Of

independent1,InterLen)TrAve=Average(Close,TrLen)CurCor=Average(Corel(Close,Cl

ose Ofindependent1,CorLen,0),CorLen)

If CurCor>-1*Lev Then If Close>TrAve And Close Of

independent1<InterAve ThenSell(“BuyEnt”,1,0,Market,Day)End If If Close<TrAve And Close Of

independent1>InterAve Then Buy(“BuyEnt”,1,0,Market,Day)End If ElseExitLong(“”,“”,1,0,Market,Day)ExitShort(“”,“”,1,0,Market,Day)End If End Sub

Two parameters are added to theoriginal system — a correlationlength and a correlation level.Notice that we are working withpositive triggers in the range of 0 to0.7, which means the system isturned off between -0.70 and 0. Ifthe correlation drops below the trig-ger level, trades are exited and newones are not taken. Optimized forthe period studied, all but threecombinations did better than thesystem without a filter.

Although it wasn’t the absolutebest, the most robust results were fora moving average of 45 days and aLev value of 0.50. This set of parame-ters made a total net profit of$309,000 on 202 trades, winning on66% of its trades. It averaged

$1,628.23 per trade with a maximumintrabar drawdown of $35,250.

The filter greatly improved the1998 results. Instead of losing morethan $80,000 at $250 a point, thesystem lost only $29,000. In 2001when the original model produced aloss of more than $80,000, theimproved version with correlationanalysis actually made $20,000. Theintermarket system did lose money in2002 but the losses were less thanhalf of those unfiltered. Theimprovement caused by correlationanalysis is less dramatic, normally to50% from 20%.

NOT ALWAYS PREDICTIVEWe have seen how correlation analy-sis can help a system’s performance,but current correlation does notalways tell the complete story.Predictive correlation is a methodol-ogy that can be applied to intermar-ket analysis and other forms of tech-nical analysis. Here’s how it works.

The idea behind predictive correla-tion requires taking a correlationbetween 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 correla-tion tells us how predictive a simplemomentum of T-bonds has beenthroughout the length of the correla-tion to future five-day price changesin the S&P 500.

The predictive correlation curve ismuch different than the curve gener-ated by standard correlation, but thecurves trend in the same direction.Research shows that predictive corre-lation is better for shorter-term trading signals.

It’s possible to create a short-termS&P 500 trading model using predic-tive 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. Wewill use intermarket divergence com-


Technology & Trading continued


Dec ‘02 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec ‘03 Feb Mar Apr May Jun Jul Aug Sep

1141.54

1089.68

1037.81

985.95

934.09

882.23

830.36

BOUND BY BONDSWhen our correlation coefficient is high, our system does well. When the figure is low, themethodology absolutely hemorrhages cash. We need to build a switch that turns our system off during the bad times.

106.1298.0289.91

0.600.380.16

-0.06-0.28-0.49-0.71



bined with the opening range break-out to create our system. Here is thecode for this system:

SubShortTermIntermarkSP502()

Dim InterAve As BarArrayDim TrAve As BarArrayDim PredCor As BarArray

InterAve=Average(Close Ofindependent1,26)

TrAve=Average(Close,12)If Close<TrAve And Close Of

independent1>InterAve Andisthursday<>True ThenBuy(“”,1,NextOpen(0)+.3*Range,Stop,Day)

If Close>TrAve And Close Ofindependent1<InterAve AndisFriday<>True ThenSell(“”,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 yesterday’s range off the open with the bias being setbased on intermarket divergence. Aday-of-week filter is used so the sys-tem does not buy on a Friday or sellon a Monday. Because the order isfor the next day, the system does notbuy on a Thursday, the next daybeing Friday. It exits the close of thesame day.

Many systems like this were writ-ten during the 1990s, but theystopped working when the intermar-ket relationship decoupled.Theoretical results with no deduc-tion for slippage and commission areshown in “Range targets” (above).

By integrating the concept of pre-dictive correlation into the intermar-ket system, we can improve ourresults. The code for doing this is:

SubSPInterDayPredCor(CorLen,Trig)

Dim InterAve As BarArrayDim TrAve As BarArrayDim PredCor As BarArrayInterAve=Average(Close Of

independent1,26)TrAve=Average(Close,12)PredCor=Corel(Open-

Close,Close[1] Of independent1-Open[1] Ofindependent1,CorLen,0)

If PredCor>Trig ThenIf Close<TrAve And Close Of

independent1>InterAve Andisthursday<>True ThenBuy(“”,1,NextOpen(0)+.3*Range,Stop,Day)

If Close>TrAve And Close Ofindependent1<InterAve AndisFriday<>True ThenSell(“”,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-trad-ing, we use correlation to predict

“Open - Close” using “Yesterday’sOpen - Close” of T-bonds. Using a40-day predictive correlation aroundzero greatly increases the averagetrade and cuts the drawdown usingthese parameters. The system made$141,512.50, which is less in total,but the average trade increased to$289.98. This is about one-thirdhigher, and our drawdown is $15,550instead of $27,125. Overall, theresults are significantly better.

Intermarket analysis is a powerfultool when its use is understood. It hasmany applications ranging from trad-ing system development to complexmodels, such as those using neuralnetworks. Intermarket-based systemscan easily become curve-fitted whenthey are made too complex or toomany different intermarket relation-ships are included without an under-standing of their interaction.

Murray A. Ruggiero Jr. is a consultant in EastHaven, Conn. His firm, Ruggiero Associates,develops market-timing systems. He is editor-in-chief of Inside Advantage Gold Club(www.iagoldclub.com) and is author ofCybernetic Trading Strategies (John Wiley &Sons). E-mail: [email protected].

FM

RANGE TARGETSThis 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 TRADESTotal Net Profit $182,325.02 Open Position P/L $0.00 Gross Profit $607,750.00 Gross Loss ($425,424.98)

Total # of trades 900 Percent Profitable 56.11%Number winning trades 505 Number Losing Trades 382

Largest winning trade $13,950.00 Largest Losing Trade ($7,950.00)Average winning trade $1,203.47 Average Losing Trade ($1,113.68)Ratio avg win/avg loss 1.08 Average Trade (win & loss) $202.58

Max consecutive winners 12 Max consecutive losers 7Avg # bars in winners 1 Avg # bars in losers 1

Max intraday drawdown ($27,125.00)Profit Factor 1.43 Max # contracts held 1Account size required $27,125.00 Yearly return on account 29.36%



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You can program astrategy in eSignal orTradeStation and havethe signal passed ontoNinjaTrader for auto-execution. The soft-ware uses COM, DLLand file interfaces.Anyone who uses trading systems andautomation softwarecan figure this out with ease. (See“SuperDOM,” left.)

The SuperDOMwindow allows tradersto enter stops, targets,“cancel all orders” and“flatten everything” onone “ticket,” which arenice tools to havewhen you need them.NinjaTrader focuses onthe mechanics of orderplacement and man-agement, this f i l ls avoid in the strategyautomation arena by

RATING SYSTEM:= Excellent

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Software ReviewBY ROB KEENER


SUPERDOM

providing capabilities for traders topredefine how they will manage theirtrades once executed.

The SuperDOM order entry ladder,which is not standard fare by anyapproximation, and the high-endadvanced strategy management capa-bilities are great tools for automatingstrategies beyond simply passing flatsignal via e-mail style dissemination.

NinjaTrader also offers charts.These charts visualize all orders andpositions in addition to standardmarket data. All working orders,positions and executions are plottedon the chart with bars and markedlabels. With NinjaTrader charts, youcan instantly see how far or closeyour stops and targets are relative tokey support and resistance levels.You also can modify and cancelorders directly in a chart; monitorposition size, average entry price andreal-time profit and loss.NinjaTrader has order placementand strategy execution throughcharts functionality in the works.

ORDER ENTRY: The capability of defining your stoploss and profit target levels and hav-ing the trading application auto sub-mit those once an order is partially orcompletely filled allows the trader toget their orders into the market andprotecting their position. Mosttraders are not used to this type ofcapability. They can avoid makingmistakes and gain the advantage ofplacing target orders into theexchange order queue faster thanthey could do it manually.

So in effect, the order generator ofyour choice (TradeStation, eSignal,etc.) passes the order through a DLLcall and the software has the abilityto monitor the position and enterstops and targets for complex orders.

NinjaTraders simulated stop losstechnology is also an effective tool.

This allows the user to define a vol-ume trigger (500 contracts for exam-ple) that is used to determine when astop loss is triggered. Instead of trig-gering when the price trades at thestop loss, it waits until the bid size isless than 500 contracts (support isregistered at this price) at which timethe stop triggers. This prevents situa-tions where the market comes downto your stop price, takes you out andthen bounces right away without youand travels to what was once yourprofit target.

There’s a forum to support theproduct as well as weekly training sessions via a HotComm room. Thisis an interactive training sessionwhere users can interact with the founder and find tips and hintson using the software. To offer lower subscriber rates, NinjaTraderopted out of phone support and covered this with the forum and e-mail support.

This product is bound for growthand it can be added to your broker ofchoice if there is high demand. The FIX Protocol is used as well asbroker specific interfaces on a case bycase basis.

SUMMARYOverall this is a nice tool for a variety of trading styles. Strategytraders can use the automation features with advanced order control.And there’s the one-click order management that will be welcome bytraders who enter orders manually.Strategy automation features and anice order entry ladder with complexorder entry make this product a nice tool for professional traders, and NinjaTrader’s intuitive interfacehelps new traders take their tradingto the next level. As for addedbonuses, the simulation features andmarket replay environment make thefree trial a real learning tool.

www.futuresmag.com | February 2006 59Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.



Agricultural commodities arechanging and despite thefact that they trade in pre-dominantly open-outcry

pits, the changes are real. As histori-cally domestic products becomeexports, suppliers such as Argentinaand Brazil gain prominence and hedgefunds enter the fray with elbows up.

“Agricultural markets are entirelydifferent now than they were a yearago,” says Richard A. Brock, presidentof Brock Associates in Milwaukee.“Now that Brazil is the largest producerof soybeans, you’ve got two times ofyear where you’ve got to worry aboutdroughts; two times a year you’ve gotto worry about floods; two times of yearyou’ve got to worry about Asian Rust.”

Doug E. Carper, president of DECCapital, says, “The window of onecrop season to the next seems to benarrowing all the time because thereare so many outside influences andproducers. The season seems to benever ending. We have two: ours andthe South American growing season,which is exactly opposite our seasonhere in America. Rather than a threeor 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 alook at the stock consumption ratioon the United States balance sheet,says David Bell, president of BellFundamental Futures in MemphisTennessee. “South America just tookwhatever price it took to sell. Andnow with them as the dominant pro-ducer, much of that has changed.Now they set the price.”

INTERNATIONAL VS. DOMESTIC The differences between domestic andinternational crops are important andmultiply the number of fundamentalvariables influencing prices. Andwhereas the Argentina, Brazil and theUnited States are the largest growersand exporters of soybeans, corn is pri-marily a domestic crop.

“We are by far the largest producerof corn, and thus the value of the dol-lar and the price of corn has little ornothing to do with corn exports,”Brock says, adding that in the non-growing season traders are looking atavailable supplies in the United Statesand the domestic stock-to-usage ratio.

But in soybeans, the world numbers areextremely important. “You are notonly looking at the free supplies in theU.S., you’re looking at crop progress inArgentina and Brazil and weather pat-terns in both of those countries. Incorn, that’s not a factor at all.”

SUPPLY SEASONDuring the growing season the marketsare preoccupied with supply, outside thegrowing season traders focus ondemand. Supply and demand alwaysdetermine price, but the variables influ-encing supply and demand change fromseason to season. Supply variables, suchas weather, draught, disease and pests,have a large impact on price action for ashort time, typically no more than a fewmonths. But demand is determined yearlong, and volatility tends to be greaterduring the growing season.

If weather is the single most impor-tant supply variable, the timing of theweather is a very close second. “What Ilike to do is to scan the weather datalooking for a change,” says MarkHawkins, president of CommodityCapital Inc., adding that in the veryearly parts of the growing season,

Here’s 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?

BY CHRIS MCMAHON


Step-by-step into theag markets

FUTURES 101


which may not be yield determinant,the market is still focused on weather.An example of this is the draught lastJune in Illinois and Ohio. “It was drierthan the record draught in 1988 in lotsof areas. That was June. And that typi-cally is not a time where you determinecorn and bean yields. But can the mar-ket just sit still and say, ‘its really dryand hot, but I’m not going to rally, or isit more likely to extrapolate the cur-rent conditions into the growing peri-od and rally accordingly? And that’swhat it did,” Hawkins explains.

When the rains came in July, it tookthe market some time to get to gripswith the change. “If you look at the2005 weather data from the Midwest,the June-August period was essentiallynormal. And it didn’t feel normal toanybody in late June and early July.And what happened was the marketsaw unusually dry conditions in keyarea of the growing region. It rationallyknew it didn’t really matter that it washot and dry in June, but it projectedthat weather forward and ralliedaccordingly, and then we ended upwith a record soybean yield. Did soy-beans manage to shrug off the Juneweather? They rallied really hard,”Hawkins says.

There are also seasonal market phe-nomena. “In August, the speculatorstypically short the bean complex,” Bellsays. “Farmers don’t want to sell anymore until they’re sure about the sizecrop they have, and they have alreadysold at higher prices and don’t want tosell into the hole, so you kind ofexhaust your selling. On the other side,the consumers say ‘these are prettygood prices, we don’t know how bigthat crop is,’ so they do a little bit ofbuying, and it sort of builds into a shortcovering rally.”

DEMAND SEASONThe key uncertainty is crop size,which can change dramatically duringthe season. But once the crops are outof the ground, traders turn their focusto the demand variables simplybecause there are fewer fundamental

factors to consider.Hawkins stresses the importance of

adjusting position size in anticipation ofthe different levels of volatility in thesupply versus demand seasons. “Yourrisk in any given position is dramaticallygreater, let’s say, if you are trading cornin July than if you are trading corn inDecember. The median range for cornfutures in July is about 40¢ a bushel($2,000 a contract). The median rangefor corn futures in December is about17¢ or 18¢ a bushel, so your volatility ismore than double. And, you don’t reallyknow if that is going to happen in agradual way and you can incrementallyadjust, or whether it occurs over night.Your value-to-risk is going to increasesubstantially for a given contract posi-tion size in the growing season.”

Hawkins says he will watch the 20-day moving standard deviation fora particular market, and when he seesan increase he will factor that intoposition size. “You could have a rela-tively quiet planting season and themarket [volatility] may not increase inMay. And then it suddenly increasesin June or July,” Hawkins says. If thevolatility is relatively benign, Hawkinsadjusts his position size down anyway,knowing at any stage it “could become

explosive.” He also watches theimplied volatility in the options mar-ket to help anticipate increases involatility and the timing of potentialincreases. “Some people will look atthe moving standard deviation of adaily market, some people look at theimplied volatility of options, I tend tolook at the historical median andmean ranges in a particular month. SoI know that in July, my position sizewill probably have to be half what it isin December, maybe a third just basedon the median ranges that I men-tioned,” Hawkins says.

HERE COME THE FUNDSIn the past, large fund managers had tocurtail their activity in the agriculturalmarkets as their money under manage-ment grew because the position limitswere too small. Most funds eliminateor severely limit grain positions oncethey surpass $1 billion under manage-ment but that may change as higherposition limits went into effect Dec.10, (see “Trading room,” above). TheChicago Board of Trade fought forlimit increases as more of its businesscomes from funds.

“Take something like Eurodollarswhere there is no limit,” Brock says.


Source: Chicago Board of Trade

TRADING ROOMSpeculative limits for agricultural commodities changed effective 12/10/05, clearing theway for greater fund participation.CONTRACT OLD SPEC LIMITS NEW SPEC LIMITS

Corn Single Month Limit: 5,500 Single Month Limit: 13,500

All-month: 9,000 All-month: 22,000

Soybean Single Month Limit: 3,500 Single Month Limit: 6,500


Wheat/Soybean oil & meal Single Month Limit: 3,000 Single Month Limit: 5,000


Oats Single Month Limit: 1,000 Single Month Limit: 1,400



“They are going to concentrate on themarkets where they can expand theirposition size to match the amount ofmoney they have under management.For example, you take a John Henryor a Campbell, where they are tradingin the billions of dollars, 45 millionbushels is a pimple on an elephant’sback. If the market moved a dime,that would only be $4.5 million; whenyou have $5 billion under manage-ment, why waste your time?”

Carper too has noticed that theorder flow and the composition of theorder flow has changed dramatically.

“The amount of hedging pales towhat it was when I first started trad-ing,” he says, adding that the graincompanies were the dominant orderflow, with locals playing the role ofspeculators. Now the CTAs and hedgefund operators are the dominant orderflow. “The locals on the floor at theBoard of Trade are a minor part of thescale volume that once existed.”

The new alternative investmentmanagers don’t have a lot of experi-ence, he says. “They are kind of likeelephants in a china shop,” addingthat fund participation occasionallydrives ag markets beyond their capa-bility for absorbing volume. “Thedrain is just a little too small to handle

the water that needs to run through itfrom time to time,” Carper says.

That is particularly true with thenewest entrant in the market: long-only funds benchmarked to indexes likethe Goldman Sachs Commodity Index(GSCI). These funds take massive posi-tions on hold the indefinitely (see “Dr.Strangefund,” September 2005).

Hawkins says the markets need torebalance. “There appears a time whenthe index fund is by far the dominantforce on the crop,” and prices willprobably be higher for some time.“One of these days they’ll have theirboat load and then the market willwait because there won’t be anyoneother than the funds buying it.”

Large fund positions can distortmarkets but they also create opportu-nities. “My basic mode of trading iswaiting for market disequilibrium,expecting it to move to equilibrium;and then to be there when it hap-pens. And I believe the funds arepushing the market into greater dise-quilibrium,” Bell says.

ELECTRONIC VS. OPEN OUTCRYOne of the things that hasn’tchanged in the ag markets is relianceon open-outcry trading. Ag marketsare only electronically available after

hours. Even orders that are sent electronically are executed on thetrading floor.

“Electronic clerk? It’s a joke,”Carper says. “Nobody seriously thinksthat’s an alternative. It’s kind of likeclicking on your mouse to send anorder into a pony express rider,”adding that open outcry adds to theexpense of trading and is inefficientfor handling large-scale volume.

It is also unlikely to change soonbecause floor traders, formerly mem-bers of the exchanges and now largeshareholders in the exchange holdingcompanies, benefit from brokeragefees and income from renting tradingprivileges and don’t want to see floortrading go away. “They are not the bigplayers, they are facilitators. The per-centage of volume that trades thesemarkets is radically different thanwhat it used to be. My contention isthat floor traders are more irrelevantto the price discovery process thanever before, yet they represent animpediment to people who do want totrade,” Carper says.

“I don’t think floor trading as weknow [it] is indispensable,” Bell says,adding that many of the functionsthat the floor performs could be donebetter electronically, “If the floor isproviding a service that cannot beprovided in an electronic format, thenthat would imply that the electronicformat is inefficient. If the market cre-ates inefficiencies, then it is also cre-ating an opportunity and someonewill figure out how to exploit thatinefficiency.”

Proponents of open outcry saybecause the agricultural markets aredominated by spread trading, it isunlikely to go away, and that technol-ogy is not yet capable of handling thecomplexities of spread trading, a pointCarper acknowledges. “It’s harder tomake those kinds of trades electroni-cally, but the underlying futures wouldbe better served,” Carper says, addingthat something has got to give. “Rightnow, we can’t run any faster, or growour markets any larger.


Futures 101 continued

FM

Source: CSI Unfair Advantage

May Jun 16 Jul Aug 17 Sep Oct Nov Dec ‘06 Daily

MSD (%S1!, 20)=12.91

%S1! O: 587’0 H: 587’0 L: 582’4 C: 583’0 : -17’4

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.

760’0740’0720’0680’0660’0640’0620’0600’0580’0560’0540’035.00

25.00

15.00

0.00


BY YESENIA SALCEDO

Growing options volume electronically

Online Trading

Technology has launched trading up from the pits andinto the screen with point-and-click execution produc-ing record volume growth year after year. While futures

trading has dominated those records, growth in options bothon equities and futures have seen a few records of their ownin 2005.

“The Chicago Board Options Exchange (CBOE) has had arecord year, as has the entire options industry,” says EdwardTilly, vice chairman of the CBOE. “There has been tremen-dous growth in the options industry, both on screen and offscreen.”

While a lot of the options growth has translated onto thescreen, it is more difficult to adapt some of the more complexoptions strategies to the screen.

“The growth in single strategies (simple options strategies)has been tremendous on the screen — it’s point, click,receive an instant fill and move onto the next trade,” Tillysays, adding that 92% of the CBOE’s orders, accounting foralmost 60% of the volume, is traded electronically. Theremaining 40% is traded in open outcry, most of those tradesbeing complex or multipart orders like spreads.

“With complex orders, the screen hasn’t enjoyed the growthsimple options have. It’s very difficult to replicate the price dis-covery process on a complex order on screen,” Tilly says. “Therequest-for-quote (RFQ) process is handled very efficiently inopen outcry. On a screen, electronic notification is more diffi-cult to service and it becomes a service question.”

The option exchanges have always had to deal with theproblem of quote traffic but it is a new issue for futuresexchanges to deal with as they attempt to create a viableelectronic options market. “The difference with options onthe screen versus futures is large. With futures you buy them,you sell them — it’s pretty easy functionality. With optionsyou have so many different strategies that it can get quitecomplex,” says Robert Ray, SVP business development at theChicago Board of Trade (CBOT).

Jonathan Kronstein, CBOT senior economist of the inter-est rates products group says a larger percentage of financialoptions trades are the result of complex strategies. “Peoplecan’t think of every single strategy’s auto quote, so in manycases they have to create the strategy and submit the requestfor quote to the market place,” Kronstein says. He says equityoptions, being a more retail focused market, do not involveso many complex strategies. “You also need the request-for-quote functionality for strategies because if someone wants toexecute a strategy that isn’t currently being auto quoted, theyneed 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 gener-ates about 78% of all the quotes in North America. TheCBOE alone quotes about 180,000 different option strikeprices, and each one of those strikes require a bid and an askand a last sale. And each time the stock price moves, theoptions price moves, creating new data.

“With a lot of futures contracts you have very activelytraded liquid markets, but with options trading there arehundreds of different strike prices, calls and puts, differentexpirations — that volume, that liquidity — gets spread outmuch more thinly,” says Dan O’Neil, president of futures andforex broker XpressTrade.

SEEING THE GROWTHBoth futures and options exchanges have been bringing moremarket makers to the electronic options world as well asadding functionality to their electronic platforms.

“Market makers, including specialists and electronic mar-ket makers, play a very active role in populating the complexorder book at the CBOE. Market makers ultimately will carrythe burden of the move to the screen,” Tilly says. CBOEbegan rollout of its Hybrid Trading system in June 2003 andhas been working on it since. In 2005 remote market makerswere added to Hybrid, which has increased quote traffic. Inthe summer of 2005 CBOE implemented spread technology,which has increased the number of spread trades being exe-cuted electronically.

The CBOT and the CME also have experienced growth inoptions both in open outcry and electronic trading. Themost heavily traded electronic options contract at the CBOTis the 10-year Treasury note. The most popularly traded elec-tronic options contract at the CME is the E-mini S&P witha daily average of 25,000. The most popular options contracttraded electronically at CBOE is the QQQ.

“There has been an explosion in options trading overall inthe industry, electronically it’s also taking off,” Ray says. “Ifyou look at ratios of options to futures volume, some optionsvolume exceeds the futures.”

The CBOT chose LiffeConnect as its electronic platformat the end of 2003. “One of the reasons we decided on thatplatform was because of the very rich functionality that wasembedded in the platform for options trading,” Ray says.

In August 2005 the CME integrated its enhanced optionsfunctionality for trading CME eurodollar options into theGlobex platform.

“Eurodollar options growth year-over-year is up about40%, pit and screen [combined]. Our average daily volume isaround 750,000. It is the most actively traded interest rateoptions on futures globally,” says Robin Ross, managing



director, interest products, CME.“We came up with a methodology where instead of

looking at blank order books, people can see indicativequotes in all these different types of strategies...we have over50,000 indicatively quoted packages for Eurodollars,” Rosssays. “You can launch an RFQ for the strategy and have ourlead market makers respond quickly with hard quotes thatcan be transacted upon.”

Tina Lemieux, director of CME equity products says elec-tronic options on the E-mini were up 800% from November2004. Average daily volume for E-mini S&P options was 500in the fourth quarter of 2003 and 4,000 for the same periodin 2004, and in 2005 it jumped to 34,000. “We’ve seentremendous growth in our electronic options,” Lemieux says.

When the enhanced functionality was added in August2005 volume increased. At the beginning of January 2005Eurodollars traded between 2,000 to 3,000 option contracts aday electronically and as of November 2005, it was tradingabout 30,000. “We’veseen good growththere, but it’s still asmall percentage ofour total volume.There’s still moreroom to grow. Out ofour average daily volume of 750,000we’re only trading 5% electronically (inEurodollar options),”Ross says.

RECORDS On Dec. 16, 2005 theCBOE set a singleday record on theS&P 500 Index (SPX) of 884,985 contracts. Total CBOEyear-to-date volume in 2005 set a record as more than 427million contracts traded through November, which was anincrease of 29% over 2004, which was also a record year.

Options on CME Eurodollar futures have a year-to-dateaverage daily volume of 740,000 as of November 2005. InJuly 2005, average daily volume for options on CMEEurodollar futures traded on the enhanced option systemtotaled more than 25,000 contracts. This is an increase from5,000 contracts per day in January 2005. The volume inEurodollar options has increased by 42% in the first half of2005 versus the same period in 2004.

A total of 98,253 CME Eurodollar options were traded on

Globex on Sept. 1, 2005. From January through July 2005,the volume of CME Eurodollar option contracts traded rose40.5% over the same period in 2004.

REASONS FOR GROWTHO’Neil says he has definitely seen greater demand for options athis firm and he attributes that growth to active traders gravitat-ing toward markets that are volatile and present trading oppor-tunities. “With the stock market mired in a sideways trend andwith many commodities in the midst of multi-year bull mar-kets, we’ve seen an influx of newcomers to the futures markets,”O’Neil says. “Many stock investors, who have become morecomfortable and familiar with the benefits of options over thepast several years, have brought this options knowledge withthem to the futures markets. In general, traders and investorshave become more sophisticated and are willing to branch outand try new products. Options are tremendous tools in thatthey allow traders to construct positions with practically

any risk/rewardprofile, any direc-tional bias and any time horizon.”

Ross attributesvolume growth ineurodollar futuresand options to the numerousinterest rateincreases by theFederal Reserve.“We have a prod-uct that trades pri-marily complexstrategies — themajority of thetrades that are

done are structured trades, which normally have four or morelegs in many cases, you have call ratio spreads, butterfly’s,condors, different expiries, all sorts of strategies,” Ross says.

O’Neil says traders want fair, transparent and liquidoptions markets and they will trade where the liquidity isgreatest. “Electronic trading is faster, more accurate and lessexpensive for both traders and brokers. From the exchangesside too, electronic trading is more efficient,” he says.

The process of moving more complex option strategies tothe screen will take time and require improved technology tohandle quote traffic, but exchanges and firms will continue towork towards reaching that goal as options volume in generalcontinues to grow.


Source: XpressTrade

OPTIONS FOR ELECTRONIC OPTIONSHere’s a screen shot of a typical option order entry screen. Many of the sametrading tools once available only to futures traders are now being adapted to suitoption traders as well.


Paolo di Montorio-Veroneseruns a company called PdMVCapital. The letters comefrom his aristocratic name,

and the fund of funds he just launched,the PhD Fund, boasts an impressive16.6% proforma return, with volatilityof just 5.1% and a Sharpe ratio of 3.1.

To assemble it, he reviewed scores oftraders across Europe, and he says thetrading pool he went fishing in wasn’tmuch different from the pool of talentyou’d find in the United States.“Whether based in Chicago or London,every commodity trading advisor(CTA) follows his own model, andthose models vary more depending onthe individual than on where he islocated,” he says. “We have commoditytraders in London who are trading pri-marily in Chicago, and they use thesame methods any would use to analyzemarkets and identify trends.”

He adds, however, that he specifical-ly sought out traders who were activein the world’s most deep and liquidmarkets and used automated systems.“These people have trading desks thatare manned 24 hours a day, but theactual trades are on autopilot,” he says.

WORLD'S TIME ZONEWhile algorithmic traders can be in alltime zones, discretionary traders need to be on top of their markets. Severaldiscretionary currency traders likeMichael Hecht (see Trader Profile,January 2006) and Mikkel Thorup saythe consistent high numbers posted byEuropean currency traders grow from acombination of world view and timezone positioning.

“There are distinct advantages tobeing a currency trader in theEuropean time zone,” Hecht says.“First, there's the cultural element: Weall grew up changing currencies everytime we traveled in one direction orthe other. And then we have a timezone that enables us to get the meat ofAsia, Europe and North America,which you won't find in Chicago, anddefinitely not in California.”

Thorup, who runs Zurich-basedCTA Capricorn Group, agrees. “Weget 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 crossesthe way Americans keep track of box scores.

Both men shy away from algorithmictrading and focus instead on discre-tionary approaches. “I’m not sure weare looking at anything differentlythan what people look at in the U.S.,”Thorup says. “We take our signals froma 24-hour trading day rather than, say,the International Monetary Market inChicago. But that is the norm aroundthe world these days.”

NATIONAL NICHESBut perhaps the most particularly, if not typically, European players are those like Michael Rothman, who spe-cializes in Danish Mortgage Bonds (see “Nordic Niche,” right). “Most ofthe people who trade like we do aren'tCTAs,” he says. “As a result, the globalfunds took a while to find us.” Similarniche markets exist in most Europeanmember states, including Germany, Italyand France.

“There is a tendency for Europeantraders to look for the smaller, ineffi-cient, niche market, where they canachieve large basis-point gains on

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.

BY STEVE ZWICK


The Great Divide(s)

MANAGED MONEY

smaller trades,” says Simon Rostron,a media consultant for hedge funds.“In the United States, the emphasis is on larger trades with smaller basis-point gains.”

But if di Montorio-Veronese's expe-rience is any indication of the future,growth among European traders willcome among those in the deepest, mostliquid markets employing algorithmicprograms. “The new wave of tradersmaking their name in Europe are com-ing out of American banks with a pres-ence here,” he explains. “They don'ttrust illiquid markets.”

STRUCTURAL DRIVERSBoth the European love of niche tradingand the tendency of American-trainedtraders to pursue pan-European strategiesflow from the evolving structure ofEuropean markets, which are harmoniz-ing slowly (see “Hitchhiker’s guide tothe EU,” July 2005) and still have localmarkets dominated by local banks.American banks, on the other hand,have been the greatest believers in a uni-fied market and have been the biggestplayers in pan-European products.

“It makes sense that Europeantraders who learned their trade atAmerican banks will be attracted to international markets, like curren-cies,” di Montorio-Veronese says, aveteran of Goldman Sachs himself whodid a stint with Morgan Stanley beforeheading Man Group’s European salesoperation. “But it also makes sensethey will develop systems that can beadapted to the most deep and liquidmarkets worldwide.”

The differences in the trading roomsreflect a variety of differences in thestructure of markets themselves. Evenas cross-border clearing and settlementbecomes more practicable, cross-bordermarketing of retail products remains asticky issue. One result: the prevalenceof guaranteed funds in Europe.

Investors in such funds are guaran-teed a certain return if they stay in theprogram long enough (see “Guaranteedprofits: Pipe dream or reality,”December 2002). The guarantee is usu-

ally ensured by putting most of themoney into zero coupon bonds thatmature at the same time as the guaran-tee runs out. In the United States, suchfunds are generally perceived as littlemore than marketing sleight of hand,but in Europe, where Man Group hasbeen offering such programs since

1983, guaranteed funds are considereda bona fide value-added product.Rostron offers a reason.

“There is a tendency of people in theU.S. to dismiss guaranteed funds,because they figure they can just go outand buy the bonds themselves,” con-cedes Rostron. “But if you're sitting in

Nordic Niche: Danish mortgage bondsLike 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 outsideof Denmark throughout the past decade.

Add to that the surging demand for managed investment products of allstripes in Denmark (see “That’s a lot of shoes”), and you can see why moneymanagers like Michael Rothman have chosen to inhabit the niche.

His company has generated a smooth 12% to 15% annually trading inthe secondary market, using mainly cash and forward contracts/repos inbonds maturing in the next one to five years.

The Copenhagen Stock Exchange does not list bond futures, but Danishbanks do administer an OTC trading platform that can be accessed by highnet-worth individuals via member banks. Rothman, however, warns of lowliquidity. “If you want to cover a position using futures, you are best usingthe German Schatz or Bund,” he says, adding that an active spread markethas developed between Danish mortgage bonds and Bund futures.

Since 1986, Rothman's niche within the niche has been finding opportu-nities in less-actively traded series, so-called “off-the-run” bonds. Rothmansays Danish pension funds and institutional investors are not active in thesector. “This lack of market participation and the illiquidity it creates, cou-pled with the inherent valuation complexity resulting from the redemption


THAT’S A LOT OF SHOESFunds aimed at both retail and institutional investors have grown rapidly in Denmark.

Source: The Federation of Danish Investment Associates

2000 2001 2002 2003 2004 2005 YTD TYPES OF FUNDS (through Nov.)

RETAIL 177.957 177.722 188.028 249.505 297.56 374.271

INSTITUTIONAL 72.117 98.184 91.203 108.669 215.5 323.262

FOREIGN 7.127 6.429 5.256 6.098 6.136 10.331

TOTAL 257.201 282.335 284.487 364.272 519.196 707.864

The total assets under management in retail funds, institutional funds and funds marketed abroad in millions DKK.


Bahrain, buying the bonds is easy inconcept but less easy in fact.” And,lacking a home market the size of theUnited States, European hedge fundsare marketing themselves aggressivelyin multiple jurisdictions.

HARMONIZATIONSwitzerland is second only to the UnitedKingdom in the number of hedge fundsservicing continental institutions. But,since Switzerland is outside theEuropean Union, Switzerland stands tolose out on the retail boom as theEuropean Union moves towards harmo-nizing financial services.

Laws regarding brokerages based in one member state but with branches in another have come moreclearly into focus since we visited the subject in July. On Jan. 1, severalcountries came into compliance with the “passport” requirements of the E.U.'s Markets in FinancialInstruments Directive. As of that date, for example, brokerages based in, say, Lichtenstein could openbranch offices in other member states without being licensed locally.Instead, Lichtenstein’s FinancialSupervisory Authority will keep tabson the activities of companies basedthere and send reports to regulators inother countries.

But there are still plenty of issues tobe resolved in terms of hedge funds,which often fall into a no-regulator’sland between institutional and retail.The European Fund and AssetManagement Association has come upwith two proposals for harmonizingand streamlining hedge fund lawsacross the European Union. One focus-es on the structure of supply, or howfunds are structured, perhaps throughamendments to the existing UCITSDirective. The other focuses on thestructure of demand, or who is allowedto invest in hedge funds.

However, with retail brokeragesacross the continent gearing up to sellthe things to private investors, you canbet which proposal will get the biggestindustry push.

Managed Money continued

FM

profile of mortgage bonds (the call feature found in mortgage bonds), hasled to an inefficient market in this niche sector and a consequent yield arbi-trage opportunity.”

The strategy relies on long-standing relationships with institutional partic-ipants, to maintain its unique market-making position. “Our ability to pro-vide market liquidity in an otherwise illiquid market enables us to earn high-er spreads than might normally be expected,” he explains.

“It has been a good business for years but suddenly, over the past fewyears, we are getting a lot of money from abroad, although not much yetfrom the United States.”

The market has a fascinating history and predates the securitization ofU.S. mortgages by 180 years, having been launched by a consortium ofissuers in 1796 to dilute the risk of default on masses of mortgages issuedafter a fire destroyed one quarter of Denmark one year earlier. The bondshave been a cornerstone of the nation's real estate apparatus since, but for-eigners didn't take to them in large numbers until after the Danish govern-ment implemented a fixed exchange and interest rate policy with the euro.

“This is the seventh-largest mortgage bond market worldwide,” explainsRothman. “That's not just because it has been around so long, but alsobecause 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 mutualcredit associations gave way to independent mortgage banks that offeredeasy credit. In 1970, the government simplified loan structures and gave theMinister of Housing authority to deny licenses for new institutions. The resultwas a gradual drop in the number of lenders from 24 to seven as existingentities merged and new ones stopped popping up. The market benefitedwith 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 theloan-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 theinefficiencies that he has been able to exploit is yet to be seen.

ECB: Hedge funds off the hookThe European hedge fund industry breathed a collective sigh of relief in

early December when the European Central Bank published a 54-pagepaper stating banks had learned from past disruptions, and that hedge fundswere not destabilizing EU banks. The report did, however, find areas of con-cern: poor stress-testing, poor aggregation of risk and poor disclosure insome 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 f ind the report and excellent backgrounder available for download at:http://www.ecb.int/pub/pub/prud/html/index.en.html.

68 FUTURES | February 2006Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.



INDEX FUNDSDow Jones Indexes (DJI) has launchedthe Dow Jones EPAC Select DividendIndex, which tracks the top 100 yield-ing stocks in Europe, Asia and Canada.Components were selected from theDow Jones World Developed-Ex. U.S. Index, representing95% of free-float market capitalization for developed coun-tries excluding the U.S. DJI also launched the Dow JonesCanada Select Dividend Index, which tracks the country’stop 30 yielding stocks. The 30 components were selectedfrom the Dow Jones Canada Total Market Index, represent-ing 95% of the country’s float-adjusted market capitaliza-tion. The index is weighted by indicated annual dividend,and the weight of any one component is capped at 10%.www.djindexes.com.

SOFTWAREDynamic Trend Inc.’s Dynamic Trend Profile, a technicalanalysis program, will be powered by eSignal’s real-timedata. The combination brings eSignal’s technical chartsand indicators together with Dynamic Trend Profile’s spe-cialized market scans to help traders identify market trends

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 mayuse the Matrix function to generate trade setups, automati-cally perform analysis and locate opportunities based onuser-defined criteria. (800) 833-1228, www.esignal.com.(330) 645-0800, www.dynamictrend.com.

Trading Technologies (TT) has released X_Trader 7trading software. The enhancement to its platformincludes new exchange connections and more powerfultools. X_ Trader 7 is built on a new API and incorporatesa 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 beenimproved. X_Trader 7 also supports more order types

including new synthetic order typeslike stop market and stop limits withtrigger quantities, timed orders, marketon open and market if touched.www.tradingtechnologies.com.

Numerator has launched its flagship service, nuFed, whichdelivers Federal Reserve data on America’s largest 150banks, reflecting more than $1.2 trillion of market cap, ormore than 9% of the entire U.S. market. Users can gener-ate and download a single bank analysis or reports compar-ing 150 banks across line items. Important features are totalanonymity and security for customers and no up-front costsor minimums. www.nuFed.com.

FUTURESThe Chicago Mercantile Exchange (CME) plans to launcha futures contract based on the MSCI EAFE Index onMarch 20, which will trade exclusively on Globex. Thecontract is designed to help investors participate in interna-tional equity markets. The MSCI EAFE Index comprises 21MSCI country indices, representing the developed marketsoutside of North America. The EAFE Index is the basis forthe second largest exchange traded fund in the world, withapproximately $1.5 trillion is benchmarked to it.www.cme.com/mscieafe.

The Chicago Board of Trade (CBOT) has launched twonew market maker programs designed to support optionstrading on Two-year U.S. Treasury note futures. Participantsin the electronic market marker program will provide contin-uous two-sided quotes and respond to requests-for-quote foroptions on Two-year U.S. Treasury note futures traded oneCBOT, its electronic trading platform. Participants includeCapstone Fixed Income LLC, Citigroup Corporate andInvestment Banking, Consolidated Trading LLC, DRWInvestments LLC and Optiver US LLC. Participants in theprimary market marker program will do the same on theopen auction platform. www.cbot.com.

CLEARINGFortis has acquired O’Connor & Company and will combineits Chicago clearing operations with O’Connor, more thantripling its size. The combined organization will operate asO’Connor until the integration is completed, when it willassume the Fortis name. Fortis Clearing is one of the largestindependent third-party clearers in Europe, Asia/Pacific andthe U.S. and offers clearing services for the derivatives, equi-ties, bonds and commodities markets. Fortis Clearing hasoffices in Amsterdam, Frankfurt, Hong Kong, London,Singapore and Sydney and has general clearing membershipsin 21 exchanges and access to other major exchangesthrough third party relationships. www.fortis.com.

New For Traders

Send new product information to:Futures, 833 W. Jackson Blvd. 7th FloorChicago, Ill. 60607, Fax: (312) 846-4638

Attn: Chris McMahonE-mail: [email protected]

Dynamic Trend Profile is now powered by eSignal’s real-time data.



2005 public funds returns (through December)


Funds Review

Starting Unit value ChangeDate unit through for

Name of fund Trading advisor(s) started value 12-31-05 2005



These funds have the following cash distributions, which should be added to the fund’s current value to get a true picture of the funds’ actual returns since beginning trading.

Fund Total Fund TotalJ.W. Henry/Millburn LP $20 Hutton Investors II $200

U.S. Closed

Dean Witter Cornerstone Fund II Northfield Trading; J.W. Henry Jan-85 975 3753 -19.43%

Dean Witter Cornerstone Fund III Sunrise; Graham Jan-85 975 3961 -6.09%

Dean Witter Cornerstone Fund IV J.W. Henry; Sunrise May-87 975 5880 -19.31%

Dean Witter Diversified Futures Fund II LP Morgan Stanley Jan-89 1000 2693 -21.51%

Dean Witter Diversified Futures Fund III LP Morgan Stanley Nov-90 1000 1673 -21.93%

Dean Witter Diversified Futures Fund LP DW Futures/Currency Mgmt. Apr-88 1000 1001 -22.16%

Dean Witter Global Perspective Portfolio EMC; Millburn Ridgefield Mar-92 1000 1132 -0.18%

Dean Witter Multi-Market Portfolio L.P Morgan Stanley Aug-88 1000 1191 -21.77%

Dean Witter Portfolio Strategy Fund J.W. Henry Feb-91 1000 2727 -24.25%

Dean Witter Principal Plus Fund SSARIS Feb-90 1000 1895 -3.81%

Dean Witter World Currency Fund LP J.W. Henry; Millburn Ridgefield Apr-93 1000 1132 -14.63%

Hutton Investors Futures Fund II J.W. Henry; Trendlogic Jul-87 1000 8178.21 -18.68%

JWH/Millburn (B) J.W. Henry; Millburn Ridgefield Feb-91 100 290.32 -7.38%

JWH/Millburn (C) J.W. Henry; Millburn Ridgefield Jan-92 100 226.29 -7.38%

JWH/Millburn LP J.W. Henry; Millburn Ridgefield Jan-90 100 357.74 -7.37%

ML Global Horizons LP Athena; Chesapeake Jan-94 100 221.81 -3.47%

Salomon Smith Barney Diversified 2000 Futures Fund Multiple managers Jun-00 1000 1284.36 -4.68%

Salomon Smith Barney Global Diversified Multiple managers Feb-99 1000 1480.68 10.94%

SB AAA Energy Fund L.P. II AAA Capital Management Jul-02 1,000 2171.92 88.91%

Shearson Mid-West Futures Fund J.W. Henry Dec-91 1000 2373.6 -24.17%

Shearson Select Advisors Futures Fund J.W. Henry Jul-87 1000 3045.05 -23.92%

Smith Barney AAA Energy AAA Capital Management Mar-98 1000 5337.09 91.10%

Smith Barney Diversified Futures Multiple managers Jan-94 1000 1611.36 -7.73%

Smith Barney Diversified Futures II Multiple managers Jan-96 1000 1516.78 1.74%

Smith Barney Global Markets Futures Fund Multiple managers Aug-93 1000 2712.37 -3.14%

Smith Barney Mid-West Futures II J.W. Henry Jan-96 1000 1552.78 -24.32%

SSB Fairfield Futures Fund L.P. Multiple Managers Jun-02 1,000 1389.59 -21.23%

U.S. Open

Campbell Strategic Allocation Fund LP Campbell & Co. Apr-94 1000 3007.37 9.54%

Citigroup Diversified Futures Fund Multiple managers May-03 1000 930.98 -4.46%

Citigroup Emerging CTA Portfolio Multiple Managers Jan-04 100 1078 10.39%

Citigroup Fairfield Futures Fund II Graham Capital Management Mar-04 1000 798.1 -12.12%

IDS Managed Futures I J.W. Henry; Welton Invst. Jun-87 75 366 -21.52%

JWH Global Trust J.W. Henry Jun-97 100 142.15 -4.30%

Marathon Currency & Financials (CFE) Portfolio Multiple Advisors Jan-01 1000 4088.43 -3.67%

Marathon Diversified Portfolio Multiple Advisors Mar-95 1000 2787.7 -6.77%

Marathon FX Portfolio Multiple Advisors Jan-98 1000 2051.7 -3.12%

Marathon Macro Strategic Portfolio Multiple Advisors Jul-98 1000 1368.64 -6.49%

Marathon Plus Portfolio Multiple Advisors Apr-98 1000 2501.93 -9.29%

Marathon System Financial Portfolio Multiple Advisors Mar-95 1000 2891.39 -10.35%

Millburn World Resource Trust Millburn Ridgefield Sep-95 1000 1095.15 1.22%

MS Charter Campbell Campbell & Co. Oct-02 10 12.71 9.66%

MSDW Charter Graham LP Graham Cap. Mgmt. Mar-99 10 18.59 -16.11%

See page 18 for top CTA performance rankings.


MSDW Charter Millburn LP Millburn Ridgefield Mar-99 10 10.45 -0.67%

MSDW Charter MSFCM Morgan Stanley Mar-94 10 15.73 -19.62%

MSDW Spectrum Global Balanced Fund SSARIS Nov-94 10 15.23 4.32%

MSDW Spectrum Select L.P. Multiple Advisors Aug-91 10 28.46 -1.45%

MSDW Spectrum Strategic Fund Blenheim Capital; Eclipse Capital Nov-94 10 14.17 -2.68%

MSDW Spectrum Technical Fund Multiple Advisors Nov-94 10 22.36 -5.45%

Quadriga Superfund, L.P. Series A Quadriga Capital Mgmt. Nov-02 1000 1328.33 -9.43%

Quadriga Superfund, L.P. Series B Quadriga Capital Mgmt. Nov-02 1000 1521.61 -12.06%

Salomon Smith Barney Orion Futures Fund Multiple managers Jun-99 1000 1613.81 17.94%

Smith Barney Potomac Futures Campbell & Co. Oct-97 1000 1817.4 6.92%

Smith Barney Tidewater Futures Fund Chesapeake Capital Corp. Jul-95 1000 2150.06 -2.92%

Smith Barney Westport Futures Fund J.W. Henry Aug-97 1000 1262.39 -22.82%

Triad Trading Fund LP AAA Capital Management Nov-94 1000 7226.3 74.81%

TriFex Trading Fund LP Treasury Management Service Inc. Jan-04 1000 1132.25 9.74%

Wimbledon Alternative Diversified Strategies III Multiple Advisors Jul-02 1000 1120.25 3.97%

Wimbledon HDN Fund LP Multiple Advisors Feb-03 100 148.14 12.69%

Wimbledon Marathon LP Multiple Advisors Feb-04 100 98.83 -7.58%

Wimbledon Sand Spring Fund Class L Shares Multiple Advisors Jul-00 1000 1426.33 4.43%

Offshore

AHL Capital Markets Ltd Man Investment Prod. Ltd. Aug-93 10 74 22.94%

AHL Currency Fund Man Investment Prod. Ltd. Aug-93 10 60.1 -9.23%

AHL Diversified Guaranteed II Man Investments Aug-96 10 40 -1.09%

Alternative Opportunities Fund Karin Kisling Mar-04 100 114.5 9.31%

Athena Gtd. Futures Adam, Harding & Lueck Dec-90 10 82.12 7.64%

Blue Danube Fund - Currency Opportunity Multiple managers May-99 1000 1226.05 4.09%

Blue Danube Fund - Futures Aeneas Multiple Advisors Jul-03 1000 715.95 -12.18%

Blue Danube Fund - Futures Dynamic Multiple managers May-02 1000 1127.81 0.94%

Blue Danube Fund - Futures Select Multiple managers Oct-95 1000 1310.12 6.76%

FTC Futures Fund Balanced FTC Asset Mgmt. Apr-03 1000 1138 2.25%

FTC Futures Fund Classic FTC Asset Mgmt.; Pomeranz & Prtnr. May-98 1000 1246.47 -0.05%

FTC Futures Fund Dynamic FTC Asset Mgmt. May-02 1000 1250.06 15.99%

Global Futures Fund IX Ltd. Man Investments Jan-02 1,000 10230.17 6.15%

Global Futures Fund VI Ltd. (DM) Man Investments Nov-96 10000 14780.14 7.30%

Global Futures Fund VII Ltd. (DM) Man Investments Apr-97 10000 13548.17 7.33%

Global Futures Fund VIII Ltd. Man Investments Jun-04 10,000 12530.07 7.19%

Global Futures Fund X Ltd. Man Investments Jan-02 1,000 9080.12 7.17%

Global Futures Fund XI Ltd. Man Investments Jan-02 1,000 1559.74 8.90%

Global Futures Fund XII Ltd. Man Investments Jan-02 1,000 1656.77 9.49%

GSL-JWH Financial & Metals J.W. Henry Jan-93 100 493.89 -13.97%

GSL-JWH Strategic Allocation J.W. Henry Oct-02 100 106.79 -9.25%

Hasenbichler Commodities AG Hasenbichler Trading Services Jul-90 1000 13186.93 0.26%

Man AHL Alpha plc Man Investments Oct-95 100 530.17 9.98%

Man AHL Diversified plc Man Investments Mar-96 10 40.17 -23.21%

MAN-IP 220 Fusion Ltd. Man Investments Apr-98 1 2.32 10.48%

Northfield International Northfield Trading Mar-91 10 19.17 6.56%

SMN Alternative Investment Fund Class ASMN Investment Services Ltd. Mar-97 100.03 143.31 -1.77%

SMN Diversified Futures Fund SMN Investment Services Ltd. Oct-96 72.67 158.52 -3.66%

Wimbledon Fund Ltd. Class A Shares Multiple Advisors Jan-97 1000 1749.99 -0.31%

Wimbledon Fund Ltd. Class B Shares Multiple Advisors Sep-96 1000 2334.49 2.28%

Wimbledon Fund Ltd. Class C Shares Multiple Advisors Jun-96 1000 7142.05 18.68%

Wimbledon Fund Ltd. Class M Shares Multiple Advisors Apr-96 1000 2508.62 2.52%

Wimbledon Fund Ltd. Class TT Shares Multiple Advisors Jan-99 1000 2129.51 9.54%

Wimbledon HDN Fund Ltd. Offshore Multiple Advisors Jan-03 1000 1505.11 14.63%

Wimbledon Multi-Strategy Fund Ltd. Multiple Advisors Apr-01 100 115.84 4.87%







TopsIPO-MANIAThe successful IPOs of 2005 ran the gamut in terms ofmarket models: The Chicago Board of Trade (CBOT),the oldest futures exchange in the United States, finallytook the plunge after years of fighting legal battles thatdelayed the offering; the International SecuritiesExchange (ISE), one of the newest exchanges, launchedin 2000, and the first all-electronic options exchange;and the Intercontinental Exchange (ICE), which is actu-ally an OTC bilateral trading platform that is also theparent of ICE Futures , the former InternationalPetroleum Exchange.

Chicago Board of TradeCBOT’s IPO was actually more successful than everyone’sexchange IPO model, the Chicago Mercantile Exchange.CBOT opened trading above $80 despite an offering priceof $54, which was raised twice in months preceding theoffering, and quickly rallied above $100. However, ques-tions regarding its growth potential led some analysts todowngrade the stock leading to a dip as the year closed out.

International Securities ExchangeThe most successful launch of a new exchange, ISE in afew short years went from start-up to volume leader inindividual options and challenges the Chicago BoardOptions Exchange for overall leadership.

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.

BY DANIEL P . COLL INS


Tops & bottoms of 2005

TRADE TRENDS

ISE STOCK PRICE

Source: eSignal

32.50

30.00

27.50

25.00

22.50

20.00

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

IPO offering price

CBOT STOCK PRICE

Source: eSignal

24 31 7 14 21 28 5 12 19 27

130.00

120.00

110.00

100.00

90.00

80.00

70.00

60.00

Nov Dec

IPO offering price


Intercontinental Exchange The Intercontinental Exchange (ICE) benefited from energyexemptions in the Commodity Futures Modernization Act of2000 and established itself as a platform for OTC energy trad-ing. The fall of Enron created an opportunity for the creation ofcleared OTC products and ICE has been battling the New YorkMercantile Exchange (Nymex) to fill that space.

EXCHANGE SEAT PRICESChicago Board Options Exchange. CBOE announced plans

early in 2005 to explore demutualization and a possible IPO. While issues relating to CBOT exercise rights holderscontinues to be a drag on its value, the possibility of anotherChicago exchange IPO has helped CBOE seat prices nearlytriple during the course of the year (see “Chartview,”Trendlines page 14).

New York Mercantile Exchange. Seemed liked everyonewanted to get a piece of the energy exchange as Nymex took bidsfrom multiple suitors. They apparently settled on a $135 millionbid from General Atlantic for a 10% stake in the exchange. Theinterest pushed seat prices to a record $3.1 million.

While many New York Stock Exchange specialists talkedabout the NYSE getting the short end of theNYSE/Archipelago Holdings merger, in the end they votedby a 95% margin to approve the deal. And why not, seatprices exploded as the year wore on.


NYSE YEARLY SEAT PRICES

Source: NYSE

1994 1996 1998 2000 2001 2002 2004 2006

$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

BottomsKATRINA In 2005 Mother Nature once again proved to be a cruel mis-tress. Hurricane Katrina ravaged the Gulf coast and breachedthe New Orleans levy system flooding virtually all of the BigEasy. Oil rigs broke from moorings, natural gas distribution wasall but stopped, the Port of New Orleans was closed for busi-ness. The human toll was worse.

HEDGE FUND TIMING: BAYOUIn a year that saw a hurricane destroy the levy system pro-tecting the City of New Orleans causing massive flooding,multiple deaths and destroying much of the Crescent City, itwas bound to be a bad year for a hedge fund named Bayou.

REFCO IMPLOSIONPeople in the trading business understand how quickly fortunescan turn, but even hardened traders had to be shocked at thisreversal. If ousted Refco CEO Phillip Bennett took care of hisoutstanding debt, perhaps with the money awarded him priorto the Refco IPO, this Refco story could have been a top.Instead, the largest independent futures commission merchantfell into bankruptcy and many dedicated employees where leftwith worthless stock, and clients with an uncertain future.

ICE STOCK PRICE

Source: eSignal

REFCO STOCK PRICE

Source: eSignal

22 29 6 12 19 26 3 10

30.00

25.00

20.00

15.00

10.00

Sep Oct

21 28 5 12 19 27

37.50

35.00

32.50

30.00

27.50

Dec

IPO offering price

Seat

pric

es

High

Low


Trade Trends continued

Fights of the yearDEUTSCHE BORSE VS. TCI

As 2005 began Deutsche Borsewas preparing for another

go at the London Stock Exchangeafter it rejected a $2.6 billion DB bidto purchaseit. But one ofDB’s newershareholders, ahedge fund called The Children’sInvestment Fund (TCI) had otherideas. A very public letter-writingcampaign ensued when TCIManaging Partner ChristopherHohn asked for an extraordinaryshareholder meeting to debatethe LSE bid and replace theentire supervisory board. DB CEOWerner Seifert claimed Hohn’sactions were damaging theboard and that TCI had ulterior financial motives.

The German exchange pulledits LSE bid and announced itwould use the capital for a 10%share buy-back and a dividend toshareholders. Hohn was not yetsatisfied though, and in MaySeifert and three other supervisoryboard members resigned.

TT VS. RCG

In defending its software patents,independent software vendorTrading Technologies (TT) agreedto out of court settlements withmore than a dozen firms. Butthere are still holdouts: RosenthalCollins Group (RCG), apparentlyunder the belief the best defenseis a good offense, countersued TTfor numerous Sherman Act viola-tions. An Illinois court on Dec. 26dismissed most of RCG’s claims.

Off the chartsMYSTERY SOLVED!On June 9 the CBOT rededicated two 12-foot 5.5 tonstatues representing agriculture and industry that hadbeen missing for years at a 75th anniversary celebrationof the CBOT building. The statues disappeared in 1929after demolition of the original 1885 CBOT building.They were discovered in 1978 in a suburban forest pre-serve, which curiously enough used to be the estate ofArthur Cutten, a prominent CBOT trader in the early1900s. The CBOT noted it does not know how the 5.5 ton statues got from LaSalle Street to the CuttenEstate more than 30 miles away.

LOVE/HATE TRIANGLEThe year started out with speculation as to who would win the battle to purchase theLondon Stock Exchange: Deutsche Borse or Euronext. A shareholder revolt pushedDB out of the game and then Euronext appeared to get cold feet. The hot rumor as wemove into 2006 is of a DB/Euronext merger. Maybe then the LSE will have a buyer.

NO QUIB(BL)ING, THAT’S A LOT OF COPPER A scare was averted as China appears to have honored the large (approximately220,000 metric ton) short copper position accumulated by Liu Qibing, a trader forChina’s State Regulation Center of Supply Reserve (SRB). SRB initially distanceditself from Qibing’s trades, saying Qibing acted on his own.

FAT FINGERS Tokyo Stock Exchange President and CEO Takuo Tsurushima resigned along withtwo TSE directors after what has been described as a fat finger error by a MizuhoSecurities broker caused a 40 billion yen ($345 million) loss. According to theTSE, the fat fingered broker mistakenly placed a sell order for 610,000 shares of J-COM 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 toMarch 23 from April 8 after the CME announcedearlier in the week they would launch an all-electron-ic ethanol contract.

FOREX FOREVER Has the growth in retail forex gotten out ofhand? We’re not sure but an indication may bewhen brokers start using approaches usuallyreserved for college students offering study help ortrying to unload old furniture.

This ad was posted in the entrance of a supermarket in suburban Chicago. Regulation of retailforex may become more structured as legislationreauthorizing the Commodity Futures TradingCommission will close some loopholes.

Learn how to trade

the foreign exchange

market (Forex)...

The potential is huge!


Signs of the times

NOT SO FAST!Two things are clear at Nymex: They want to become a public company andthey need help getting there. For a while it looked like they settled on wherethat help would come from, General Atlantic. But recently they appeared toreopen the bidding and the new hot contender is the CME. The CME knows athing or two about a successful IPO and will be free to compete directly withNymex by the middle of the year, giving Nymex added incentive to cut in theCME. (See Trendlines, page 14.)

EVERYONE SHOUT!That loud noise was a shout for joy from businessjournalists as the Securities and ExchangeCommission in June unanimously agreed toeliminate initial public offering quiet periods.

Rogues GalleryPhillip Bennett. Revelations of theformer Refco CEO hiding $430 mil-lion in bad debt led to the Refcobankruptcy. While segregatedfutures accounts remained safe,retail forex customers had to waittwo months before they learnedthat they would be made whole andretail investors in the Roger RawMaterials Fund are still in limbo.

Sam Israel III. The slick CEO ofhedge fund Bayou ManagementLLC with the Wall Street pedigreeproved to be much more style thansubstance. Israel created a falseaccounting firm to mask a massivefraud in the $440 million hedgefund. It was discovered and Israelwas charged with fraud.

Records• CBOT: More than 674 million con-

tracts traded at the CBOT in 2005,a 12.9% increase over 2004 andthe fourth consecutive year ofrecord volume.

• CBOE: More than 468 million contracts traded on CBOE in 2005,a 30% increase over 2004’s record year.

• CME: The CME traded 1.05 billioncontracts in 2005, a 34% increasefrom 2004 and the sixth consecu-tive year of record volume.Average daily volume was nearly4.2 million.

• Eurex set a record turnover of1.25 billion contracts in 2005, a17% increase from 2004.

• OneChicago: The security futuresproduct exchange completed itsthird full year of existence in 2005and traded 5.53 million contracts,a 188% increase from 2004. InDecember OneChicago set anopen interest record of 1.6 mil-lion contracts.

• Minneapolis Grain Exchange: TheMGEX set a volume record of1.422 million contracts in 2005,the majority of which came fromits Hard Red Spring Wheat con-tract, which traded a record 1.39million contracts.

• New York Board of Trade: Nybottraded 37.9 million futures andoptions contracts, which was 20%more than 2004 and the thirdstraight record volume year.

• New York Mercantile Exchange:Explosive volatility in the energycomplex led to record volume atNymex.


NYSE Specialists. On April 17 former NYSE specialists werecharged by the NYSE enforce-ment division with securitiesfraud. The specialists werealleged to have violated theirfundamental obligation to prior-itize public customers’ ordersover the proprietary interests oftheir specialist firms.



Trade Trends continued

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 RosenthalThomas A. RussoDr. Richard L. SandorMary L. SchapiroJohn P. SievwrightCraig F. SmithsonSteven D. SpenceJohn H. StassenOlof StenhammarHoward A. StotlerDennis A. SuskindPaula A. TosiniKenneth G. TropinFrederick G. UhlmannDavid J. VogelF. Helmut WeymarRobert K. WilmouthJohn A. WingBenjamin Wolkowitz

Boca BeatThe Futures Industry Association celebrated its 50th anniversary this past March during its annual con-

ference 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 industrytoday understand the contributions made by those who came before them. We are benefiting from theground they broke and the programs and policies they put in place.” Here are the inductees:

FUTURES HALL OF FAME

IN MEMORIAM

Fred Arditti, who passed away inOctober, was responsible for devel-oping the process for cash settlementof Eurodollar futures at the ChicagoMercantile Exchange. The CME hasnamed its annual innovation awardin his honor.

Ch-ch-changesReserve Board Chairman AlanGreenspan, the maestro, steps aside.

Greenspan could have been theinspiration behind the old E.F.Hutton add, ‘When E.F. Hutton talks,people listen.’

Trading floors grew quiet whenGreenspan gave testimony and tradersand brokers attempted to discern Fedpolicy through the maestro’s carefulword selection.

Just desertsOn March 15 Bernie Ebbers, the formerCEO of Worldcom, was convicted oncharges of conspiracy, securities fraud

and false regulatory filings in con-nection with the $11 billion

fraud which broughtdown the telecom-

munication company. Ebbers was latersentenced to 25 years in prison.

Many other of the corporate crooks ofrecent years finally faced retribution.

• Joe Nacchio, former QwestCommunications CEO, was indicted on42 counts of insider trading.• Adelphia Communications founderJohn Rigas, in June, was sentenced to 15 years in prison for defrauding customers. His son Timothy was sen-tenced to 20 years.• Former Tyco CEO Dennis Kozlowskiwas found guilty by a New York court offraud, conspiracy and grand larceny.

FM

CMEINNOVATION

AWARD



Dateline

C O N T R A C T D A T E S1 LTD: BM&F Alcohol OF, iBrX 50 F, Euronext-Liffe Mar White sugar OF.

2 FND: BM&F Alcohol F, Sugar F, LTD: CME Jan Mid-sized milk OF, Jan Milk

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

3 LTD: CME Jan Frozen Pork Bellies OF, Live cattle OF, Pork bellies, frozen 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

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, LTD: Eurex Bobl OF, Bund OF,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 Heatingoil OF, Mar Natural gas OF, Mar Unleaded gas OF, Mar Aluminum OF, MarCopper 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, MarGold F, Mar IDI O, Mar Soybeans F, Mar US dollar F,O,OF, CBOT Gold F, Mar T-bonds/10-,5-,2-yr. T-notes/inflation-indexed Treasuries OF, Mar Grains and oilseedsOF, Mar Soybeans OF, Mar Soybean meal OF, Mar Soybean oil OF, Mar WheatOF, Mar Corn OF, Mar Oats OF, Mar Rice OF, KCBT Mar Wheat OF, MGEX MarWheat OF, Nymex Aluminum F, Gold F, Silver F, Palladium F, Platinum F, CopperF, 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-daydeposits 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, MarReal 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, MarUnleaded gas F, Mar Propane F

MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

3

6 7 8

13 14 15 16

21 22 23

27

Crop summary. GermanyProduction index

Crop summary. U.K. CPI.Germany National accounts,

CPI

Canada Balance ofpayments

F E B R U A R Y

28

17

1 230 31

2

10

1

9

3

20 24

Japan Production index COT report, Employment

Crop summary. JapanEmployment, Merchandise

trade. France Unemployment,PPI

Germany PPI

Crop summary. JapanProduction index,

Merchandise trade.Germany Employment.France Employment, PPI

Production index

COT report, Merchandisetrade. Japan PPI. France

Production index,Merchandise trade

Cotton ginnings, Cropproduction. U.K. Merchandisetrade. Australia Employment

COT report, PPI. JapanNational accounts. France

Balance of payments

COT report

COT report

Australia Merchandisetrade

Crop summary, CPI.Canada CPI

U.K. Production index.Germany Merchandise trade

Holiday: U.S.

Japan Balance of payments.German Balance of

payments

France CPI



CBOE, Amex, PCX,

Phlx, ISE, OneChicagoA.M. settled index O ........2/16 ........3/16Currency O ......................2/10 ........3/10P.M. settled index O ........2/17 ........3/17

CBOT2-yr. T-notes F ....................- ........3/31Corn F....................................- ........3/14Corn OF ................................- ........2/24DJIA F ....................................- ........3/16DJIA OF ............................2/17 ........3/16Ethanol F..........................2/14 ........3/14Fed funds F ..........................- ........3/31Fed funds OF ..................2/28 ............-Gold F ..............................2/24 ............-Grains and oilseeds OF ..1/21 ........2/24Oats F ....................................- ........3/14Oats OF..................................- ........2/24Rice F ....................................- ........3/22Rice OF..................................- ........2/24S.A. Soybeans F....................- ........3/24Silver F..................................- ........3/29Soybean meal F....................- ........3/14Soybean meal OF ................- ........2/24

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

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

CME10-yr. Swap F ......................- ........3/1310-yr. Swap OF ....................- ........3/1313-wk. T-Bills F,OF ............- ........3/1313-wk. T-Bills OF ..........1/27 ............-

2-yr. Swap F ........................- ........3/135-yr. Swap F ........................- ........3/13Agencies F............................- ........3/22Butter F ................................- ........3/22Butter OF ..............................- ..........3/3Canadian dollar F ................- ........3/14Canadian dollar F,OF............- ..........3/3Currencies F ........................- ........3/13Currencies OF ......................- ..........3/3Diammonium phosphate F ..- ........3/15Ethanol F..........................1/31 ........2/28Euro F....................................- ........3/13Euro OF..................................- ..........3/3Eurodollar F ....................2/13 ............-Eurodollar F,OF ....................- ........3/13Euroyen F,OF ........................- ........3/10Euroyen Libor F....................- ........3/10Feeder Cattle F,OF................- ........3/30GSCI F,OF ............................- ........3/16JGB F ....................................- ........3/10Lean hogs F,OF ..............2/14 ............-Libor F,OF ........................2/13 ........3/13Live cattle F ....................2/28 ............-Live Cattle F ..........................- ........3/31Live cattle OF ....................2/3 ............-Lumber F ..............................- ........3/14

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

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

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

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

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

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

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

ABOUT THE CALENDAR… Dates are believed to be correct but sometimes do change. Holidays may affect government offices or banksbut not trading. Check with your broker or the exchange. Reports are U.S. reports unless indicated otherwise. Contracts traded are forcurrent 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 dayContract month FEB MAR

Last trading dayFEB MAR





MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

6 7 8 9 10

13 14 15 16

20 21 22 23 24

Merchandise trade. Canada Merchandise trade.

U.K. Production index,Merchandise trade. Germany

Production index

COT report, Crop production,

Employment. CanadaEmployment. Japan PPI.France Production index,

Merchandise trade

COT report, Livestockslaughter

M A R C H

17

27 28 1 2 3

27 28 29 30 31

Canada PPI. Australia Nationalaccounts

U.K. PPI. Japan Balanceof payments

Crop summary. GermanyCPI. France CPI

Japan Production indexGermany EmploymentJapan Merchandise trade

Cotton ginnings

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

France Employment

Crop summary

COT report, Productionindex. France Balance of

paymentsU.K. EmploymentCPI. Canada CPI.

Germany Balance of payments

Germany PPI

COT report, AnnualLivestock slaughter.

Japan Employment, CPI.Australia Merchandise

trade

Crop summary, National accounts

U.K. National accounts,Balance of payments

Crop summary. Japan Production index,

Merchandise trade.Germany Employment.France Employment, PPI

Canada Balance ofpayments

Crop summary, PPI


Dateline continued


ADVERTISER PAGE ADVERTISER PAGEAblesys . . . . . . . . . . . . . . . . . . . . . . . . . . . .20Alaron . . . . . . . . . . . . . . . . . . . . . . . . . . . .c3CBOE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21Chicago Board of Trade . . . . . . . . . . . . . .c4CMC Markets . . . . . . . . . . . . . . . . . . . . . .31CoesFx . . . . . . . . . . . . . . . . . . . . . . . . . . . .17Direct Trade . . . . . . . . . . . . . . . . . . . . . . .30Esignal . . . . . . . . . . . . . . . . . . . . . . . . . . . .c2Fidelity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Futures Magazine Subscriptions . . . . . . .23Futures Magazine Subscriptions . . . . . . .30Futures Magazine Subscriptions . . . . . . .36Gain Capitol . . . . . . . . . . . . . . . . . . . . . . .37Global Forex Trading . . . . . . . . . . . . . . . .19Global Forex Trading . . . . . . . . . . . . . . . .33Go Futures . . . . . . . . . . . . . . . . . . . . . . . . .19

Interactive Brokers . . . . . . . . . . . . . . . . . .47MG Financial . . . . . . . . . . . . . . . . . . . . . . . .9National Futures Association . . . . . . . . . . .3Ninja Trading . . . . . . . . . . . . . . . . . . . . . .29New York Board of Trade . . . . . . . . . . . .13New York Mercantile Exchange . . . . . . .25Open-E-Cry . . . . . . . . . . . . . . . . . . . . . . . .29Pricecharts.com . . . . . . . . . . . . . . . . . . . . .53Real Tick . . . . . . . . . . . . . . . . . . . . . . . . . .41Quote.com . . . . . . . . . . . . . . . . . . . . . . . .11Sonic Futures . . . . . . . . . . . . . . . . . . . . . . .28Tradebolt . . . . . . . . . . . . . . . . . . . . . . . . . .28Traders Expo . . . . . . . . . . . . . . . . . . . . . . .63Tradestation . . . . . . . . . . . . . . . . . . . . . . .4-5XpressTrade . . . . . . . . . . . . . . . . . . . . . . .12XpressTrade . . . . . . . . . . . . . . . . . . . . . . .49

SEE CLASSIFIED ADVERTISING ON PAGES 80–85

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

BM&F1-day deposits F..................- ........2/281-day deposits OF ..........1/31 ............-Alcohol F............................2/8 ..........3/8Alcohol OF..........................2/1 ..........3/1Arabica coffee F ..................- ........3/23

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

Eurex3-mo. euribor F ..............2/13 ............-

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

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

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

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

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

TGEArabica coffee F ..................- ........3/16Azuki F ............................2/23 ........3/28

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

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

Last trading dayContract month FEB MAR






EVENTS COMING UP

Call the numbers listed for more information. For other seminars, see the classifieds on pages 80-85.

AD INDEX

Managed Funds Association’s 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 DinnerDance 2006. FEB. 23. The Ritz Carlton. Battery Park,New York. www.futuresandoptionsforkids.org.

FIAs 31st Annual International FuturesIndustry Conference. MAR. 15-18. Marriott BocaRaton 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.

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Stock market forecastThe stock market has meandereddirectionless in 2004 and 2005. Are wein for another flat period in 2006 or willthe market finally pick a direction? Ouranalysts answer that and otherquestions regarding equities.

Top traders of 2005It was another difficult year for CTAs.We feature several managerswho were able to navigatethe tough waters in 2005and discuss the maintrends of last year. Who didbetter? Diversified or nichetraders? Systematic of discretionary?

Statistical analysisWe look at the time-proven tool oflinear regression analysis and how itcan give you a solid idea of whereprices are likely to move based onwidely available fundamental data.

Trading rectangles Trading setups can be geometrical andtechnical. We examine the notion oftrading rectangles and how they canbe interpreted for possible profit.

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Bernie Carey measures his success as a trader by the40 years he traded grain futures at the Chicago Boardof Trade (CBOT). “I lived to tell about it,” he says.

The 89-year-old Carey, who resides in Chesterton, Ind.,began trading when he was 23 and still puts on a few trades ayear. “I got to keep the heart pumping,” Carey says.

Carey comes from a family of CBOT traders. His fathertraded grains at CBOT, mostly wheat, for about 30 years;his nephew is CBOT Chairman Charlie Carey; and threeof his four children trade at CBOT — one has spent 20years in the corn pit, leasing Carey’s membership, and twotrade electronically.

Carey found trading to be very exciting right from thebeginning. “The tension and excitement and the opportunitymade it interesting work,” hesays. He traded outrights andspreads, but not optionsbecause they weren’t around atthat time. He traded the mostliquid grain contracts, concen-trating mostly on soybeans. Helearned to trade grains watch-ing his father.

Carey worked in a GeneralMotors factory for a year aftergraduating from Spring HillCollege in Mobile, Ala., whenhis father purchased a mem-bership for him at the CBOT— a membership he still heldwhen the CBOT went publicin October 2005. Carey, alongwith his nephew Charlie,CBOT President and CEOBernie Dan and other CBOTdirectors, rang the openingbell at the New York StockExchange on that day. “I’m sure glad I held onto [the mem-bership] for so many years. As it turns out, it was one of mybest investments,” Carey says. “It was a lot easier financiallyback then to get a membership.”

His most memorable trade goes back to 1940, his first yearon the floor, when traders drew charts by hand and peoplewalked around with erasers updating quotes on chalkboards.

“I had only been trading for two or three months and it wasat the time in Europe when the Germans overran France, andthe news was very, very bearish and our market went down,”Carey says. “Wheat went down the limit one day and the nextday it was sure to open lower. My father told me it was going toopen lower and then it was going to bounce up. He suggested Igrab something if I could on the lower opening. I grabbed[5,000 bushels] and sure enough it rallied and I took 4¢ out ofthat trade,” Carey says. He remembers that $200 winner very

well because it gave his account some early breathing room.“That was a lot to make on a trade at that time for me.”

The trade was an indication of Carey’s penchant for riskas he points out that wheat was available in 1,000 bushel-lots at the time.

When deciding which trades to take, Carey would look atboth technical and fundamental factors. “My main focus wasstudying the history of price movement, you look for whatyou think are opportunities,” Carey says, adding, “I would fol-low the weather [as well]. If you don’t have rain you don’thave crops. So dry weather means higher prices.”

Carey hadn’t been trading much more than a year when hewas drafted in 1941. He served in the U.S. Army for fouryears starting out in the infantry before becoming a naviga-

tor. He was based in Englandand flew on 25 missions. TheChicago native returned to hissouth side neighborhood in late1945 and went back to tradingat the CBOT. He compareseach army mission to trading,“It’s a challenge, to see in eachcase if your judgment is corrector not,” Carey says. “I was suc-cessful because I had to be, inthe army and in trading.”

He attributes his success toan ability to keep his wits anddiscipline no matter what theoutcome of a trade is. “Youhave to respect your capitaland your risk.”

Carey says the amount ofcapital a trader has shoulddetermine the type of risk hetakes on every trade. “If yourmoney is low, you trade small,

if it isn’t you can take bigger and bigger risks,” he says.Carey was not averse to taking on risk. “I’d say I took bigrisks in trading. I would take big risks and lose sometimes,but that’s part of the business.”

Carey made more money in 1947 than any previous yearby taking advantage of a bull grain market caused by world-wide demand. “Europe, still devastated by the war, had justsurvived one of the worst winters on record and the UnitedStates had to pump money into Europe. It was the time of theMarshall Plan,” Carey says.

They weren’t all good years. In 1960 he briefly left theCBOT to go to the Chicago Mercantile Exchange’s floor totrade eggs because he saw fewer opportunities in grains. Hewas only there for about three months when the grains mar-kets picked up and he returned to the CBOT never to leaveit again for another exchange. After all, roots grow deep.

BY YESENIA SALCEDO


Trader Profile

Bernie Carey — Trading is in the blood

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