0206 Futures Mag PDF

Energy market's feisty future 26 2005's tops & bottoms 72
www.futuresmag.com February 2006
TOP
10
TRADING
SYSTEMS
OF ALL TIME
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Contents
FEBRUARY 2006 VOLUME XXXV NUMBER 3
42
Top ten systems
cover story
By George Pruitt and Joe Bobek
Trading systems come and go

but some withstand the tests of
time and market sentiment.
Independent system tester Futures
Truth lists the systems that have
performed well historically.
Further, in analysing these
systems, our authors breakdown
each and describe the common
elements that are instrumental in
successful trading systems.
ILLUSTRATION BY:
PICTURED: JIM ROGERS
F E A T U R E S
MARKETS TRADING TECHNIQUES TECHNOLOGY & TRADING
26 Energy markets could find 38 Understanding the arb trade 60 Intermarket analysis:
home in the range By Ben Lichtenstein What works today
By Carla M. Bauch While not as viable as it once By Murray A. Ruggiero Jr.
Some analysts predict higher crude was, the arb trade still exists. Intermarket analysis can be a
prices and others say energy prices Here’s how it affects markets powerful tool if used properly.
will stabilize during the first half of and possibly your trading. We show you some of the
2006. What kind of price range will many applications from simple
this new year bring? 50 Has technical analysis kept up with to complex.
the (Dow) Jones’?
By Darrell Jobman
EQUITY TRADING TECHNIQUES Technology has changed the way you
34 The versatility of buy-write strategies trade, but has technical analysis kept up
By Mike Oyster with these changes? We speak with some
Creating strategies through futures key experts about significant indicators of
and options on futures may be more yesterday and how today’s technology
effective than using securities. might have altered them. Contents Continued, page 8
Futures (ISSN 0746-2468) is published monthly except semimonthly in January, June and September by The National Underwriter Co, DBA Highline Media, 5081 Olympic Blvd., Erlanger,
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6 FUTURES | February 2006

Contents continued
group publisher / editorial director
Ginger Szala
D E PA R T M E N T S
10 Editor’s Note Taking a long view 32 Forex Trader The gift of the managing editor Daniel P. Collins
associate editor Yesenia Salcedo
break-even trade associate editor Chris McMahon
12 Sound Off! editor at large Steve Zwick
14 Trendlines CFTC half way home • 58 Software Review NinjaTrader contributing editors
Chartview: A run on seat prices • New James T. Holter
DB boss joins merger mania • CBOT 64 Online Trading Growing options Murray A. Ruggiero Jr.,
moves in on Asia • When is a deal a Carla M. Bauch
deal? • International news • Musical volume electronically
CEOs • Oil giant charged with art director Carl Walanski
violating CEA 69 New for Traders graphic designer Sean Kealey
18 Managed Money Review advertising coordinator Abby Dahlinghaus

70 Funds Review
20 Trading Places Webber to head
Patsystems 77 Dateline February and March
advertising director
22 Hot Commodities 10-year T-notes, 79 Ad Index midwest/southeast sales
corn and E-mini S&P Peter D. Djuvik
phone: (312) 846-4606 fax: (312) 846-4638
24 Market Strategy How to benefit 86 Trader Profile Bernie Carey —
from an inverted yield curve west/east coast sales manager
It’s in the blood Tracey Goldvarg
phone: (312) 846-4611 fax: (312) 846-4638
F E AT U R E S classified & web sales manager

Jennifer Testa
phone: (847) 526-7434 fax: (847) 526-7435
FUTURES 101 TRADE TRENDS international sales representatives

Europe: Carolyn Hicks
60 Step-by-step into the ag markets 72 Tops & bottoms London, England
By Chris McMahon By Daniel P. Collins phone: (44) 208-340-3273
Trading opportunities in the From Refco to IPOs to a Chinese
agricultural markets don’t only copper trader, there was always Japan: Ken Masunaga
Hiroyuki Naruke
present themselves during the something to talk about in 2005 M.K. News, phone: (81) 03-3664-9271
growing season. We show you in the derivatives industry. In our futures learning center sales manager
what to look for year-round. annual tongue-in-cheek review, Gary Kamen
we look back with some bows and (312) 846-4618
yes, many arrows.
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BOTTOMS
TOPS
president and ceo Andrew L. Goodenough

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

Taking the long view
EDITOR’S NOTE
L
ast November during a conversa- are purchased off-the-shelf — have performed over the years. We
tion with Chicago Board of asked the independent system testing group Futures Truth, started by
Trade Chairman Charlie Carey, icon John Hill, to update our readers on the best 10 systems of all
we discussed the successful initial public time. (See “Top 10 systems,” by George Pruitt and Joe Bobek, page
offering launched by the CBOT. He 42.) Although many traders, especially today’s professional trader,
mentioned Bernie Carey, his uncle and build their own proprietary systems, people can still buy some solid
a CBOT trader of long ago, rang the off-the-shelf black box and open systems. Futures Truth analyzes these
bell at the New York Stock Exchange systems by paper trading every signal to test performance. The article
(NYSE) the day the Chicago exchange also analyzes what seems to work and what doesn’t, and that informa-
went public. Of course we got to talking about changes in the indus- tion can be used by all traders.
try, and it made me think that if I feel there has been seismic change While putting together this “look back” issue, I’ve thought about
in the industry since I began covering it in the 1980s, what must some of the icons of today I’ve interviewed, long before they became
Bernie Carey think? So we asked him, and as a result he’s our profile icons. Traders such as John W. Henry, Paul Tudor Jones, Louis
this month in “Bernie Carey — It’s in the blood,” page 89, by Bacon; industry innovators, such as Leo Melamed, Richard Sandor,
Associate Editor Yesenia Salcedo. Henry Jarecki; trail blazing brokers such as Barry Lind, Les Rosenthal,
This month the CBOT also is celebrating the 30-year anniversary Lee Stern, Tom Dittmer, John Conheeney — people who have
of the contract that started it all for interest rates, the Ginnie Mae. affected this industry through innovation, time and sheer talent.
It’s not that the contract is still being traded, but the chain of con- There are hundreds of people out there, still in the industry today,
tracts it preceded, from the 30-year Treasury to 10-year note to still blazing trails, still spurring industry growth and innovation,
Eurodollars, Eurobunds and all other present and past interest rate which has been startling. Not only volumes, but image: On Oct. 20,
contracts, has made the world’s economic pulse healthier. 1987, did anyone believe that the Chicago Mercantile Exchange and
That anniversary reminded me that Futures magazine turns 34 years CBOT stock would be traded on the NYSE?
old this month and that’s a milestone of success in both publishing and Recently John Geldermann, an industry icon, died. John was
trading. The changes in the business have been breathtaking. To illus- always helpful, always straightforward. Several years ago I interviewed
trate part of this, we asked the original Futures editor Darrell Jobman John and his brother Tom while aboard their fishing boat on Lake
to take a look at how technical analysis, especially key indicators, have Michigan. It was a rough day. Not feeling well, I went inside where
survived or thrived as the business moved into the electronic age. In John was steering. He took one look at me and said, “Get outside
“Has technical analysis kept up with the (Dow) Jones’?” page 50, quick and keep your eyes on the
Darrell interviews some of the originators of every day indicators that horizon!” He was right of course,
traders across the world use and finds out if those tools have withstood and it seems the industry fol-
the test of time. The answers are surprising. lowed that advice as well.
We also wanted to see how trading systems — those systems that E-mail me at gszala@futuresmag.com
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Sound Off!
MORE ALTERNATIVE INVESTMENTS vided by the Commodity Futures Trading Have an opinion, question, objection,
I read your managed money piece Commission (CFTC). We compile the list idea or beef? Let us know.
“Alternatives abound,” January 2006. based on those responses. Sound Off! Futures, 833 W. Jackson Blvd., 7th Floor
Nicely done. Because the Refco bankruptcy occurred Chicago, Ill. 60607, Fax: (312) 846-4638
Steve Lamb, via e-mail after the most recent CFTC data was E-mail: gszala@futuresmag.com
released, our Top 50 Story did not reflect the
Keep letters to 250 words. We reserve the
Thank you. Futures will soon expand our most current information. Futures has subse- right to edit for grammar, space and taste.
performance reporting of the alternative quently posted on our Web site, at
investment arena in the Managed Money www.futuresmag.com/mid_month_ 1950s on the Chicago Board of Trade for
Review section of the magazine. In addition update/images/Mid-month_spread.xls, renowned locals such as Henry Shatkin
to commodity trading advisors, Futures will an updated ranking based on October num- and Dave Goldberg, John and a partner
present the recent performance bers. That, however, did not include the full launched Computer Information Systems
history of several of the most popular hedge scope of change including Man Financial’s (CIS) in 1967, the first computerized
fund strategies based on the Barclay/Global acquisition of Refco. We will post another back office system for accounting and one
HedgeSource indexes. updated ranking when data is available. still used today by industry professionals.
— Ed — Ed John was active in industry governance,
having just been inducted into the Futures
TOP 50 BROKERS? JOHN GELDERMANN Industry Association’s Hall of Fame, as
Every year we get questions about John Geldermann, founder of well as serving for years on the Chicago
how we collect data for our annual Geldermann Inc., passed away in early Mercantile Exchange board. He is sur-
December Top 50 Brokers story. January. Geldermann, 80, was long vived by his wife, children and a large
Futures faxes a questionnaire to the top known in the futures industry as an inno- extended family, including all those in the
70 or so futures commissions merchants vator. Not only did he and his brother futures industry who will miss him dearly.
based on current segregated fund data pro- Tom start a clearing business in the — Ed
Trendlines
News, trends and insights for traders
ONE CHAMBER DOWN... the Chicago Mercantile Exchange House did,” Melamed says.
(CME) in particular, likes the bill Damgard is not as confident the
CFTC half way home because of three things, none of them Senate will follow through. “It is unfor-
Before its Christmas break, the House related to energy. The bill closes tunate that we are not getting the
of Representatives passed legislation loopholes related to retail forex trad- CFTC reauthorized. The reason we are
reauthorizing the Commodity Futures ing, mandates a structure to allow risk not is that they are amending the act to
Trading Commission (CFTC), which based margining for security futures require the CFTC to do stuff that is
also granted the Chicago exchange products (SFP) and equity options beyond its mission.” Damgard is joined
community many of the items on its and authorizes the trading of certain by several trade organizations and
wish list. But one item in the bill — an debt and foreign security indexes by members of the President’s Working
energy amendment giving the CFTC June 30, 2006. Group (PWG) who are unhappy with
expanded authority — could cause a CME Chairman Emeritus Leo the amendment.
delay that may push reauthorization Melamed says the exchange worked In a Dec. 12 letter to Michael
into the next holiday season. with the Congress to correct some Oxley, R-Ohio, chairman of the House
“It passed with the energy legisla- small problems in the last reauthoriza- Committee on Financial Services,
tion, which has a lot of people con- tion. “It is fixing some of the things Department of Treasury (DOT) Under
cerned that this is beyond the purview that were wrong with the [Commodity Secretary Randal Quarles expresses
of the CFTC’s expertise,” says John Futures Modernization Act of 2000]. concern about the energy amendment
Damgard, president of the Futures We are looking for the Senate to pass on behalf of DOT Secretary John
Industry Association. substantially the same legislation. Snow. The letter points out the
The Chicago exchange community, Right now we are very pleased that the Treasury and other PWG members are
concerned about provisions that could
affect OTC derivatives markets,
CHARTVIEW: A RUN ON SEAT PRICES including energy and natural gas.
Quarles calls the scope of the amend-
As 2005 came to a close the Chicago Board Options Exchange (CBOE) established a progression of ment broad. “These provisions could
record seat sales, the top being $875,000. That is not bad considering that the first seat sold in 2005 result in unintended adverse conse-
went for $299,000. quences and undermine the regulatory
The record sales come at a good time, as CBOE will operate as a for-profit exchange as of relief and legal certainty that were so
Jan. 1, 2006, despite having a ways to go in the demutualization process. carefully crafted through the [CFMA],”
Exchange boss Bill Brodsky says IPO talk is premature but sees the rising seat values and record the letter states.
volume, which is 30% above 2004, as a healthy sign. The PWG worked on several of
“Seat [prices] are a barometer of the interest of investors,” Brodsky says. the fixes in the reauthorization but
$1,000.0 the energy amendment was somewhat
CBOE SEAT PRICES (IN THOUSANDS) of a late surprise and may simply be
$900.0
protection for some in Congress from
$800.0 the wrath of their constituents over
the expected high energy costs this
$700.0
winter. “In a way it is a little bit of a
$600.0 cruel hoax on the consumer to make
them think that somehow the CFTC
$500.0
requiring a lot of reporting is going to
$400.0 prevent prices from going up,”
Damgard says.
$300.0
$200.0 BENEFITS
The CFMA attempted to give the
$100.0
CFTC authority on all retail forex
$0.0 trading but that was challenged by an
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Illinois court decision in the Zelener

case. “That had to be fixed and that is
Source: eSignal what this act does,” Melamed says.
The other fixes relate more to the

jurisdictional problems stemming from to offer stock options. ture to distribute prices or cooperate
the 20 plus year Shad/Johnson agree- The long-awaited global clearing on clearing and settlement.
ment that was repealed as part of the link, which would allow German The E.U. Commission has long
CFMA. The Securities and Exchange traders to execute trades in the United advocated consolidation of continental
Commission (SEC) failed to meet States, and visa versa, has been on ice clearing and settlement for use by all
commitments to create a risk based since CFTC Chairman Reuben Jeffery exchanges, but Deutsche Boerse was by
margining scheme for SFPs, now they took over in July, 2005. His predeces- far the largest advocate of “one-stop”
will be required to. Many insiders sor, Sharon Brown-Hruska, had given vertical silos, where all trades are exe-
blame the lack of success of SFPs to the setup a provisional nod in late cuted, cleared and settled through one
not having futures style margining. 2004, and sources close to the entity. Italy and Spain are among
Perhaps the item with the most Deutsche Boerse management board other countries also offering vertical
potential for exchanges will be tell Futures the CFTC’s backtracking silos, but Germany’s sheer mass gave
the ability to trade certain debt and drove the decision to seek a strategic the model credibility.
foreign security indexes. This will be partner in the United States. Euronext, under the leadership of
accomplished through a new definition Within Europe, continental press Jean-François Théodore, has advocat-
for what constitutes broad-based for- reports at one time had Francioni talked a central clearing and settlement
eign indexes. Melamed says the world ing of merging Deutsche Boerse and entity for all continental securities and
has changed a great deal since Euronext, but competition concerns derivatives products, with exchanges
Shad/Johnson and the U.S. investor quickly put the kibosh on that. focusing on product development and
needs to be able to hedge many of Whether or not those talks took managing initial public offerings
these non-U.S. indexes. place, sources close to Deutsche (IPOs). If Francioni holds a similar
“We are talking 20 years later, the Boerse’s supervisory board tell Futures vision, the entire competitive land-
whole world has changed many times no such concerns would prevent the scape of the continent could change.
and many of these Asian countries are exchanges from forming a joint ven- Meanwhile, at press time, both
important geographical centers of
investment and we need these instru-
ments of finance. By changing that
definition, it opens up a whole new JADE FUTURES?
vista of risk management and that is
important,” Melamed says. CBOT moves in on Asia
By Daniel P. Collins Most memorandums of understanding (MOU) are vague and do not result in
near-term action, but the Chicago Board of Trade (CBOT) and the Singapore
NEWYEX AND EUROPA BOERSE? Exchange (SGX) made a bold move a few short months after their August MOU,
announcing they will establish a regional commodity derivatives market called
New DB boss the Joint Asian Derivatives Exchange (JADE).
joins merger mania The all-electronic market, half-owned by each partner, is expected to launch
in the third quarter of 2006.
Reto Francioni has certainly shaken up “We saw a fragmented marketplace in Asia and we wanted to fill that puzzle.
the exchange landscape. Since his This puts us in the Asian market in a very concrete way,” says Robert Ray, senior
tenure as head of Deutsche Boerse VP, business development at the CBOT.
began in September, not only has CBOT’s electronic platform, built on LiffeConnect technology will be the trad-
Eurex boss Rudi Ferscha departed, but ing backbone of JADE. The CBOT will be responsible for straight-through pro-
the exchange has begun talks to forge cessing into SGX Clearing Corp. “We will bring eCBOT customers direct access to
joint ventures with cross-continental SGX and JADE, and we’re bringing to SGX 25,000 independent software vendor
rival Euronext. Francioni also has been screens and 140,000 quote vendor boxes,” Ray adds.
talking to several U.S. exchanges Former SGX head Tom Kloet, now COO at Fimat, says both exchanges should
about turning Eurex US into a joint benefit. “SGX is locked into financials and this allows them to expand into an
venture with a local partner. asset group they had no exposure in. For the CBOT, this continues their interest
The most likely candidate is the in Asian commodities in general,” Kloet says. “The CBOT is a great distribution
New York Stock Exchange (NYSE), channel and SGX is a strong clearing structure, so the exchanges are very compli-
which has made no secret of its desire mentary to each other. The challenge will be to sift through products and pick
to get into the derivatives game, while the right ones. And while the volume created will not be a panacea, there’s a lot
Eurex has made no secret of its desire of potential for this to be good,” Kloet adds.
By Yesenia Salcedo
www.futuresmag.com | February 2006 15

International News Trendlines continued
DEUTSCHE CDO by an NFA hearing panel, is a result Euronext and Australia’s Macquarie
TRADER BURIES LOSSES of an NFA complaint issued on May 26, Bank Ltd were preparing their offers
While auditing its trading accounts for 2005, and reflects a settlement offer for the London Stock Exchange
year-end bonuses in December, submitted by Wallstreet and DiCrisci. (LSE). Although it was Deutsche
Deutsche Bank’s London office uncov- The NFA complaint charged Boerse’s bid for LSE that brought
ered a little discrepancy — if you Wallstreet, DiCrisci and Mitchell Francioni to the helm of Deutsche
consider £30 million little. In January, with making deceptive, misleading Boerse, he has said nothing to indi-
the bank told the Financial Services and high-pressured sales solicitations, cate he won’t lead the exchange into
Authority it had zeroed in on the which included false statements, merger talks with the LSE.
problem: collateralized debt obligation exaggerated profit claims and Meanwhile, the LSE has taken a
(CDO) trader Anshul Rustagi had been inadequate risk disclosures. The page from Deutsche Boerse’s book,
covering up his losses. At press time, complaint also charged Wall Street offering to return £250 million to
it’s not clear whether Rustagi will and DiCrisci with failing to diligently investors if it stays independent
face criminal charges, but he certainly supervise employees and agents in through 2006.
won’t be qualifying for bonuses any the conduct of their commodity Whatever the exchange bosses
time soon. futures activities. decide, competition authorities will
The reason DiCrisci can reapply be looking at the derivatives market.
STEAK WELL DONE but Mitchell can not is because of The big question: Do you look
Japan has opened its door to some the severity of the offenses. DiCrisci at exchange-traded products like
U.S. and Canadian beef. The ban acted more as a manager while those on Eurex and Euronext.Liffe,
relating to North American cases of Mitchell was the one making or do you look at OTC products
mad cow disease has been in effect deceptive solicitations. cleared via Eurex Clearing, Euroclear,
since 2003. Japan lifted the ban on “The common bad practices and LCH.Clearnet?
beef from cows younger than 21 in the industry remain the same, By Steve Zwick
months, if the heads and spinal cords it’s just the topics that change,
have been removed. In addition, Korea like right now its all about commodities COMPLEX IN THE CITY
and the United States are scheduled to affected by the hurricanes,” says
open talks about reopening South Larry Dykeman, NFA director of When is a deal a deal?
Korea to boneless U.S. beef in communications and education. Last we heard, the New York
mid-January. “The underlying message is the Mercantile Exchange (Nymex) had
same in terms of the unrealistic gains signed a definitive agreement
NFA KEEPS CLEANING and not disclosing the risks. In the with venture capital firm General
UP THE INDUSTRY Wallstreet case 100% of the customers Atlantic LLC (GA) to sell 10% of
The National Futures Association (NFA) lost their money.” the exchange for $135 million. A
continues to crack down on “bad The NFA also ordered Platinum streamlined board of directors and
practice” offenders by permanently Trading Group Inc., a former IB and an IPO were to follow. Now the word
barring Wallstreet Financial Trading commodity trading advisor located in is the exchange is in talks with the
Inc. (Wallstreet), a former futures intro- Boca Raton, Florida, not to apply for CME who would like a piece of
ducing broker (IB) in West Palm Beach, NFA membership for ten years. Nymex. CME share prices increased $9
Fla., from reapplying for NFA The NFA Complaint charged on the day news of the talks hit the
membership or acting as a principal Platinum with making deceptive and wire services.
of an NFA member. misleading solicitations encouraging This comes on the heels of Nymex
The NFA has also permanently individuals to open accounts to trade Chairman Mitchell Steinhause’s open
barred Andre C. Mitchell, an associated OTC forex. letter to shareholders, members and
person of Wallstreet, from NFA staff explaining changes to be made to
membership. Joseph C. DiCrisci, BEING PREPARED the GA deal after some of the mem-
the sole owner and principal CBOE has completed implementation bers objected to details as described in
of Wallstreet, can not apply of systems and testing of an off-site the preliminary proxy filed with the
for NFA membership or associate back-up facility which is now opera- SEC. Changes include decreasing the
membership or act as a principal tional. The back-up facility will not total number of shares to be authorized
of an NFA member for one year. include a trading floor, operating to 89 million from 220 million, and
The decision, handed down completely electronically. details regarding the ability of the
shareholders to call special meetings,

amend the bylaws and elect directors. shareholders as the board tries to close to be stymied by parochial concerns
The GA deal is subject to a vote by the GA deal. despite that they have been demutual-
the Nymex shareholders. Any changes A petition to call a special meeting ized for a number of years.
would have to be agreed to by GA and to elect a new 25-member board at By Chris McMahon
there is no penalty for either party Nymex has been temporarily shelved,
killing the deal. giving the board breathing room to REFCO ROUND UP
Cataldo J. Capozza, owner of three forge a deal with the CME. Typically,
authorized Nymex trading shares, filed only a third of board seats are open to Musical CEOs
a lawsuit against Nymex demanding election in a single year. • Refco Inc. named Harrison J.
records to investigate whether the GA “Nymex has asked for a period of a Goodin CEO, replacing interim chief
deal is fair, protects open outcry, month or so, give or take, for the Robert Dangremond. Goodin was
undervalues Nymex, and whether the opportunity to try to renegotiate some senior managing director of Goodin
board seriously considered other offers. deal. And they have said that they Associates LLC and the fourth CEO
It also includes the assertion that there would like the opportunity to negoti- named since the implosion. Unsecured
is “adequate reason to believe that the ate a deal with the CME,” says Mark Refco creditors filed a lawsuit in
bidding process was rigged to ensure Rifkin, Capozza’s lawyer. “Mr. Capozza response, this one to block the
that the bids would be identical, or would like to work with the exchange appointment of a bankruptcy trustee,
nearly identical, in value and that the to facilitate an appropriate agreement citing Goodin’s expertise and a desire
Board would accept the GA proposal.” with the CME, one that’s in the best to limit expenses and maximize a
Nymex has so far denied Capozza’s interest of Nymex and all its share- potential return to burnt customers.
entitlement to the documents. In holders,” Rifkin adds. Representatives
a press release, Steinhause declined of the CME, Nymex and GA declined • The bankruptcy court has
the request, characterizing it as a dis- to comment on the record. approved the sale of Refco’s retail FX
ruptive and costly effort to confuse Ironically, Nymex’s plans continue Trendlines continued, page 19

Managed Money Review
BY DANIEL P. COLLINS
Man agrees to release info

PAAM and its affiliates. between Refco Group Ltd. and Cargill.
A
fter a testy exchange between
lawyers for Man Financial and Judge Baylson also requested Thomas The objection argues the notice to hold
U.S. District Court Judge Gilmartin, Man Financial SVP, who is Cargill to a five-year exclusive agree-
Michael Baylson at a Dec. 16 hearing, on leave from Man and was a sharehold- ment with Refco and its affiliate
Lee A. Rosengard, attorney for receiver er in PAAM, be deposed. Much of the entities should not be enforced without
C. Clark Hodgson, withdrew the information requested is related to e- assigning to Refco obligations related to
receivers contempt motion against Man mails and audiotapes of conversations its purchase of Cargill’s futures commis-
after Man agreed to release all of the between Gilmartin and PAAM officials. sion merchant business. Under the pur-
requested information related to its role In response to the motion, Man chase and sales agreement, Refco
as broker to the defunct hedge fund claimed they had complied with their agreed to a post closing “earnout” of
Philadelphia Alternative Asset obligations and that the receiver had $67 million to $192 million based on
Management (PAAM). gone beyond its mandate. performance. Cargill claims Refco owes
In June the Commodity Futures an additional $59.5 as well.
Trading Commission obtained a motion WHO’S HOLDING THE BAG? In a reply to Cargill’s objection, Refco’s
to freeze the assets of PAAM as part of a In December, Cargill Inc. filed an attorney claimed the exclusivity agree-
fraud action against the $230 million objection in U.S. Bankruptcy Court to ment stands alone and should be assigned
commodity pool and appoint a receiver the notice to assume and assign to “without reference to other agreements
to obtain custody of all the assets of Man Financial exclusive agreements and without Cargill’s consent.”
Comparing index returns public funds summary

S&P 500 Total Return Index
November
+3.78%
YTD
+4.88%
December 2005 Number reporting: 96
Average performance for the month: -1.37%
Funds up: 33 Down: 62 Unchanged: 1
Lehman Brothers Treasury Index +0.65% +4.18%
Morgan Stanley EAFE Index +2.25% +5.98% Top performers in December
Futures Public Funds (November) +3.31% -0.03% Fund Trading advisor(s) December Return YTD
Smith Barney AAA Energy . . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . . . .12.53% . . . . . .91.10%
SB AAA Energy Fund L.P. II . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . . . .12.04% . . . . . .88.91%
November’s top CTAs Triad Trading Fund LP . . . . . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . . . .11.20% . . . . . .74.81%
GSL-JWH Financial & Metals* . . . . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8.23% . . . . . .-13.97%
November YTD GSL-JWH Strategic Allocation* . . . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.80% . . . . . . .-9.25%
Barclay CTA Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+2.82% . . .+2.11% Worst performers in December
Barclay Sub-Indexes: Dean Witter Portfolio Strategy Fund . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-12.07% . . . . . .-24.25%
Agricultural Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . .+1.61% . . .+4.37% Shearson Mid-West Futures Fund . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-11.67% . . . . . .-24.17%
Currency Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+1.42% . . .+0.07% Smith Barney Mid-West Futures II . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-11.67% . . . . . .-24.32%
Diversified Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+3.94% . . .+0.98% Smith Barney Westport Futures Fund . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-11.53% . . . . . .-22.82%
Financials and Metals Traders . . . . . . . . . . . . . . . . . . . .+1.39% . . .+2.03% Dean Witter Cornerstone Fund II . . . . . . . . .Northfield Trading; J.W. Henry . . . . . . . . . . . .-8.67% . . . . . .-19.43%
Discretionary Traders . . . . . . . . . . . . . . . . . . . . . . . . . . .+0.33% . . .+5.79% Number reporting: 96
Systematic Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+3.22% . . .+1.87% 2005 results Average performance for the year: -0.26%
(through Dec. 31) Funds up: 42 Down: 54 Unchanged: 0
More than $10 million under management Top performers in 2005
1. Hasenbichler DRC AG . . . . . . . . . . . . . . . . . . . . . . .+29.96% . . .+5.29% Fund Trading advisor(s) December Return YTD
2. Meyer Capital Mgmt. . . . . . . . . . . . . . . . . . . . . . . . .+19.51% . . . .-7.69% Smith Barney AAA Energy . . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . . . .12.53% . . . . . .91.10%
3. TradeCom CTA Pool XXL . . . . . . . . . . . . . . . . . . . . .+17.98% . . .-22.78% SB AAA Energy Fund L.P. II . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . . . .12.04% . . . . . .88.91%
4. Beach Capital Mgmt. Ltd. (Discret.) . . . . . . . . . . . . .+17.89% . .+10.25% Triad Trading Fund LP . . . . . . . . . . . . . . . . .AAA Capital Management . . . . . . . . . . . . . . . .11.20% . . . . . .74.81%
5. Quadriga Trading Mgmt. (Superfund) . . . . . . . . . . .+17.29% . . .-19.34% AHL Capital Markets Ltd* . . . . . . . . . . . . . .Man Investment Prod. Ltd. . . . . . . . . . . . . . . . . .0.27% . . . . . .22.94%
Wimbledon Fund Ltd. Class C Shares* . . . .Multiple Advisors . . . . . . . . . . . . . . . . . . . . . . . .1.33% . . . . . .18.68%
Less than $10 million under management
1. BAM Asset Mgmt. (Program 1) . . . . . . . . . . . . . . . .+25.88% . . .+8.80% Worst performers in 2005
2. Calaveras Trading (Standard 2X) . . . . . . . . . . . . . . .+22.99% . . .+2.88% Smith Barney Mid-West Futures II . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-11.67% . . . . . .-24.32%
3. Marshall-Weins Trading (Version #2) . . . . . . . . . . . +22.88% . . . .-0.38% Dean Witter Portfolio Strategy Fund . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-12.07% . . . . . .-24.25%
4. SMI Management . . . . . . . . . . . . . . . . . . . . . . . . . . .+21.12% . . . .-4.73% Shearson Mid-West Futures Fund . . . . . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . .-11.67% . . . . . .-24.17%
5. Fort Orange Capital Mgmt. (Gl. Strat.) . . . . . . . . . . .+19.00% . .+30.75% Shearson Select Advisors Futures Fund . . . .J.W. Henry . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-5.15% . . . . . .-23.92%
Man AHL Diversified plc* . . . . . . . . . . . . . . .Man Investments . . . . . . . . . . . . . . . . . . . . . . . .-8.22% . . . . . .-23.21%
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 Note: Listed return may not be fully attributable to listed advisor(s). * Offshore fund.

Trendlines continued
Trendlines Continued, page 17
business and the 35% interest in the company, alleging a breach of fidu- on Nymex, a violation of the
FXCM owned by Refco Capital ciary responsibility. Beeland has $374 Commodity Exchange Act.
Markets (RCM). The likely buyer is million tied up in the Refco bankrupt- The order assesses a $200,000 fine
FXCM. RCM claims to owe customers cy and has filed suit against Refco, against Stasco and a $100,000 fine
$4.16 billion. Refco Inc. still owes alleging the company improperly against Catteral. Royal Dutch Shell
$16.8 billion to unsecured creditors. moved the funds from secured to unse- is the parent of both firms.
cured business units just prior to According to the order, traders for
• Refco Securities LLC now faces Refco’s collapse. Stasco and Stusco prearranged and
liquidation after a bankruptcy judge By Chris McMahon executed non-competitive crude oil
ordered the company to return $117 futures trades on five occasions
million that was already transferred SHELL GAME between November 2003 and March
to RCM. 2004. Traders for the two related
Oil giant charged firms agreed to take the opposite side
• Thomas H. Lee, founder of the
‘friendly takeover’ firm that bears his with violating CEA of crude oil trades with the quantity
and contract month predetermined.
name, has resigned. Thomas H. Lee The CFTC on Jan. 4 filed and Catteral, Stusco and Stasco con-
Partners owned a 35% equity stake settled charges against Shell Trading sented to the order, which found
in Refco. US Company (Stusco), Shell they violated the CEA without
International Trading and Shipping admitting or denying its findings.
• Investors in Beeland Co. (Stasco) and Nigel Catteral, They are directed to cease and
Management Co.’s Rogers Raw former chief trader for Stusco, desist from further violations.
Materials funds have filed suit against for engaging in prearranged trades By Daniel P. Collins

Trading Places
B Y C H R I S M CM A H O N
Webber to head Patsystems

Prior to AttentiV, Webber was an
D
avid Webber replaces Kevin Send news of personnel moves to:
Ashby as CEO of Patsystems accountant with Price Waterhouse. Futures, 833 W. Jackson Blvd., 7th Floor
PLC as of Jan. 03, 2006. Chicago, Ill. 60607, Fax: (312) 846-4638
Previously, Webber was managing Edward T. Tilly will serve as vice Attn: Chris McMahon
director of software compa- chairman of the Chicago E-mail: cmcmahon@futuresmag.com
ny AttentiV, where he Board Options Exchange for a
worked for 10 years. “Pats third and final term. The vice Russ Rausch will rejoin Trading
has built itself up into a big chairmanship is the highest Technologies Inc. as executive vice
platform made up of blue member-elected position at president global support and chief infor-
chip customers,” Webber the exchange. Tilly has been a mation officer after a short stint as head
says. “They have a very CBOE member since 1989. of Calyon Financial’s electronic broker-
strong, capable management Gary R. King has been age for North America.
team and a very strong cus- appointed to the board of The Chicago Mercantile Exchange
tomer base; I am going to DAVID WEBBER directors of the Dubai has named C.F. Wong managing direc-
have the benefit of building Mercantile Exchange (DME), tor, Asia. Wong has more than 25 years
off that foundation and creating some the joint venture between the New experience in international futures mar-
real growth. That’s what I’m about, York Mercantile Exchange Inc. and kets. He previously served as CEO at
getting them through the next phase.” Dubai Holding. ABN-AMRO Asia Futures.
Hot Commodities
B Y C H R I S M CM A H O N
Notes stuck in range Minis looking large

Holly S. Liss, VP of Citigroup Global Markets Inc., expects to see the March The early 2006 equity rally has traders
10-year note contract just below 108-00. “On the outside, you do have a 62% bullish even with bearish technicals.
retracement of the entire range from September to November that comes in at Independent trader Stephen Hallman
110-13, and I think that is your topish area,” Liss says. says the E-mini S&P 500’s breakout
SA September Federal Reserve policy paper says demand from foreign central
banks is suppressing 10-year yields by as much as 150 basis points, says B. Craig E-mini S&P (Mar ‘06) daily
Elder, SVP of fixed income
research at Robert W. Baird
10-year T-note (March ‘06) daily
& Co. Inc. “Something’s got
to give,” he says, but he’s not
expecting any surprises
from new Fed Chair Ben
Bernanke, whom he expects
to be very conservative in
Source: eSignal
Q1 and Q2 and to tighten
interest rates in the fall.
The key is a 4.42% yield of an upward sloping wedge pattern is
— which the notes have usually a sign of an imminent sell-off,
Source: eSignal been hovering just below in but Hallman is not selling.
early 2006 — says Brian He says that by breaching the upper
Reynolds, market strategist at M.S. Howells & Co. When yields go below 4.42%, line, the way could be clearing for a
mortgage companies buy futures, pushing yields down; they sell if yields go above higher move. As a result, he’s looking
4.42% due to less refinancing. “I view this as a shock absorber for the economy. If to go long.
the economy is strong, yields go above 4.42%; [if it] is too soft, they go below 4.42.” The main factors influencing price
action in equities has been the Fed’s
interest rate increases, which the Fed
has hinted are nearing the end. “We
Sideways corn know they are going to raise the rate,
Analysts are bearish on corn despite an impressive December rally, particularly that’s already baked in. If they are at
after the March contract failed to take out October’s highs. Daniel W. Basse, or near the end, then that opens the
president of AgResource Company, attributes the rally to short covering by door for more upside,” Hallman says.
index funds and expects the large supplies to drive the market sideways until He expects March S&Ps to rally 3%,
news breaks on the next growing season. He pegs the March contract to a range to about 1325. He sees support at
between $2.10 and $1.90 per bu. and doesn’t see any help on the demand side as around 1250. “I like the 1250 area to
increased production from bio-genetics has absorbed any increase in world buy it.”
demand. “Although the grains look cheap in the context of the CRB index, the Stewart DeSoto, president of
fundamentals just aren’t DeSoto Capital Management LLC,
Corn (March ‘06) daily $ per bu. there yet,” Basse says. says seasonal factors indicate
Bob J. Wiedeman, princi- a strong rally in the index. “Despite
pal at Strategic Ag Trading, high oil prices, and gold prices going
is only slightly more opti- through the roof, I just don’t
mistic. He cites directional see anything holding the market
trades that get kicked in by back,” DeSoto says. He says there is
moving averages as a bearish a lot of pent up demand given the
factor. “The dryness in tight trading ranges that equity
South America, coupled indexes have been stuck in, particu-
with the short positions in larly in the Dow. DeSoto expects the
corn in the last month or so, March contract to hit 1360 in
Source: eSignal has driven it to 20¢ off the February, a 6% rally from the start of
lows. Now we backed off 10¢ the year. He sees 1280 as a likely
from the highs,” Wiedeman says. He calls a low of $1.90 and a high of $2.15. near-term low.

Market Strategy
BY MICHAEL BENHAMOU
How to benefit from an inverted yield curve

While an inverted yield curve is a general bearish indicator
T
he end of the year 2005 rally was affected after the
two-year Treasury note yielded more than the 10-year for equities, its negative implications to the banking
Treasury note for the first time in five years. Some sector makes that sector a prime target to short. The Regional
investors interpret an inverted curve as an indication that Bank Holders Trust (RKH) is an exchange trade fund (ETF)
the economy will soon experience a slowdown, which caus- traded on the New York Stock Exchange. There are currently
es future interest rates to give even lower yields. Before a 19 companies included in this ETF, among the largest
slowdown, it is better and most liquid U.S
to lock money into traded stock involved
long-term invest- in the regional
ments at present pre-
INVERSION TRADE Banking industry. In
By using options you can profit from inversion opportunities with limited risk.
vailing yields because 2003 the RKH went
future yields will be 150 up 33%, 10.46% in
even lower. 2004 and 4.3% in
These yield curve 140 2005 (as of Dec. 28)
inversions are rare, and after a rally of 10% in
they form during the last three months
130
extraordinary market of the year. If the yield
conditions wherein curve remains invert-
120
the expectations of ed for a while, the
investors are complete- RKH will most likely
ly the inverse of those 100 give back a large part
demonstrated by the ND J F M A M J J A S O N D J F M A M J J A S O N DJ F M A M J J A S O N D J F M A M of its gain.
normal yield curve. In 2002 2003 2004 2005 2006 A good way to play
such abnormal market Source: TradeStation a downside move on
environments, bonds the RKH is the follow-
with maturity dates fur- ing option strategy:
ther into the future are expected to offer lower yields than Date: Dec. 28, 2005
bonds with shorter maturities. The inverted yield curve indi-
cates the market currently expects interest rates to decline as RKH last price is $142.75
time moves further into the future, which in turn means the
Historical high 144.70 (Dec. 27, 2005)
market expects yields of long-term bonds to decline.
Remember that as interest rates decrease, bond prices increase
Historical low since 2003 is $91.20 (March 11, 2003)
and yields decline. Note that RKH was trading at 126.70 in October 2005
That the inversion has been somewhat limited does not dis-
qualify its importance. Even though yields between the two Buy a RKH May 130 put (debit $1.80)
year and 10-year have moved back and forth in positive and Sell a RKH May 145/150 bull spread ($4.40 credit and
negative territory, the fact remains that it has inverted. $2.60 debit)
Previous yield curve inversions took place in 1998 and then Total cost is zero excluding brokerage and margin
again in 2000, just before two economic downturns, but note
also that the 1996 inversion was followed by an economic Risk/ reward analysis
boom, so it does not always work! No less an expert than out- Max risk is $5 (or 3.3% of nominal) if the RKH is > 150
going Federal Reserve Board Chairman Alan Greenspan has as of May 20, 2006
You are short RKH > 145 (with a natural stop loss at 150)
discounted the connection between a yield curve inversion
No exposure if RKH is between 130 and 145 as of
and recession. While Greenspan acknowledges that the con- May 20 2006
nection has existed in the past, he has noted growing econom- “Unlimited” profit if RKH is < 130 at as of May 20, 2006.
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 a Michael Benhamou is co-managing partner of Louis Capital Markets
(LCM). Prior to founding LCM, he was head of sales & investment strategy
negative for banks, as they can not conduct their carry trade as in foreign exchange at Credit Lyonnais Securities in New York after having
a profit: borrow short, lend long-term and capture the spread. worked at Smith Barney Inc.

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

find home in the range
BY CARLA M. BAUCH
not head north of $70. “We are not in a changes due to the fact that we have
W
hile a few experts predict
we will revisit $70 per trending environment. We expect to reached a multiyear high in prices,”
barrel crude oil in 2006, see range trading up to May or June of Qureshi says. As an average for the
many analysts expect this year,” Patel says. (See “Less volatili- year, Qureshi expects crude to trade in
energy prices to stabilize during the ty for crude,” below). the upper $50s. More specifically, he
first half of the year. Predictions of Jamal Qureshi, lead analyst of PFC sees price ranges between $57 to $59
crude oil prices in the mid to high Energy’s oil market group agrees crude during the first half of this year and
$50s are the norm as analysts call for will settle into a trading range the first around $54 during the second half.
range-like markets instead of the half of this year. “We see significant Qureshi points to hedge fund activity as
trending markets energy traders have
came to know so well.
Vikram Patel, senior technical ana- LESS VOLATILITY FOR CRUDE
lyst for Informa Global Markets, Most analysts predict crude will experience less volatility in the first half of 2006 and
prices will range from the mid to high $50s per barrel.
explains, “A top is in place and we are
$/bbl.
not going back to these levels any time
70.00
soon.” Patel reminds us the largest gain
is often at the end of a bull market. 65.00
From approximately May to August of 60.00
last year, the price of crude oil rallied
$25.00. “This is the largest dollar 55.00
increase in the shortest time frame,” 50.00
Patel says. He points out the retrace-
45.00
ment levels of $46.20 and $70.85 — the
later reached in August 2005 after 40.00
Katrina hit the Gulf of Mexico — lead 35.00
to a 61.8% retracement of $55.40. After
seeing two solid Fibonacci levels inter- 30.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
secting at the same point, Patel forecasts 2004 2005
the price of crude will hold above Source: eSignal
$55.00 through June of this year, but

a telling tale of crude’s sentiment. ket to be the final judge. “I don’t think numerous reports about “demand
“Hedge funds are not automatically we are going to see 3% demand growth destruction,” if you look closely at the
bullish. They are now inclined to play unless we see $30 per barrel crude. If the numbers there has not been a tremen-
both sides,” he says. price stays up here we won’t see strong dous drop in demand since Katrina and
This year instead of focusing on how growth. The price has to go to a lower Rita struck the gulf coast. “For
high crude will climb, analysts are price level to get demand growth back.” instance, [demand of] gasoline over 9
debating what the low for the year will Bentz explains while we have read million barrels a day is good and gaso-
be. “The mission in 2006 is to find what
the floor price is,” explains Tim Evans,
senior energy analyst, IFRMarkets.com.
Evans explains there is inherent tension
in the relationship between high stock
Tech Talk: Crude projections
BY JOHN RAWLINS
prices and high energy prices. “They
don’t normally go together and this is a
serious bearish fundamental risk for the
crude oil market,” Evans says.
T he first chart is a projec-
tion of crude oil made
on Dec. 23, 2004, projected
84.4 CRUDE OIL, 12-23-04
Tom Bentz, energy analyst with BNP out one year. It is not a pro- 75.5
Paribas Commodity Futures, Inc., sees jection of price but price
crude oil’s drop as a correction that momentum. The price is 66.1
could make its way to $45. Prior to smoothed so we are able to
crude seeing a bit of a topping action extract a more constant 56.8
in mid December, Bentz would have cyclical behavior and then
predicted crude to retest recent lows of proprietary filters extract 47.4
$55, but after the commodity spiked a and combine those cycles to
bit Bentz sees $45 to $47 as a downside give a future projection. 38.0
8/6 10/15 12/23 3/11 5/20 7/29 10/7 12/23
target area. However, Bentz explains, The second chart is a 2004 2005
“The long term trend is still up. We crude oil weekly chart. You
could see a correction down to $45 and can see the relative strength 70
then we are probably looking for the index (RSI) under the chart 60
beginning of the next leg up that could with a vertical line indicating 50
last for two to three years.” where the crude forecast
40
was made from Dec. 23,
DEMAND’S INFLUENCE 2004. Compare the Dec. 23, 80
2004 forecast with the RSI to
A bigger question than where the price 70
note the close correlation.
will fall to is how much will demand 70
The strength of this program
grow in 2006. In mid December the is its ability to project the 60
International Energy Agency (IEA) said timing of the next high or 50
global demand for oil would amount to low. However, like all pro- 40
83.4 million barrels per day in 2005 and grams that are using histori- Oct Jan Apr Jul Oct
85.2 million barrels per day in 2006, cal data to project future 2005
adding that world demand growth for price behavior, they are sub-
2005 would end up at 1.4% and estimat- ject to unforeseen events 76.1 CRUDE OIL, 12-28-05
ed demand growth for 2006 at 2.2%. In like wars and hurricanes that
2004, the market experienced a much can disrupt the analysis. 68.8
larger demand growth of 3.8%, with a The last chart is the cur- 61.5
demand of 82.2 million barrels per day. rent weekly projection of
(See “World oil demand growth,” page crude and indicates momen-
54.2
28). “Somehow we take 3.8% demand tum moving higher into
growth in oil consumption as if the March 2006 with a decline
46.8
world is coming to an end, when really it into May 2006.
is not that much of a stress on the sys-
39.5
tem,” Evans says. However, Evans notes 5/13 7/6 9/2 10/28 12/23 2/10 4/7 6/2
this year’s high prices may very well John Rawlins is a trader and 2005 2006
dampen growth. Evans expects the mar- private researcher.

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

World oil demand is estimated to increase by about 1.7 million barrels per day in 2006,
up from 1.2 million barrels per day in 2005.
1.6 CHANGE FROM PREVIOUS YEAR
1.4 OECD* Non-OECD Asia FSU** and Eastern European Other
1.2 Forecast
Million barrels per day
1.0
0.8
0.6
0.4
0.2
0.0
2003–2004 2004–2005 2005–2006
*Countries belonging to Organization of Economic Cooperation and Development
**Former Soviet Union
Short-Term Energy Outlook, December 2005
Source: Energy Information Administration

EIA, as of the beginning of December, bound market for the first six months of
some 36% of normal daily federal the year. (See “Natural gas due to stabi-
Gulf of Mexico oil production and lize,” page 30.) Patel, sees natural gas in
approximately 29% of federal Gulf of February and March trading around $10
Mexico natural gas production remain to $12 per mBtu, but later in the year
shut-in due to Hurricanes Katrina and expects to see ranges around $12 to $14.
Rita. In Louisiana, shut-in onshore Evans notes natural gas recently
oil and natural gas production is down gapped 20% above the cost of heating
to about 40% of prehurricane capacity oil. “If we see a drift down in crude oil it
and is projected to be fully restored by will help shape the sentiment for natural
the end of March 2006. However, as of gas prices. We can’t sustain a 20% pre-
Dec. 22, shut-in oil status in the Gulf mium over heating oil prices,” Evans
was down to 412,687 barrels a day — a says. He blames the unprecedented high
more than 126,000 barrel improvement natural gas prices on reaction to the hur-
from early December. (See “Hurricane ricanes. “We priced in a shortage,” he
recovery,” below.) says. And while analysts’ opinions differ
on their view of the supply situation of
NATURAL GAS FOLLOWS SUIT natural gas and other energies, statistics
Natural gas appears set for a calmer first from the Energy Department tell us that
half of 2006 as well. Traders and analysts U.S. supplies of crude, heating oil and
are predicting less volatility and a range natural gas as of the week of Dec. 16
HURRICANE RECOVERY
Gulf crude oil production has improved at a slower pace than natural gas. Some hurricane
affected facilities will remain out of service through the second quarter of 2006.
Mbd SHUT-IN FEDERAL OFFSHORE GULF CRUDE OIL PRODUCTION $/bbl.
2,000 Shut-in Production 72
WTI Crude Oil Price Forecast
(left axis) (right axis)
1,600 63.00 66
61.75 62.50
60.00
1,200 60
800 54
504
392 331
400 297 48
0 42
8/22 9/11 10/1 10/21 11/10 11/30 Dec Jan Feb Mar
Mbd=Thousand barrels per day, $/bbl.=Dollars per barrel Short-Term Energy Outlook, Dec. 2005
Bcf/d SHUT-IN FEDERAL OFFSHORE GULF NATURAL GAS PRODUCTION $/Mcf.

10 Shut in Production 20
Henry Hub Price* Forecast
(left axis)
(right axis)
8 16
12.34 12.51 12.02
6 9.93 12
4 8
2.4
1.5 1.0
2 0.7 4
0 0
8/22 9/11 10/1 10/21 11/10 11/30 Dec Jan Feb Mar
*Trading on Henry Hub suspended from 9/23-10/6, Bcf/d=Billion cubic feet per day, $/Mcf.=Dollars per thousand cubic feet
Short-Term Energy Outlook, Dec. 2005
Source: EIA

Markets continued
NATURAL GAS DUE TO STABILIZE

Like crude oil, natural gas, according to most experts, is headed for a range trading market this year.
$/mBtu.
16.00
15.00
14.00
13.00
12.00
11.00
10.00
9.00
8.00
7.00
6.00
5.00
4.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2004 2005
Source: eSignal
were above the five-year average. “Even Commission (CFTC) for another five
with the upside potential that it stays years, which included a controversial
cold, there is not a shortage in natural amendment aimed at providing more
gas. The supply situation is not in bad transparency to the natural gas markets.
shape,” Evans says. On Dec.13, natural According to the House Committee on
gas reached an all-time high of $15.78, Agriculture, the amendment charges
after a cold wave moved across the the CFTC with preventing and detect-
United States. In late December, natural ing manipulation of the natural gas mar-
gas prices were more than 70% above kets, outlines increased record keeping
prices form a year ago at that time. In requirements for large traders operating
addition, gasoline futures as of late on the exchanges and increases the civil
December were up close to 50% from and criminal penalties for violations of
the previous year at that time and heat- CFTC antimanipulation rules.
ing oil experienced more than a 30% The amendment has received oppo-
gain over the past year. sition from several groups including
Even though it appears crude oil and the Treasury Department, the Federal
natural gas will not be as volatile this Reserve and industry associations such
year as in 2005, traders participating in as the Futures Industry Association. In
the energy markets are still looking for a Dec. 13 letter to Congress Federal
ways to manage the risk that goes hand Reserve Chairman Alan Greenspan
in hand with energies. Take for referred to the language in the amend-
instance, natural gas. “A lot of cus- ment as “rather vague” and explained
tomers are trading natural gas,” it could be read to require the CFTC to
XpressTrade’s Zarembski says. broaden record-keeping and reporting
However, he explains because margins requirements beyond futures. The
are so high, traders are looking at Senate must still approve the bill and
options. “By trading options, traders while the Senate Agriculture
can play the market [without] taking Committee approved a version of the
quite as high of a risk in their outright bill in July, the Committee is still
position,” he says. working out details with the Senate
It is not only traders, though, taking Banking Committee. As of late
notice of natural gas. On Dec. 14, 2005, December, the bill was not yet on the
Congress also has a closer eye on the Senate’s schedule. FM
market. The House of Representatives
approved legislation to reauthorize the
Commodity Futures Trading Carla M. Bauch is a freelance writer in Chicago.

Forex Trader
BY ABE COFNAS
The gift of the break-even trade

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

EQUITY TRADING TECHNIQUES
Here are a couple ways to use buy-write options strategies to mimic the
performance of traditional bond and stock investments — as well as an
approach that uses a relatively new derivative instrument.
Versatility of
buy-write strategies
BY MIKE OYSTER
The most significant growth for liability to buy back the call. But what
L
ast month we outlined the
theory behind the buy-write covered call writing came after the if a call option was written a bit further
trading strategy. Buy-write, Chicago Board Options Exchange out-of-the-money? It wouldn’t provide
also called covered call writ- (CBOE) commissioned the develop- as much income, but would allow for
ing, programs have experienced strato- ment of a passive buy-write index. greater capital appreciation. An exam-
spheric growth recently and now This index, the BXM, showed the per- ple can illustrate how that might work.
include more than $18 billion in assets. formance of a completely decision- On Nov. 21, the S&P 500 index
Although the growth has been impres- free foray into covered call writing. futures closed at 1257.00. The BXM’s
sive, the concept remains in its infancy Most buy-write strategies today are philosophy, if used in the futures mar-
as virtually all the assets are managed similar to the BXM, which behaves ket, would dictate selling a call at the
with the same general philosophy. The uniquely relative to both stocks and next highest strike with one month
idea can, however, be stretched and bonds. In other words, BXM-like pro- until expiration — in this case, the
molded to form different investments grams can be expected to grow assets December 1260 call.
to meet different needs. modestly and generate income, but not Selling this call at 10.3 would
Most investments fall into one of a tremendous amount of either. Thus, have generated $2,575, but capped
two distinct categories: those that seek we can bend the BXM’s rules a little to capital appreciation at only 0.2%
capital appreciation and those that create some different investments that until the options expired the third
generate income. Although exceptions target more specific goals. Friday in December.
exist, stocks are expected to provide Let’s loosen the cap a little and write
capital appreciation and bonds are used GROWING PRINCIPAL a call approximately 1% out-of-the-
for generating income. As a capital appreciation tool, the money so we can capture 1% per
Being able to classify an investment BXM has good potential. The princi- month in capital appreciation if the
as one or the other is an important pal inhibitors to the BXM’s asset market advanced that much or more.
aspect of effective portfolio construc- growth qualities are the call options Selling the December 1270 would do
tion, but most buy-write programs are written barely out-of-the-money (at the trick and would also generate
not easily classified as stock-like or the strike price just above the current $1,450 in income.
bond-like. They may still merit consid- index’s price). So, we have an unleveraged position
eration, but the concept could prove Upward moves in the market are that is on pace to generate 5.5%
more effective if implemented with a capped at that strike because any addi- in income — $1,450 times 12 divided
more focused performance agenda. tional appreciation is offset by an equal by $314,250 (1257 x $250) — and

allows for 1% per month in capital
appreciation. This can be particularly
OPTIONS FOR ETFS
While many of the options on ETFs lack liquidity, some of those listed by the Chicago
compelling if future stock market Board Options Exchange (CBOE) are based on popular underlying markets.
returns are, as many expect, below
historical averages, because giving Options on Diamonds (DIA)
Diamonds are shares in an ETF that is designed to track the performance of the Dow Jones Industrial Average.
away the upside will be far less painful
Options on this ETF are physically settled and represent 100 shares of the underlying Diamond. They are
than it would be if the market posts American style exercise. They have been trading at CBOE since May 20, 2002.
20% returns.
Certainly the stock market will not Options on iShares MSCI EAFE (EFA)
go up 1% every month, but even if we The MSCI EAFE index is a stock index based on Europe, Australian and Far Eastern holdings. Options on this ETF
have been traded since Sept. 25, 2002.
captured just 5% of the upside during a
given year, combining that with the Options on iShares S&P 100 Index (OEF)
5.5% in income could result in greater An option on 100 shares of the iShares S&P 100 index ETF, an exchange-traded fund managed by Barclays Global
capital appreciation than the stock Fund Advisors to track the S&P 100. These are American style options.
market in general.
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-
MONEY FLOW mance of the Nasdaq 100. These also are American style options.
To create a fixed-income generating
vehicle, we sell a higher-priced option Options on SPDRs (SPY)
An option on 100 shares of Standard & Poor's Depositary Receipts (SPDRs). This ETF option also has American
at a lower strike price. This will style expiration.
produce more cash, but we don’t
want to just spend all of the Source: CBOE
income immediately.
Monte Carlo simulations indicate
that if all the income from a covered promise. The more income spent, the cuss the specific financial tools for
call writing program was spent, the greater the risk of principal loss. Some implementation. Our examples used
total value of the investment would studies show if 10% of covered call futures and futures options, but most
soon deteriorate to zero because it writing income is spent and the buy-write programs are constructed
endures all the downside moves of the remainder reinvested, the principal with S&P 500 index (SPX) options.
stock market and enjoys none of value of the investment could be main- The problem with using SPX options
the upside. tained. Even if only 8% was generated is that there is no underlying security
A better idea is to kick out the in income, such a yield would prove far that can be delivered if the written
income you need and reinvest the rest. superior to most fixed income strate- calls are exercised. More to the
Unlike a bond, which will return the gies in use today. point, selling SPX calls as part
principal to the bondholder at maturi- However, it should be noted that of a buy-write program would be
ty, the “principal” of a covered call certain market environments could considered a “naked” position,
writing strategy is the cash used for make even that much income difficult necessitating hefty margin require-
investing in S&P 500 futures, which to generate while still preserving ments that would lessen the efficiency
must be replenished after negative principal. Transaction costs and taxes of the program.
stock market performance. should be considered as well. One potential solution may be found
Looking again at Nov. 21, we see the in an entirely different derivative:
1250 call could have been sold for OPEN THE TOOLBOX exchange traded funds (ETFs). There
16.5, which would have generated Now that we can see how a buy-write are ETFs that have options connected
$4,125 in income — a 15.8% annual- strategy can be created to achieve more directly to them. Using ETFs might
ized yield on an unleveraged invest- specific investment goals, we can dis- allow a buy-write program to be con-
ment of $314,250. Spending that much
income without reinvesting anything
would lead to total depletion of assets.
So some of the income should be rein- The problem with using SPX options is that
vested back into the program in order
to maintain the “principal” value of there is no underlying security that can be
the investment.
How much should be reinvested? delivered if the written calls are exercised.
That depends, and requires some com-

Equity Trading Techniques continued
AMPLE OPPORTUNITY tion that actually lost value. However,

While buy-write strategies can be constructed using SPX options or options on the ETF having the investment completely
(SPY), the best opportunities may be found using options on the S&P 500 futures. contained within a futures program
may allow more favorable tax treat-
S&P 500 Futures January Calls (OS) S&P 500 Futures January Puts (OS) ment of profits and the opportunity to
Est. Est. offset losses.
Strike Open High Low Last Settle Change Volume Open Int. Strike Open High Low Last Settle Change Volume Open Int.
The greater awareness of covered call
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
writing has increased the average
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
investor’s comfort with this terrific
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
investment tool. Additionally, creating
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
strategies through the use of futures and
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
futures options may prove more efficient
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 and effective than using securities. As
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 the concept becomes more widely
understood, we can say with a high
Source: CME.com
degree of confidence that various forms
of covered call writing strategies will be
structed without excessive margin number of strike prices, inhibiting designed and offered to fulfill far more
requirements, but doing so brings about opportunities to build precise strategies. specific investment needs. FM
a new set of problems. Finally, there is the tax issue. An
Of the ETFs that have options investor who generates short-term
connected to them, most are relatively option income while holding the Michael J. Oyster is a CFA, CTA and is the
author of Mission Possible, Achieving
illiquid, with wider bid-ask spreads. underling ETF for the long term may Outperformance in a Low Return World.
Also, most ETF options have a limited be forced to pay income tax on a posi- www.AchievingOutperformance.com.

TRADING TECHNIQUES
Floor traders constantly try to profit from price anomalies between
open outcry and electronic contracts through arbitrage. Part of their strategy
is the not-so-subtle ways they try to influence either market. This plays
a major role in the price flow of both markets.
Understanding
the arb trade
BY BEN LICHTENSTEIN
MANY FACES middle out of each trade by buying the
A
rbitrage is one of the most
influential but commonly Arb opportunities can present them- bid and selling the offer. Arb locals
misunderstood factors that selves in many different forms. There are only trade when an arb opportunity is
drive price activity in mod- arb situations that occur because the present. Arb locals rarely hold a posi-
ern futures markets. Understanding market is slow and situations that are tion for more than a second, if that
how arb trades work can give available only because the market is long. They are in constant communi-
you an edge regardless of your extremely busy and moving fast. cation via wireless headset to another
trading approach. One arbitrage opportunity that was local who is sitting in front of a Globex
A successful arb, in the simplest of popular recently was the spread terminal located around the perimeter
terms, is the instantaneous, or near between cash currencies and futures. of the pit.
instantaneous, purchase of one product Back in the 1980s and early 1990s, The bid and offer are commonly mis-
and the sale of another that results banks and institutional traders would understood. A bid is not any buyer,
in a profit but a net zero position. arb the interbank cash markets and the and an offer is not any seller. A bid
Popularly traded products, such as futures traded in the pit. As prices represents a buy order of a certain
the S&P 500 futures, that offer side-by- diverged, traders would buy the cash quantity at a certain price. An offer
side open outcry and electronic and sell the futures for instant profit. represents a sell order of a certain
trading provide some of the best While this type of arb certainly was the quantity at a certain price. The current
opportunities to execute arb trades predecessor to the arb of today, the two bid/offer represents the narrowest
today. Floor traders frequently are in are different in many ways. spread between buyers and sellers. The
position to take advantage of price However, before we get into the difference between the bid and the
discrepancies that occur regularly in specifics of modern arb trades and the offer is the spread. Trade occurs when
the two separate marketplaces. influence on the markets, we need to the bid and the offer find a price with-
These regular discrepancies create understand the basics. in the spread they both agree upon or
arb opportunities throughout the trad- First, we have the trading pit. The when a third party enters the equation
ing day. With a basic knowledge of trading pit is the arena where all open and executes a trade at the standing
the simple terms and procedures used outcry orders are executed, or filled. bid or offer.
we can break down this trade, show The pit has three types of participants, Differences in prices and tick values
how it affects prices, and broaden our filling brokers, locals and arb locals. are necessary for the arb to occur. For
understanding of a major influence on Filling brokers execute trades for cus- instance in the S&P 500 futures, pit-
these markets. tomers. Locals attempt to scalp the traded contract prices change in 0.10

increments, such as 1192.20 to
1192.30. The cash value of this change
MARKET TERMINOLOGY
Understanding these basic terms will help you realize the workings and influence
(tick) is $25.00. The E-mini contract is of arb trades.
one-fifth the value of the pit-traded
contract and it ticks in 0.25 incre- Trading pit: The arena where all open outcry orders are executed or filled.
ments such as 1192.00 to 1192.25 (see
“Different ticks,” page 40). Even Filling brokers: Open outcry participants who execute customer orders (fill paper) for a commission. They
though the move is bigger, the con- typically stand on the top step.
tract value is smaller, so the cash value
of this one-tick move in the E-mini is Locals: So-called “scalpers,” locals are the open outcry participants who are the middlemen to the majority of
$12.50, or half the value of a one-tick trades. They provide market liquidity. They are the market makers. They typically stand in the middle of the pit.
move in the pit-traded contract. It's
primarily contract size and tick size Arb locals: Local traders whose sole purpose is to take advantage of the arb opportunities between the price
that create the opportunities. in the pit and the price trading on the electronic markets.
Bid: Someone trying to buy a certain quantity at a certain price.

SLOW AND STEADY
Arb groups are usually made up of just Offer: Someone trying to sell a certain quantity at a certain price.
two traders. One trader stands in the pit,
being constantly fed bids and offers on Spread: The difference between the price where bids are willing to buy and the price where offers are
where the E-mini is trading. When the willing to sell.
E-mini contract is showing a 1249.25
bid, the arb locals in the pit are all Tick values: The minimum distance a market can move. The different tick values of the pit- and electronical-
showing a 1249.20 bid. If paper comes to ly-traded markets is one of the main reasons arb opportunities exist.
the pit to sell at the market, the filling
broker will sell to the locals showing the
1249.20 bid.
Immediately after buying the the tick. If they miss the 25s and end the E-mini.
1149.20s in the pit, the second mem- up selling the 1249.00s, they go from a But what if something causes the
ber of the team, who sits in front of an profit of $12.50 per contract to a loss of E-mini market to drop abruptly, which
E-mini terminal, sells the 1149.25s in $50.00 per contract. To be a successful is often the case when a large sell order
the E-mini on the screen. Because the arb local, you need to be in constant hits the screen or the pit? Say the E-
ratio is five E-mini's to every one S&P, communication with your partner, mini drops to 1249.50. The arb locals
he needs to sell five mini’s for every who's watching the E-mini screen and now have a chance to sell to the limit
one contract his partner bought in the can immediately execute the other leg order in the pit at 1249.60 and buy the
pit. If an arb local buys 20s in the pit of the spread for a profit or minimal new offer on the screen at 1249.50. In
and sells 25s on the screen, he has loss. The speed in the communication this case, the arb local has to be aggres-
made 0.05 per contract, which is a between the two is essential to avoid sive to get the filling broker to trade
total profit of $12.50 for that trade. missing the second leg of the trade. with him. If he does, he has completely
Arb locals would also try to buy at This coordination occurs hundreds of exploited the arb; this is the closest
1249.70 when the market in the times a day and has in many ways anyone will ever get to free money.
E-mini is showing a 1249.75 bid. Or on added liquidity to the pit.
the sell side they would try to sell at OVERFLOW EFFECTS
1249.80 when it is offered in the FAST AND FURIOUS While the arb affects price activity in
E-mini at 1249.75. The basic or slow arb trade is just one of many ways, there are two specific results
In theory, the arb is a guaranteed many that arb locals capitalize on regu- are worth examining. The first is the arb
moneymaker. In reality, the trade larly. Another type of arb, the fast arb, slows a very fast moving market, reduc-
requires a great deal of discipline, skill, presents itself when the market makes a ing volatility. The second is though
patience and the ability to adapt to sudden move up or down. many traders believe the electronic mar-
constantly changing market condi- If a broker in the pit is working kets lead the floor, the arb creates this
tions. These examples are simple but it a limit order to pay 1249.60 on 50 illusion that the E-mini contract leads
doesn't always work out that way. contracts, arb locals would be offering the pit when the opposite is true.
Arb locals are not without risk. After 1249.80. Why are they offering the To demonstrate, assume that the
buying the pit contract at 1249.20, 80s? The most likely reason should be spread in the pit is 1249.50 bid at
they need to sell at 1249.25 to make clear: 1249.75 is probably the offer in 1250.00 offer.

Trading Techniques continued
provides a market for the market mak-

DIFFERENT TICKS ers. It enables locals to create a win-
The larger S&P pit-traded contract moves in smaller price increments, so they appear
to move in a smoother fashion than the electronically traded E-mini contract. This ning trade for a very small profit out of
discrepancy creates arb opportunities. a trade that in the past would have
been an immediate loser.
1259.50 SELECTED TIME & SALES DATA The illusion this creates to traders off
1259.40 (DEC. 8, 2005) the floor is that the E-mini contract
1259.30 E-mini (RHS) leads the pit, but the opposite is true.
1259.20 When a large sell order hits the pit it is
Pit contract (LHS)
1259.10
the arb locals selling the E-mini con-
tract to lock in small profits that you
1259.00
first see on the screen. Traders off the
1258.90 floor see the bids getting hit in the
1258.80 E-mini and then prices moving lower
1258.70 in the pit. This also creates the illusion
1258.60 that it is initiative action in the E-mini
1258.50 contract when it is actually responsive.
1258.40
HISTORY LESSON
1258.30
The markets have gone through many
1258.20 changes since the introduction of
1258.10 electronic trading. The arb has become
1258.00 increasingly popular and will continue
1257.90 to grow in popularity as the depths
1257.80 of the market increase on the electronic
platforms. The changes the market
1257.70
has gone through as a result of electronic
1257.60
trading are not always obvious to
1257.50 many day-traders and the effects the arb
8:30:05
8:30:17
8:30:27
8:31:23
8:31:36
8:32:39
8:33:01
8:33:10
8:33:10
8:34:05
8:34:32
8:35:16
8:35:38
8:35:34
8:35:37
has on price activity within markets that

offer side-by-side trading often similarly
go unnoticed.
Source: CME
It's important that these traders
understand the influence this type of
Five years ago when most S&P 500 that without the E-mini would have trading has to recognize potential pit-
orders were still executed in the pit, if a been a loss. falls as well as profitable opportunities.
larger firm such as Morgan Stanley had Before, many locals were forced to No matter what product you trade, you
large quantities to sell, say 500 con- step aside when such orders came into need to obtain all the information pos-
tracts, the order almost always would the pit or risk getting run over. No one sible that affects it.
push the price dramatically lower. This wants to be the first buyer of a large sell With new derivatives products com-
is called slippage. Depending on the order. As the order is laid off into the ing online all the time — futures,
market conditions and the size of the market, it eats up all the current options, ETFs, options on ETFs, futures
large order, slippage could be anywhere demand. The game was anticipating on ETFs, etc. — based on the same or
from one to three full points, or from the last chunk of the big order, antici- similar underlying, it creates more arbi-
1250.00 down to 1247.00, before all pating the eventual surge higher. trage opportunities. By understanding
contracts were sold. Now, when a large firm has a the fundamentals of the arb trade in the
But now that the E-mini has big order it tends to have much less S&P 500, even if that trade is not as
achieved a critical level of liquidity impact on the market. Instead of hav- viable as before, traders can equip them-
slippage has been reduced dramatically, ing to get out of the way, locals can selves to take advantage of these new
sometimes to as little as half a point for provide a bid that is just below that of opportunities as they appear. FM
a 500 lot order. This can be attributed the existing bid in the E-mini. If the
to the arb locals in the pit having seller gives to their bid, the arb locals
Ben Lichtenstein is the president of
access to the E-mini contracts, which immediately sell the E-mini to lock in TradersAudio.com and a member of the
allow them to take a profit on a trade a small profit. The arb trade, in turn, Chicago Mercantile Exchange.

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’S
TOP 10
TRADING
SYSTEMS
BY GEORGE PRUITT AND JOE BOBEK
F
inding 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.

This is the fourth long-term review TOP 10 THROUGH TIME
of the top 10 trading systems. The There are a few constants on this list of the top 10 commercially available trading systems
previous three were published in (listed alphabetically).
1993, 1997 and 2001. As before, this 1993 1997 2001 2005
current list was not solely determined Black or White Aberration Aberration Abberation
by profitability. The following criteria Culler Currency CatScan 1 Basis II Basis II
were used to pick 10 systems from a DCS-II Combo Advantage DCS II Checkmate
universe of more than 200:
Dollar Trader Culler Currency Dollar Trader Dollar Trader
1. A minimum of four years of real- Pilot Trader DCS II Dynamic Break Out Golden SX
time simulated results. Quad Level Trend Dollar Trader Golden SX R-Breaker
2. Consistency of returns; minimum Time Trend III Grand Cayman Grand Cayman R-Mesa
drawdowns relative to profits. Ultimate II R-Breaker R-Breaker ReadySetGo
3. Minimum amount of curve fitting Volpat Time Trend III STC S&P Day Trade STC S&P Daytrade
to past data. Wilder's Volatility Universal LT TrendChannel TrendChannel
4. Consistent parameters for all mar- Source: Futures Truth Inc.
kets traded.
The year 2004 ended on a sour note and performance diminished with time. This
“Top 10 through time” (above) lists the first few months of this year pushed raises the question that all system devel-
today's top 10 trading many commodity trading advisors opers and traders struggle with: Do all
systems alphabetically. It also alphabeti- (CTA) and trend traders into the cellar. good systems eventually fail? The answer
cally lists the top 10 trading systems of Many of them have yet to climb out. is not a simple yes or no.
past years. There are exceptions; many of the advi- The accompanying tables and graphs
There wasn't any one system that sors that focus on the energy markets demonstrate that these 10 systems,
stood head and shoulders above the rest. have had spectacular results. November despite being on this list, have gone
While we hoped we would produce a produced good trending markets and through some gut-wrenching draw-
list that included a mix of markets and many trend traders were able to capitalize downs. Many of the results may suggest
strategies, the performance figures of and pull their year-to-date numbers up to these systems have failed. However, it's
trend following and S&P 500 day-trad- respectability. This is evident in the equi- important to view the results with an
ing systems rose to the top of the heap. ty curves of the trend-following systems open mind. The markets as a whole
Seven systems on our list are trend fol- that we have included in our list. have exhibited a less-than-friendly trad-
lowers and the other three are S&P 500 It was tough compiling this list, and ing environment through the past three
day-trading systems. we were limited to those systems that years, with 2005 leading the way. Trend
we currently track. This top 10 list may followers have had it especially tough in
WHAT'S GOOD? be biased toward systems with longer this period with only a handful of mar-
In our selection process, long term real-time results (only results obtained kets providing profitable trends.
viability was more important for with data after the system’s release to Nonetheless, these 10 systems have
inclusion than recent performance; the public are included). performed in the past and are doing so
we looked at the big picture. Do note, however, all of the system right now in these difficult market con-
For example, many day-traders have performance numbers presented are ditions and should do so in the future.
migrated from the S&P (mini and full- hypothetical. They only traded in the After all, the one constant of system
size contracts) to the mini contracts of world of the computer. Real-life trading trading is there is no perfect system:
the Russell 2000 and Mid Cap 400. The and simulated trading can be quite There is no Holy Grail.
once highflying mini Nasdaq has fallen different, and this difference can be
out of favor altogether. The year 2005 further magnified by a higher frequency TESTED MARKETS
will go down in history as one of the of trading. Of the 10 systems, two, Where applicable, we have tested the sys-
worst performing years for day-trading. R-Mesa 3 and Checkmate, are “black tems on a portfolio of 16 different markets:
Volatility, the fuel for day-trading prof- box” systems (trading logic is encrypt- U.S. Treasury bonds,Treasury notes,
its, has sunk to levels last seen in the ed). The rest disclose their rules to British pound, Japanese yen, Swiss
mid-1990s. However, the latter part of customers and researchers. franc, euro FX/Deutsche Mark, soy-
the year did show an up-tick in volatili- Obviously, the top 10 list has changed beans, cotton, live cattle, copper,
ty and system performance. through time. Some of the systems natu- sugar, orange juice, heating oil, crude
Like the day-traders, trend followers rally fell off because they were no longer oil, natural gas and silver.
also have been beaten down by 2005. available. Others fell off because their Markets were chosen based on liquidi-

TOP 10 SYSTEMS: JUST THE FACTS

The performance figures of each system are listed by market traded. The statistics are the composite figures through the 20-year test period.
The accompanying equity curve charts show how the hypothetical equity for these systems might have grown through time, although such
performance would have been unlikely for any one person trading these systems in the past due to the benefits of hindsight and other reali-
ties of actual trading. The systems are listed in alphabetical order. Some systems have limited data available due to artifacts of their trading
approach or black-box nature.
ABERRATION
TYPE: Longer-term trend following
Developer: Keith Fitschen
Web site: www.trade-system.com
Cost of system: $2,295
Total 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 $667,000
T-bonds 25660 1288 25590 -3980 8280 5 47.8 58 1.3 4.6
$592,000
T-note 20840 1046 25590 -7780 8570 4 46.1 5 1.3 3.9 AFTER
British Pd. 37644 1890 29725 -2588 5744 5 40.7 57 1.3 6.1 RELEASE $517,000
Japanese Yen 124588 6255 19113 7475 6350 5 50.0 65 2.3 29.4
Swiss Franc 56625 2843 16588 -1375 5188 5 51.0 63 1.5 15.4 $442,000
BEFORE
Euro (DM) 106088 5349 26900 225 9750 5 46.4 62 1.7 18.2 RELEASE $367,000
Soybeans 335 17 45390 5000 5000 7 34.8 61 1.0 0.0
Cotton 61360 3081 15990 -6290 10730 6 44.6 64 1.6 18.1 $292,000
Live Cattle -8044 -404 17892 -1996 4616 8 36.1 65 0.9 -2.2 $217,000
Copper 21450 1077 26338 14288 3525 6 40.7 61 1.3 3.8
Sugar -739 -37 13563 1680 1243 6 39.6 61 1.0 -0.3 $142,000
Orange Juice -4155 -209 32505 -3053 5273 7 39.8 64 0.9 -0.6
$67,000
Heating Oil 58048 2915 21357 -979 19043 7 47.0 68 1.4 12.5
Crude Oil 62620 3144 16980 -8440 13490 7 54.8 71 1.7 15.4 $0,000
Natural Gas 109100 7001 42000 24740 31740 7 47.8 71 1.7 14.6 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Silver -26090 -1310 46265 -4315 10030 5 36.8 56 0.7 -2.7
BASIS II
Type: Intermediate-term trend following with oscillator-based indicator
Developer: Alfaranda CTA
Web site: www.alfanetsys.com
Total Avg Max P/L DrawDn Trds Wins TIM W:L Gain $826,000
AFTER
$PL $PL/Yr DrawDn (Last 12 mo) (Last 12 mo) /Yr (%) (%) ratio /Mr+DD $733,000
BEFORE RELEASE
T-bonds 72960 3663 14460 -3650 8600 9 44.0 86 1.5 21.3
T-note 60530 3039 18200 -6850 7870 11 45.1 92 1.5 15.4 RELEASE $640,000
British Pd. 53350 2679 29263 -1788 7581 10 41.5 90 1.3 8.7 $547,000
Japanese Yen 146988 7380 24775 15700 4413 10 41.2 86 1.8 27.4
Swiss Franc 127500 6402 14250 11213 4463 10 44.8 89 1.8 39.8 $454,000
Euro (DM) 114238 5760 31800 -4163 14225 7 43.2 56 1.7 16.8
$361,000
Soybeans -9385 -471 35720 -2390 8540 13 36.6 95 0.9 -1.3
Cotton 71630 3596 24620 -1900 6005 11 46.1 92 1.5 14.0 $268,000
Live Cattle -4608 -231 20760 -576 5080 12 39.9 98 1.0 -1.1
$175,000
Copper 30163 1514 22825 12938 4938 11 38.6 92 1.2 6.1
Sugar 2274 114 14661 3562 1019 11 41.4 98 1.0 0.7 $82,000
Orange Juice 1463 73 20138 1350 1980 13 38.1 97 1.0 0.3
$0,000
Heating Oil 42332 2125 22915 0 0 11 47.0 81 1.3 8.5
Crude Oil 40820 2050 20060 -5100 5100 11 42.8 91 1.3 8.7 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Natural Gas 87600 5621 25620 0 0 9 43.7 65 1.8 17.7
Silver -12650 -635 38550 -6365 12565 13 34.5 93 0.9 -1.5

CHECKMATE
Type: Longer-term trend following black box system
Developer: Dean Hoffman
Web site: www.traderstech.net
Total Avg Max Wins W:L
$500,000
$PL $PL/Yr DrawDn (%) ratio AFTER
T-bonds 48575 2429 6863 51.85 2.11 $450,000
RELEASE
T-note 3622 181 8941 35.19 2.01 $400,000
British Pd. 55631 2782 19038 38.46 3.19 BEFORE
Japanese Yen 102088 5104 6113 50.00 3.24 $350,000
Swiss Franc 38663 1933 8813 37.93 2.86
RELEASE
$300,000
Euro (DM) 146013 7300 6300 52.73 3.44
Soybeans 11400 570 10425 40.00 2.05 $250,000
Cotton 28925 1446 8050 44.00 2.57 $200,000
Live Cattle -6746 -337 13065 19.35 3.28
$150,000
Copper -75 -3.75 13425 29.31 2.41
Sugar 651 32.55 7285 28.57 2.58 $100,000
Orange Juice 2948 147 10665 33.33 2.20 $50,000
Heating Oil 31804 1590 12917 35.59 2.91
Crude Oil 30575 1529 5475 47.17 2.49 $0,000
Natural Gas 110365 5518 21025 48.89 3.41 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Silver -28185 -1409 41115 22.73 1.80
DOLLAR TRADER
Type: Longer-term trend following $215,000
Developer: Dave Fox AFTER $190,000
Web site: www.dollartrader.com RELEASE
$165,000
Cost of system: $1,050 BEFORE $140,000
RELEASE
$115,000
Total Avg Max P/L DrawDn Trds Wins TIM W:L Gain $90,000
$PL $PL/Yr DrawDn (Last 12 mo) (Last 12 mo) /Yr (%) (%) ratio /Mr+DD
$40,000
Euro 52325 2627 19100 -4050 14850 4 41.7 88 1.6 12.2
$15,000
Japanese yen 155425 7804 17175 9163 7713 9 51.4 83 2.0 39.5
$0,000
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
GOLDEN SX
Type: Longer-term trend following
Developer: Randy Stuckey
Web site: www.mindfire-systems.com
$596,000
AFTER $528,000
T-bonds 29320 1472 19250 -2650 6600 7 38.4 66 1.2 6.7 RELEASE
BEFORE $460,000
T-note 41910 2104 18420 -3390 5820 7 47.4 72 1.4 10.6
British Pd. 22975 1154 52769 -4500 8575 8 31.8 62 1.1 2.1 RELEASE
$392,000
Japanese Yen 109313 5489 26038 6650 5150 7 42.9 68 1.8 19.5
Swiss Franc 49188 2470 24725 -5200 7388 8 39.5 68 1.3 9.3 $324,000
Euro (DM) 91250 4601 32450 275 9338 8 36.0 58 1.5 13.2
Soybeans -9435 -474 47810 -410 6115 9 37.6 74 0.9 -1.0 $256,000
Cotton 51475 2585 28595 -11135 12555 8 43.2 70 1.4 8.7
Live Cattle 6576 330 19440 760 3928 9 42.2 85 1.1 1.7 $188,000
Copper 18413 925 23788 12138 5388 8 38.6 77 1.2 3.6
Sugar -10293 -517 20821 1579 2766 8 40.1 88 0.9 -2.4 $120,000
Orange Juice 12540 630 28898 2093 2715 9 42.6 84 1.2 2.1
Heating Oil 7510 377 33256 4145 19286 9 34.4 70 1.0 1.1 $52,000
Crude Oil 64040 3215 19490 4670 10060 9 47.8 79 1.5 14.1
Natural Gas 135180 8675 45610 22850 26940 10 44.4 76 1.8 16.8 $0,000
Silver -43845 -2201 64060 -7895 13610 8 34.0 70 0.7 -3.3 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

ty and diversification. Diversification is Japanese yen and euro. TrendChannel system's walk-forward test compares
probably the most important cog in your was tested on the euro, 10-year Treasury with its backtest.
trading machine and your best ally in notes and Japanese yen. Performance results are based on a
fighting drawdowns. A portfolio of non- The performance of each trading sys- one-contract basis. This allows us to
correlated markets should have draw- tem consists of a hypothetical backtest compare apples to apples. Each round-
downs at different times and therefore and a walk-forward test. (Due to data turn trade was levied a $75 ($100 for
help reduce the overall maximum draw- requirements, R-Mesa 3 does not S&P) commission/slippage charge. In
down, which would be more severe include a backtest.) The two testing addition to the equity curves of each sys-
when trading overly correlated markets. periods are identified on the equity tem, a composite analysis, contact infor-
Some systems on the list weren’t curve charts that accompany the data. mation and a brief summary are provid-
designed to trade a basket of markets Although not valid for predicting ed. The composite analysis consists of
and their results are shown only on future performance, it is helpful to total profit, maximum draw down, per-
those markets recommended by the ven- include the hypothetical backtest data centage wins and win-to-loss ratio.
dor. R-Breaker, STC-VB and R-Mesa 3 with the walk-forward test data to give
were tested on the S&P only. Dollar insight into a 20-year performance win- DIFFERENT STROKES
Trader for Currencies was tested on the dow. Also, it's intriguing to see how a The top 10 trading systems do not use
READY-SET-GO
Developer: Alan Pryor
Web site: www.longtermtrading.com
Cost of system: $995
Total Avg Max Wins W:L

$PL $PL/Yr DrawDn (%) ratio $600,000 AFTER
T-bonds 10863 543 14456 36.84 1.94 RELEASE
$500,000 BEFORE
T-note 22000 1100 17934 44.00 1.69
British Pd. 84919 4246 10575 46.15 2.79 RELEASE
$400,000
Japanese Yen 131375 6569 16550 49.38 2.80
Swiss Franc 84100 4205 13363 44.87 2.50 $300,000
Euro (DM) 150250 7513 20938 43.82 3.06
Soybeans -6244 -312 21644 41.10 1.31 $200,000
Cotton 18545 927 23965 39.76 1.89
$100,000
Live Cattle 4955 248 11933 42.55 1.55
Copper -7413 -371 29400 35.82 1.60 $0,000
Sugar 8864 443 11611 46.88 1.51
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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-BREAKER
Type: Breakout and countertrend $336,000
Developer: Richard Saidenberg $298,000
Web site: www.soundviewcapital.com AFTER $260,000
Cost of system: $3,000 RELEASE $222,000
BEFORE $184,000
RELEASE $146,000
Total Avg Max P/L DrawDn Trds Wins W:L Gain
$108,000
$PL $PL/Yr DrawDn (Last 12 mo) (Last 12 mo) /Yr (%) ratio /Mr+DD
$70,000
S&P 300650 15223 36200 -20800 23025 146 43.80 1.30 36.3
$32,000
$0,000
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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

Type: Breakout and countertrend
$294,000
Developer: Stafford Trading AFTER $261,000
RELEASE $228,000
Web site: www.staffordtrading.com
$195,000
Cost of system: $1,200 (locked); $1,800 (open) BEFORE $162,000
RELEASE $129,000
$96,000
Total Avg Max P/L DrawDn Trds Wins W:L Gain
$63,000
$PL $PL/Yr DrawDn (Last 12 mo) (Last 12 mo) /Yr (%) ratio /Mr+DD $30,000
S&P 283900 14375 30325 0 12825 113 45.90 1.30 39.8
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 $0,000
TRENDCHANNEL
$302,000
Developer: John Tolan AFTER
RELEASE $267,000
Web site: www.trendchannel.com
BEFORE $232,000
Cost of system: Contact vendor RELEASE $197,000
$162,000
$127,000
$92,000
Japanese Yen 134663 6761 22450 8088 5300 7 46.4 76 2.1 27.5
$57,000
Euro (DM) 116400 5869 26138 -2738 15625 7 43.7 74 1.6 20.5
$22,000
T-note 42560 2137 13240 -5560 6480 7 43.6 74 1.4 14.5
$0,000
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
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.

the same analysis techniques to predict shelf life except S&P systems, which much money on the table. Marrying the
the markets. They fall into four basic tend to be shorter. There has been a short- and long-term approaches can
approaches: void of successful shorter-term systems alleviate the impact of these drawbacks.
(other than day-trading). The salient statistics of each of the
Trend following: A system that fol- To create a successful short-term sys- top 10 systems are found in "Top 10 sys-
lows the overall market direction on tem, one that trades three- to five-day tems: Just the facts" (page 43). Of
any time frame. swings, the system needs a high percent- course, there is no guarantee these sys-
Break out: A system that capitalizes age of wins and an average trade figure tems will produce profits like those
on market surges after stages of consoli- that's large enough to cover execution shown here or won't enter into an
dation. These can vary from short costs and still build equity. Through the unbearable drawdown next month.
intraday to long-term, meaning weeks years, developers have tried to create However, a trader who takes the time to
or months. such a system and some have had correctly develop a trading plan with a
Countertrend: This system tries to enough short-lived success to grab the solid money management overlay, has a
capitalize on the contrarian view, taking attention of brokers and the public. much greater chance of success. Starting
advantage of opposite moves against the Even though many short-term systems with a trading system that has done well
longer-term trend. can’t stand on their own as a primary throughout time is step one. FM
Oscillator: Incorporates an oscillating trading vehicle, they can be used to
indicator to determine trend changes to help hedge the bets of long-term trend
pick tops and bottoms. following. Also our $100 commission George Pruitt is director of research of Futures
Truth magazine and coauthor of Building
and slippage charge may be overly puni- Winning Trading Systems with TradeStation
The majority of these systems would tive given brokerage competition and and The Ultimate Trading Guide. George can be
be classified as longer-term trend follow- the liquidity of electronic markets. reached at george@futurestruth.com or
www.futurestruth.com. You can view Pruitt’s
ers. This approach seems to be preva- The two major beefs with trend fol- previous top 10 systems features at
lent among the systems with the longest lowing are drawdowns and leaving too www.futuresmag.com/previoustopten .
TRADING TECHNIQUES
Markets have taken advantage of technology during the last 30 years, but
where are the advances in analyzing price movement?
Has technical analysis

kept up with the
(Dow) Jones’?
BY DARRELL JOBMAN
are today’s Charles Dows, R.N. Elliotts better at analysis than the individual
T
echnology has revolutionized
the way business is done or W.D. Ganns with original analytical trader. “You would think that with
around the world, including ideas? Ask some of the people who so much money involved and the
many aspects of trading during have played prominent roles in the incentive that money managers
the last 30 years, but has it really pro- marketplace about the state of techni- have to produce profits, they would
duced any innovations in technical cal analysis today and you’ll get a wide have the best state-of-the-art analysis
analysis for today’s global, 24-hour range of answers. possible, but that’s not so,” he says,
electronic markets? noting the poor performance of many
Some new ideas in technical analysis SAME OLD THING? public futures funds (47 funds down an
have certainly surfaced throughout the “Technical analysis today is not that average of 4.49% through October,
years, as chronicled in these pages. much different than it was 25 years according to Futures). However, most
Welles Wilder introduced the relative ago,” says Mendelsohn, president of the high-end system development
strength index (RSI) in 1978: “RSI: A of Market Technologies LLC and talent has gravitated to private place-
momentum oscillator that can help you developer of VantagePoint intermarket ment hedge funds and commodity
spot market turns,” (Commodities, June analysis software. “The only difference trading advisors.
1978); Louis Mendelsohn wrote about is that the charts have different
backtesting software concepts (three dates and the computer’s ability to pro- PLENTY OF TOOLS
articles in 1983); Steven Nison intro- duce these charts quickly and easily is John Bollinger, whose extensive study
duced candlestick charts to the Western vastly improved.” of market volatility resulted in the con-
world in “Learning Japanese-style ‘can- New technical analysis ideas are still cept of Bollinger Bands, believes
dlesticks’ charting, December 1989; and being generated by hedge funds and traders still have “an awfully good set
John Murphy advocated the use of proprietary traders using their exten- of technical analysis tools available to
intermarket analysis, to name a few sive resources to develop advanced them.” However, with the type of mar-
technical analysis developments. (See trading methods, but the institutional ket participants and trading around the
“Indicating profits,” right.) traders are keeping these proprietary clock around the world today, the
But aside from moving concepts secrets to themselves. If there is a new character of the data has changed.
from hand-drawn charts to calculators technical analysis genius or concept, As part of his ongoing research,
to computers that are ubiquitous no one will ever hear about it. he has found it instructive to feed a
in trading today, what has technical But Mendelsohn doesn’t think most data series with technical patterns
analysis done for traders lately? Where of these sophisticated traders are any to an indicator to see how it responds,

noting the behavior during steady INDICATING PROFITS
market moves and during periods of Innovations in technical analysis in the 1970s and 1980s included candlesticks showing
price deceleration. price action and three indicators: RSI, DMI and average true range introduced by Welles
“What traders really need to do is Wilder. Are there more such developments ahead?
understand the response characteristics
of the indicator tools they are using
better than they do now,” he says. 10800.00
What he suggests is not necessarily
10600.00
discovering new indicators but using
today’s computational power to mine 10400.00
the ideas from analytical work before 10200.00
the 1960s more thoroughly. Average True Range(14)
“Like the automobile, the basic 100
problem (of analysis) has been solved.
Directional Movement(14, 14)
Now it’s more about finesse,” Bollinger 25
0
says. “Look at the old masters and their 100
RSI(14, C)
techniques. There’s still a ton of infor- 50
mation there, especially in analyzing 0
the micro structure of the market.” 25 1 8 15 22 29 6 12 19 26 3 10 17 24 31 7 14 21 28 5
Aug Sep Oct Nov Dec
MAKING INDICATORS WORK Source: eSignal
One analyst who is using techniques

he developed more than 25 years ago
to trade systems successfully is Welles
Wilder, whose 1978 book, New GETTING A HEADS UP
Concepts in Technical Trading Systems, A predicted moving average based on intermarket relationships provides new insight for an
old lagging indicator.
introduced the Relative Strength
Index, Directional Movement Index,
5-yr. U.S. Treasury notes, continuous
Volatility Index, average true range 108^42
and a number of other technical tools
that are now included in most analyti-
108^05
cal software.
Actual 10-day
Wilder spends most of his time in moving average
New Zealand and is also known for his 107^32
Delta Society systems, which incorpo-

rate several concepts from the book with 106^59
his Delta turning point analysis and Predicted 10-day
have produced profits averaging $50,000 moving average 106^22
a year, he says. One of the techniques,
the Volatility System, is mostly over- 105^49
looked, but he says it may be the best
stand-alone system in the book, illustrat-
105^12
ing that sound analytical techniques Sep05 Oct05 Nov05 Dec06
from the past do not go out of date. Source: www.TraderTech.com
The Parabolic System also is stand-
ing the test of time in helping traders
get out of a position once profits are accomplishments include turning a the numbers as much as anyone,” says
built up, he adds. $10,000 account into $1 million in a Williams, whose name is often associ-
year and writing a number of popular ated with the %R indicator but whose
LOTS OF ‘MUMBO-JUMBO’ trading books including The Right Stock books have made a transition from a
Whatever type of technical analysis is at the Right Time and Long-Term Secrets technical focus in his early trading days
in vogue these days, most of it is of Short-Term Trading. to mostly fundamental in recent years.
“mumbo-jumbo,” contends Larry “I am not enamored by technical “What has stood the test of time is
Williams, an author/trader whose analysis and I have probably beaten up that trend matters,” Williams empha-

“...fundamental analysts missed the end of the Nasdaq bubble in

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

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TECHNOLOGY & TRADING
The key to intermarket analysis is devising a reliable strategy for determining
when it won't work. Here, we look closely at that process for an intermarket
system based on T-bonds and the S&P 500.
Intermarket analysis:
What works today
BY MURRAY A. RUGGIERO JR.
intermarket divergence system using 1996, and showed profits of
A
fter reviewing the basics of
intermarket analysis in the T-bonds to predict the S&P 500 was $344,675. When the analysis simula-
December 2005 issue, we explained. A positive relationship tion was rerun for this article, slightly
looked at three trading sys- was assumed. This is the code for different dates were used, along with
tems developed by Ruggiero during that system. This and subsequent data from a different vendor. A sec-
the 1990s and discussed why they codes are written in TradersStudio ond test, in an effort to replicate the
still work. We also considered a big Basic but the logic can be pro- results, was run today through the
weakness of intermarket analysis — grammed into other platforms: time period Jan. 1, 1983, through
the decoupling of market relation- Feb. 7, 1996, using available data
ships, which can cause large losses in Sub from a different vendor and adjusting
intermarket-based trading systems. ClassicPosCorIntermark(TrLen,Int for the $500 point value of the time.
This weakness is magnified because erLen) Results show $334,650. This matches
they often occur during periods of Dim InterAve the previous results about as closely
intermarket inversion. Instead of just Dim TrAve as could be expected.
breaking down, the relationships flip, When this system was first pub-
causing losses to accelerate. InterAve=Average (Close Of lished, it was profitable on about
Our next step is to look closer at independent1,InterLen) 69% of its trades with an intrabar
the effect of intermarket decoupling TrAve=Average (Close,TrLen) drawdown of about $26,000 and an
and how it can be dealt with when If Close>TrAve And Close Of end-of-day intratrade drawdown of
using intermarket analysis in trading. independent1<InterAve Then just $9,600. This system performed
We’ll start by looking at a classic Sell(“BuyEnt”,1,0,Market,Day) well until the end of 1997, making
relationship that used to be a staple End If $114,125 in pre-split $500 per point
for many stock index traders: the If Close<TrAve And Close Of dollars from February 1996 to Dec.
relationship between Treasury bonds independent1>InterAve Then 31, 1997. This represented about
and the S&P 500, which until Buy(“BuyEnt”,1,0,Market,Day) one-third of what it made during the
1998 was so powerful that it was all End If previous 14 years during that first 21
that was needed to create an End Sub months in out-of-sample testing. In
amazing system. 1998, the stock market began its
In Cybernetic Trading Strategies The original analysis was run on “irrational exuberance” rally and the
(John Wiley & Sons, 1997), a simple data from April 21, 1982, to Feb. 7, intermarket link broke down with it.

The system subsequently lost more FORTUNES LOST
than $94,000 during 1998 and 1999 Several very large losses in 2001 doomed this intermarket analysis based trading system.
at $250 per point. Perhaps more rela-
ORDER DATE SIZE PRICE DATE ORDER SIZE PRICE LOSSES ($250) LOSSES ($500)
tive to our original results, this repre-
sents almost $190,000 at $500 a Buy 2/5/2001 1 1398.2 3/28/2001 Sell 1 1206 ($48,050.00) ($96,100.00)
point — more than half of the profits Sell 3/28/2001 1 1206.0 6/4/2001 Buy 1 1298 ($22,875.00) ($45,750.00)
that the system had produced during
the previous 14 years. The results for Buy 6/4/2001 1 1297.5 7/2/2001 Sell 1 1256 ($10,400.00) ($20,800.00)
2000 were relatively good, but 2001 Buy 5/28/2002 1 1098.2 10/14/2002 Sell 1 840 ($64,675.00) ($129,350.00)
and 2002 show the bottom really
Sell 10/14/2002 1 839.5 11/11/2002 Buy 1 901 ($15,375.00) ($30,750.00)
falling out, losing almost $142,000
at $250 a point, or $284,000 at Source: TradersStudio
$500 a point. The results of this
methodology returned to mediocre
during 2003 and 2004 with 2005 This flow between asset classes and value of one variable can be used to
being a marginal year. asset allocation exists down to short- some extent to predict the other.
The system in 2001 had just one term time frames. The Pearson correlation is a special
winner in seven trades. In other years One known problem with this rela- kind of association because it only
the overall yearly winning percent- tionship is during periods of major shows a linear relation between the
ages of the methodology were market disasters, such as the crash of values of the variables. A non-linear
respectable. The problem, as 1987, the relationship can totally relationship must be transformed
illustrated in “Fortunes lost” (above), decouple as a flight to quality takes into a linear one before the correla-
was that there were some very large place. The relationship can also tion is calculated or the correlation
losing trades. decouple in latter stages of a bull calculation is useless.
These trades produced some big market when the Federal Reserve We’ll explain this process without
problems for the methodology in a increases interest rates in an effort to the math. It’s available in any statis-
short time. These five trades lost combat inflation. tics text. Points X and Y, which in
more than $161,000 at $250 a point This relationship does not follow our case are the two related market
($322,000 at $500 a point) in less the script when the market is at turn- prices, are plotted throughout a given
than two years. By studying this rela- ing points of long-term trends. In window of days. A line is drawn that
tionship closer, we can find out what some ways, this may be the cause of minimizes the distance between all
really happened here. the weak system performance in 2005 points. The standard distance
because the yield curve is very flat. between the points and the line pro-
PEARSON KNOWS The long end of the yield curve rela- vides information on how predictive
If we plotted the Pearson correlation tionship to the 10-year outlook of a X is of Y. If the line is sloping up, the
coefficient (calculated through a stock market investor does not have correlation is positive. If the line is
rolling 40-day period) between the the same historical differential. As a sloping down, the correlation is neg-
30-year T-bond and the S&P 500, result, the yield curve is flat and the ative. This entire relationship can be
the graph will show that from relationship changes. summed up by one number: the
November 2000 to November 2001 Of course, we have the help of Pearson correlation coefficient.
the relationship was well below zero. hindsight to figure all this out. The “Bound by bonds” (page 56) shows
Our system performance relies on goal is to be able to determine in the a Pearson correlation coefficient in a
this relationship being strongly posi- future when the relationship will moving 40-day window plotted as a
tive. For example, during 1996 and break down. The use of correlation line below the price chart. The corre-
1997 the correlation coefficient was analysis to filter trading systems helps lation calculation is for S&P 500 and
about 0.75 three-quarters of the time. us accomplish this. We will use T-bond prices during 2002 and 2003.
Then the relationship inverted. Pearson correlation analysis to work Even during the early years when
To understand what happened, we on this problem. the system performed well, the corre-
need to know why this relationship lation bounced up and down but did
exists. When T-bond prices move up, THE SCENT OF CHANGE not necessarily create major prob-
it indicates interest rates are falling. Correlation analysis is a way to lems. Random noise in the correla-
As interest rates move lower, stock describe the strength of an association does not affect the general
prices will rally as investors shift tion between two variables. An asso- results of the relationship. It is a
funds into stocks for higher returns. ciation between variables implies the long-term change that affects how

Technology & Trading continued
BOUND BY BONDS $1,628.23 per trade with a maximum

When our correlation coefficient is high, our system does well. When the figure is low, the intrabar drawdown of $35,250.
methodology absolutely hemorrhages cash. We need to build a switch that turns our The filter greatly improved the
system off during the bad times. 1998 results. Instead of losing more
than $80,000 at $250 a point, the
1141.54 system lost only $29,000. In 2001
1089.68 when the original model produced a
1037.81 loss of more than $80,000, the
985.95 improved version with correlation
934.09 analysis actually made $20,000. The
882.23 intermarket system did lose money in
830.36 2002 but the losses were less than
half of those unfiltered. The
106.12 improvement caused by correlation
98.02 analysis is less dramatic, normally to
89.91 50% from 20%.
0.60 NOT ALWAYS PREDICTIVE
0.38
0.16 We have seen how correlation analy-
-0.06
-0.28 sis can help a system’s performance,
-0.49
-0.71 but current correlation does not
Dec ‘02 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec ‘03 Feb Mar Apr May Jun Jul Aug Sep always tell the complete story.
Source: TradersStudio
Predictive correlation is a methodol-
ogy that can be applied to intermar-
ket analysis and other forms of tech-
the system performs. In essence, it is independent1>InterAve Then nical analysis. Here’s how it works.
a type of integration of the area Buy(“BuyEnt”,1,0,Market,Day) The idea behind predictive correla-
above and below zero. End If tion requires taking a correlation
Thankfully, there is a simple way Else between the independent series “n”
to deal with this problem. We can ExitLong(“”,“”,1,0,Market,Day) bars ago and the change in the
double smooth the correlation value ExitShort(“”,“”,1,0,Market,Day) market throughout the last n bars.
by taking a moving average of it End If For example, we could take the
equal to the correlation length. Here End Sub correlation between “Tbonds[5] -
is this simple change written into the Tbonds[10]” and the “SP500 -
trading system code: Two parameters are added to the SP500[5].” In this case, this correla-
original system — a correlation tion tells us how predictive a simple
Sub length and a correlation level. momentum of T-bonds has been
ClassicPosCorInterCorrel(TrLen,I Notice that we are working with throughout the length of the correla-
nterLen,CorLen,Lev) positive triggers in the range of 0 to tion to future five-day price changes
Dim InterAve 0.7, which means the system is in the S&P 500.
Dim TrAve turned off between -0.70 and 0. If The predictive correlation curve is
Dim CurCor As BarArray the correlation drops below the trig- much different than the curve gener-
InterAve=Average(Close Of ger level, trades are exited and new ated by standard correlation, but the
independent1,InterLen) ones are not taken. Optimized for curves trend in the same direction.
TrAve=Average(Close,TrLen) the period studied, all but three Research shows that predictive corre-
CurCor=Average(Corel(Close,Cl combinations did better than the lation is better for shorter-term
ose Of system without a filter. trading signals.
independent1,CorLen,0),CorLen) Although it wasn’t the absolute It’s possible to create a short-term
If CurCor>-1*Lev Then best, the most robust results were for S&P 500 trading model using predic-
If Close>TrAve And Close Of a moving average of 45 days and a tive correlation. In it, we will
independent1<InterAve Then Lev value of 0.50. This set of parame- use a 12- and 26-day moving
Sell(“BuyEnt”,1,0,Market,Day) ters made a total net profit of average pair and create a day
End If $309,000 on 202 trades, winning on trading system for the S&P 500. We
If Close<TrAve And Close Of 66% of its trades. It averaged will use intermarket divergence com-

bined with the opening range break- RANGE TARGETS
out to create our system. Here is the This example system makes about $200 per trade — not tradable, but not the point.
code for this system: We can make some solid improvements by adding our filter.
Sub PERFORMANCE: ALL TRADES

ShortTermIntermarkSP502() Total Net Profit $182,325.02 Open Position P/L $0.00
Dim InterAve As BarArray Gross Profit $607,750.00 Gross Loss ($425,424.98)
Dim TrAve As BarArray
Dim PredCor As BarArray Total # of trades 900 Percent Profitable 56.11%
Number winning trades 505 Number Losing Trades 382
InterAve=Average(Close Of
Largest winning trade $13,950.00 Largest Losing Trade ($7,950.00)
independent1,26)
Average winning trade $1,203.47 Average Losing Trade ($1,113.68)
TrAve=Average(Close,12)
Ratio avg win/avg loss 1.08 Average Trade (win & loss) $202.58
If Close<TrAve And Close Of
independent1>InterAve And Max consecutive winners 12 Max consecutive losers 7
isthursday<>True Then Avg # bars in winners 1 Avg # bars in losers 1
Buy(“”,1,NextOpen(0)+.3*Range,
Stop,Day) Max intraday drawdown ($27,125.00)
If Close>TrAve And Close Of Profit Factor 1.43 Max # contracts held 1
independent1<InterAve And Account size required $27,125.00 Yearly return on account 29.36%
isFriday<>True Then
Sell(“”,1,NextOpen(0)- Source: TradersStudio
.3*Range,Stop,Day)
ExitLong(“”,“”,1,0,CloseExit,Day) Dim InterAve As BarArray “Open - Close” using “Yesterday’s

Dim TrAve As BarArray Open - Close” of T-bonds. Using a
ExitShort(“”,“”,1,0,CloseExit,Day) Dim PredCor As BarArray 40-day predictive correlation around
End Sub InterAve=Average(Close Of zero greatly increases the average
independent1,26) trade and cuts the drawdown using
It is a simple system that gets TrAve=Average(Close,12) these parameters. The system made
in at 30% of yesterday’s range off PredCor=Corel(Open- $141,512.50, which is less in total,
the open with the bias being set Close,Close[1] Of independent1- but the average trade increased to
based on intermarket divergence. A Open[1] Of $289.98. This is about one-third
day-of-week filter is used so the sys- independent1,CorLen,0) higher, and our drawdown is $15,550
tem does not buy on a Friday or sell If PredCor>Trig Then instead of $27,125. Overall, the
on a Monday. Because the order is If Close<TrAve And Close Of results are significantly better.
for the next day, the system does not independent1>InterAve And Intermarket analysis is a powerful
buy on a Thursday, the next day isthursday<>True Then tool when its use is understood. It has
being Friday. It exits the close of the Buy(“”,1,NextOpen(0)+.3*Range, many applications ranging from trad-
same day. Stop,Day) ing system development to complex
Many systems like this were writ- If Close>TrAve And Close Of models, such as those using neural
ten during the 1990s, but they independent1<InterAve And networks. Intermarket-based systems
stopped working when the intermar- isFriday<>True Then can easily become curve-fitted when
ket relationship decoupled. Sell(“”,1,NextOpen(0)- they are made too complex or too
Theoretical results with no deduc- .3*Range,Stop,Day) many different intermarket relation-
tion for slippage and commission are End If ships are included without an under-
shown in “Range targets” (above). standing of their interaction. FM
By integrating the concept of pre- ExitLong(“”,“”,1,0,CloseExit,Day)
dictive correlation into the intermar-
Murray A. Ruggiero Jr. is a consultant in East
ket system, we can improve our ExitShort(“”,“”,1,0,CloseExit,Day) Haven, Conn. His firm, Ruggiero Associates,
results. The code for doing this is: End Sub develops market-timing systems. He is editor-
in-chief of Inside Advantage Gold Club
(www.iagoldclub.com) and is author of
Sub Because our system is for day-trad- Cybernetic Trading Strategies (John Wiley &
SPInterDayPredCor(CorLen,Trig) ing, we use correlation to predict Sons). E-mail: ruggieroassoc@aol.com.

Software Review
BY ROB KEENER
NinjaTrader LLC more important, cuts down on order

RATING SYSTEM:
1236 Clarkson Street entry errors.
= Excellent
Denver, CO 80218
sales@ninjatrader.com FEATURES: = Good
support@ninjatrader.com Ninja trader is a clean, user friendly = Adequate
www.ninjatrader.com application with features like strong = Poor
simulation with realistic fills func-
OVERALL RATING: tionality to precise strategy automa-
tion that can be driven by a number
LEVEL: Novice to professional. of popular trading platforms, and it The most coveted feature is the
gets better. SuperDOM order entry tool, which
PRICE: NinjaTrader standard multibro- does exactly what it
ker edition is $80 per month and $90 is intended to do,
per month with charts. SUPERDOM and that’s make trading
easier on a mechanical
RECOMMENDED SYSTEM: Broadband level. Of course, charts
connection, 1 GHz Processor, 512 Mb are available, but
Ram, Windows 2000/XP. the real gems lie in
the ease of use and
overall work flow effi-
he first sighting of Ninja Trader ciency that SuperDOM
T was a few years back when it

was first introduced as a free
add-on software to the Interactive
allows.
You can program a
strategy in eSignal or
Brokers workstation. TradeStation and have
As the old saying goes, necessity is the signal passed onto
the mother of invention. The popu- NinjaTrader for auto-
larity and demand were overwhelm- execution. The soft-
ing and it’s not unusual to see some- ware uses COM, DLL
thing grow like this from humble and file interfaces.
beginnings to a powerful tool that Anyone who uses
can be used with multiple brokers. trading systems and
We also should note NinjaTrader automation software
recently licensed Trading can figure this
Technologies’ (TT) technology plat- out with ease. (See
form and connectivity to the “SuperDOM,” left.)
exchanges used by TT. The SuperDOM
Ninja Trader came to fruition window allows traders
when creator Raymond Deux migrat- to enter stops, targets,
ed to futures from the equities side “cancel all orders” and
and immediately saw a need for a “flatten everything” on
more sophisticated product for exe- one “ticket,” which are
cuting trades. He developed it for his nice tools to have
own use but found there were others when you need them.
seeking the same software for enter- NinjaTrader focuses on
ing orders and exits with the click of the mechanics of order
a button. This includes allowing the placement and man-
user to place stops and targets with agement, this fills a
one click, as opposed to only basic void in the strategy
order entry. This saves time, but automation arena by

providing capabilities for traders to This allows the user to define a vol-
predefine how they will manage their ume trigger (500 contracts for exam-
trades once executed. ple) that is used to determine when a
The SuperDOM order entry ladder, stop loss is triggered. Instead of trig-
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technology is also an effective tool. free trial a real learning tool.

FUTURES 101
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?
Step-by-step into the

ag markets
BY CHRIS MCMAHON
worry about, now there is twice that.” But in soybeans, the world numbers are
A
gricultural commodities are
changing and despite the Just a couple of years ago, ag traders extremely important. “You are not
fact that they trade in pre- could base their expectations on a only looking at the free supplies in the
dominantly open-outcry look at the stock consumption ratio U.S., you’re looking at crop progress in
pits, the changes are real. As histori- on the United States balance sheet, Argentina and Brazil and weather pat-
cally domestic products become says David Bell, president of Bell terns in both of those countries. In
exports, suppliers such as Argentina Fundamental Futures in Memphis corn, that’s not a factor at all.”
and Brazil gain prominence and hedge Tennessee. “South America just took
funds enter the fray with elbows up. whatever price it took to sell. And SUPPLY SEASON
“Agricultural markets are entirely now with them as the dominant pro- During the growing season the markets
different now than they were a year ducer, much of that has changed. are preoccupied with supply, outside the
ago,” says Richard A. Brock, president Now they set the price.” growing season traders focus on
of Brock Associates in Milwaukee. demand. Supply and demand always
“Now that Brazil is the largest producer INTERNATIONAL VS. DOMESTIC determine price, but the variables influ-
of soybeans, you’ve got two times of The differences between domestic and encing supply and demand change from
year where you’ve got to worry about international crops are important and season to season. Supply variables, such
droughts; two times a year you’ve got multiply the number of fundamental as weather, draught, disease and pests,
to worry about floods; two times of year variables influencing prices. And have a large impact on price action for a
you’ve got to worry about Asian Rust.” whereas the Argentina, Brazil and the short time, typically no more than a few
Doug E. Carper, president of DEC United States are the largest growers months. But demand is determined year
Capital, says, “The window of one and exporters of soybeans, corn is pri- long, and volatility tends to be greater
crop season to the next seems to be marily a domestic crop. during the growing season.
narrowing all the time because there “We are by far the largest producer If weather is the single most impor-
are so many outside influences and of corn, and thus the value of the dol- tant supply variable, the timing of the
producers. The season seems to be lar and the price of corn has little or weather is a very close second. “What I
never ending. We have two: ours and nothing to do with corn exports,” like to do is to scan the weather data
the South American growing season, Brock says, adding that in the non- looking for a change,” says Mark
which is exactly opposite our season growing season traders are looking at Hawkins, president of Commodity
here in America. Rather than a three available supplies in the United States Capital Inc., adding that in the very
or four month growing season to and the domestic stock-to-usage ratio. early parts of the growing season,

which may not be yield determinant,
the market is still focused on weather.
An example of this is the draught last TRADING ROOM
June in Illinois and Ohio. “It was drier Speculative limits for agricultural commodities changed effective 12/10/05, clearing the
than the record draught in 1988 in lots way for greater fund participation.
of areas. That was June. And that typi- CONTRACT OLD SPEC LIMITS NEW SPEC LIMITS
cally is not a time where you determine
corn and bean yields. But can the mar- Corn Single Month Limit: 5,500 Single Month Limit: 13,500
ket just sit still and say, ‘its really dry All-month: 9,000 All-month: 22,000
and hot, but I’m not going to rally, or is
it more likely to extrapolate the cur- Soybean Single Month Limit: 3,500 Single Month Limit: 6,500
rent conditions into the growing peri- All-month: 5,500 All-month: 10,000
od and rally accordingly? And that’s
what it did,” Hawkins explains.
Wheat/Soybean oil & meal Single Month Limit: 3,000 Single Month Limit: 5,000
When the rains came in July, it took
the market some time to get to grips All-month: 4,000 All-month: 6,500
with the change. “If you look at the
2005 weather data from the Midwest, Oats Single Month Limit: 1,000 Single Month Limit: 1,400
the June-August period was essentially All-month: 1,500 All-month: 2,000
normal. And it didn’t feel normal to Source: Chicago Board of Trade
anybody in late June and early July.
And what happened was the market
saw unusually dry conditions in key factors to consider. explosive.” He also watches the
area of the growing region. It rationally Hawkins stresses the importance of implied volatility in the options mar-
knew it didn’t really matter that it was adjusting position size in anticipation of ket to help anticipate increases in
hot and dry in June, but it projected the different levels of volatility in the volatility and the timing of potential
that weather forward and rallied supply versus demand seasons. “Your increases. “Some people will look at
accordingly, and then we ended up risk in any given position is dramatically the moving standard deviation of a
with a record soybean yield. Did soy- greater, let’s say, if you are trading corn daily market, some people look at the
beans manage to shrug off the June in July than if you are trading corn in implied volatility of options, I tend to
weather? They rallied really hard,” December. The median range for corn look at the historical median and
Hawkins says. futures in July is about 40¢ a bushel mean ranges in a particular month. So
There are also seasonal market phe- ($2,000 a contract). The median range I know that in July, my position size
nomena. “In August, the speculators for corn futures in December is about will probably have to be half what it is
typically short the bean complex,” Bell 17¢ or 18¢ a bushel, so your volatility is in December, maybe a third just based
says. “Farmers don’t want to sell any more than double. And, you don’t really on the median ranges that I men-
more until they’re sure about the size know if that is going to happen in a tioned,” Hawkins says.
crop they have, and they have already gradual way and you can incrementally
sold at higher prices and don’t want to adjust, or whether it occurs over night. HERE COME THE FUNDS
sell into the hole, so you kind of Your value-to-risk is going to increase In the past, large fund managers had to
exhaust your selling. On the other side, substantially for a given contract posi- curtail their activity in the agricultural
the consumers say ‘these are pretty tion size in the growing season.” markets as their money under manage-
good prices, we don’t know how big Hawkins says he will watch the ment grew because the position limits
that crop is,’ so they do a little bit of 20-day moving standard deviation for were too small. Most funds eliminate
buying, and it sort of builds into a short a particular market, and when he sees or severely limit grain positions once
covering rally.” an increase he will factor that into they surpass $1 billion under manage-
position size. “You could have a rela- ment but that may change as higher
DEMAND SEASON tively quiet planting season and the position limits went into effect Dec.
The key uncertainty is crop size, market [volatility] may not increase in 10, (see “Trading room,” above). The
which can change dramatically during May. And then it suddenly increases Chicago Board of Trade fought for
the season. But once the crops are out in June or July,” Hawkins says. If the limit increases as more of its business
of the ground, traders turn their focus volatility is relatively benign, Hawkins comes from funds.
to the demand variables simply adjusts his position size down anyway, “Take something like Eurodollars
because there are fewer fundamental knowing at any stage it “could become where there is no limit,” Brock says.

Futures 101 continued
hours. Even orders that are sent

VOLATILITY (20-DAY MOVING AVERAGE) electronically are executed on the
Notice the higher volatility during the most important part of the U.S. growing season, trading floor.
and the jump in volatility entering the South American growing season. “Electronic clerk? It’s a joke,”
760’0 Carper says. “Nobody seriously thinks
%S1! O: 587’0 H: 587’0 L: 582’4 C: 583’0 : -17’4
740’0 that’s an alternative. It’s kind of like
720’0 clicking on your mouse to send an
680’0 order into a pony express rider,”
660’0
640’0
adding that open outcry adds to the
620’0 expense of trading and is inefficient
600’0 for handling large-scale volume.
580’0 It is also unlikely to change soon
560’0
540’0
because floor traders, formerly mem-
MSD (%S1!, 20)=12.91 35.00 bers of the exchanges and now large
25.00 shareholders in the exchange holding
15.00 companies, benefit from brokerage
0.00 fees and income from renting trading
May Jun 16 Jul Aug 17 Sep Oct Nov Dec ‘06 Daily privileges and don’t want to see floor
Source: CSI Unfair Advantage
trading go away. “They are not the big
players, they are facilitators. The per-
centage of volume that trades these
“They are going to concentrate on the the water that needs to run through it markets is radically different than
markets where they can expand their from time to time,” Carper says. what it used to be. My contention is
position size to match the amount of That is particularly true with the that floor traders are more irrelevant
money they have under management. newest entrant in the market: long- to the price discovery process than
For example, you take a John Henry only funds benchmarked to indexes like ever before, yet they represent an
or a Campbell, where they are trading the Goldman Sachs Commodity Index impediment to people who do want to
in the billions of dollars, 45 million (GSCI). These funds take massive posi- trade,” Carper says.
bushels is a pimple on an elephant’s tions on hold the indefinitely (see “Dr. “I don’t think floor trading as we
back. If the market moved a dime, Strangefund,” September 2005). know [it] is indispensable,” Bell says,
that would only be $4.5 million; when Hawkins says the markets need to adding that many of the functions
you have $5 billion under manage- rebalance. “There appears a time when that the floor performs could be done
ment, why waste your time?” the index fund is by far the dominant better electronically, “If the floor is
Carper too has noticed that the force on the crop,” and prices will providing a service that cannot be
order flow and the composition of the probably be higher for some time. provided in an electronic format, then
order flow has changed dramatically. “One of these days they’ll have their that would imply that the electronic
“The amount of hedging pales to boat load and then the market will format is inefficient. If the market cre-
what it was when I first started trad- wait because there won’t be anyone ates inefficiencies, then it is also cre-
ing,” he says, adding that the grain other than the funds buying it.” ating an opportunity and someone
companies were the dominant order Large fund positions can distort will figure out how to exploit that
flow, with locals playing the role of markets but they also create opportu- inefficiency.”
speculators. Now the CTAs and hedge nities. “My basic mode of trading is Proponents of open outcry say
fund operators are the dominant order waiting for market disequilibrium, because the agricultural markets are
flow. “The locals on the floor at the expecting it to move to equilibrium; dominated by spread trading, it is
Board of Trade are a minor part of the and then to be there when it hap- unlikely to go away, and that technol-
scale volume that once existed.” pens. And I believe the funds are ogy is not yet capable of handling the
The new alternative investment pushing the market into greater dise- complexities of spread trading, a point
managers don’t have a lot of experi- quilibrium,” Bell says. Carper acknowledges. “It’s harder to
ence, he says. “They are kind of like make those kinds of trades electroni-
elephants in a china shop,” adding ELECTRONIC VS. OPEN OUTCRY cally, but the underlying futures would
that fund participation occasionally One of the things that hasn’t be better served,” Carper says, adding
drives ag markets beyond their capa- changed in the ag markets is reliance that something has got to give. “Right
bility for absorbing volume. “The on open-outcry trading. Ag markets now, we can’t run any faster, or grow
drain is just a little too small to handle are only electronically available after our markets any larger. FM

Online Trading
BY YESENIA SALCEDO
Growing options volume electronically

amount of data options generate. The options market gener-
T
echnology has launched trading up from the pits and
into the screen with point-and-click execution produc- ates about 78% of all the quotes in North America. The
ing record volume growth year after year. While futures CBOE alone quotes about 180,000 different option strike
trading has dominated those records, growth in options both prices, and each one of those strikes require a bid and an ask
on equities and futures have seen a few records of their own and a last sale. And each time the stock price moves, the
in 2005. options price moves, creating new data.
“The Chicago Board Options Exchange (CBOE) has had a “With a lot of futures contracts you have very actively
record year, as has the entire options industry,” says Edward traded liquid markets, but with options trading there are
Tilly, vice chairman of the CBOE. “There has been tremen- hundreds of different strike prices, calls and puts, different
dous growth in the options industry, both on screen and off expirations — that volume, that liquidity — gets spread out
screen.” much more thinly,” says Dan O’Neil, president of futures and
While a lot of the options growth has translated onto the forex broker XpressTrade.
screen, it is more difficult to adapt some of the more complex
options strategies to the screen. SEEING THE GROWTH
“The growth in single strategies (simple options strategies) Both futures and options exchanges have been bringing more
has been tremendous on the screen — it’s point, click, market makers to the electronic options world as well as
receive an instant fill and move onto the next trade,” Tilly adding functionality to their electronic platforms.
says, adding that 92% of the CBOE’s orders, accounting for “Market makers, including specialists and electronic mar-
almost 60% of the volume, is traded electronically. The ket makers, play a very active role in populating the complex
remaining 40% is traded in open outcry, most of those trades order book at the CBOE. Market makers ultimately will carry
being complex or multipart orders like spreads. the burden of the move to the screen,” Tilly says. CBOE
“With complex orders, the screen hasn’t enjoyed the growth began rollout of its Hybrid Trading system in June 2003 and
simple options have. It’s very difficult to replicate the price dis- has been working on it since. In 2005 remote market makers
covery process on a complex order on screen,” Tilly says. “The were added to Hybrid, which has increased quote traffic. In
request-for-quote (RFQ) process is handled very efficiently in the summer of 2005 CBOE implemented spread technology,
open outcry. On a screen, electronic notification is more diffi- which has increased the number of spread trades being exe-
cult to service and it becomes a service question.” cuted electronically.
The option exchanges have always had to deal with the The CBOT and the CME also have experienced growth in
problem of quote traffic but it is a new issue for futures options both in open outcry and electronic trading. The
exchanges to deal with as they attempt to create a viable most heavily traded electronic options contract at the CBOT
electronic options market. “The difference with options on is the 10-year Treasury note. The most popularly traded elec-
the screen versus futures is large. With futures you buy them, tronic options contract at the CME is the E-mini S&P with
you sell them — it’s pretty easy functionality. With options a daily average of 25,000. The most popular options contract
you have so many different strategies that it can get quite traded electronically at CBOE is the QQQ.
complex,” says Robert Ray, SVP business development at the “There has been an explosion in options trading overall in
Chicago Board of Trade (CBOT). the industry, electronically it’s also taking off,” Ray says. “If
Jonathan Kronstein, CBOT senior economist of the inter- you look at ratios of options to futures volume, some options
est rates products group says a larger percentage of financial volume exceeds the futures.”
options trades are the result of complex strategies. “People The CBOT chose LiffeConnect as its electronic platform
can’t think of every single strategy’s auto quote, so in many at the end of 2003. “One of the reasons we decided on that
cases they have to create the strategy and submit the request platform was because of the very rich functionality that was
for quote to the market place,” Kronstein says. He says equity embedded in the platform for options trading,” Ray says.
options, being a more retail focused market, do not involve In August 2005 the CME integrated its enhanced options
so many complex strategies. “You also need the request-for- functionality for trading CME eurodollar options into the
quote functionality for strategies because if someone wants to Globex platform.
execute a strategy that isn’t currently being auto quoted, they “Eurodollar options growth year-over-year is up about
need to create it and then send a RFQ to the market place,” 40%, pit and screen [combined]. Our average daily volume is
Kronstein adds. around 750,000. It is the most actively traded interest rate
Another difficulty in trading options electronically is the options on futures globally,” says Robin Ross, managing

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

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

BY STEVE ZWICK
WORLD'S TIME ZONE track of fluctuating currency crosses
P
aolo di Montorio-Veronese
runs a company called PdMV While algorithmic traders can be in all the way Americans keep track of
Capital. The letters come time zones, discretionary traders need box scores.
from his aristocratic name, to be on top of their markets. Several Both men shy away from algorithmic
and the fund of funds he just launched, discretionary currency traders like trading and focus instead on discre-
the PhD Fund, boasts an impressive Michael Hecht (see Trader Profile, tionary approaches. “I’m not sure we
16.6% proforma return, with volatility January 2006) and Mikkel Thorup say are looking at anything differently
of just 5.1% and a Sharpe ratio of 3.1. the consistent high numbers posted by than what people look at in the U.S.,”
To assemble it, he reviewed scores of European currency traders grow from a Thorup says. “We take our signals from
traders across Europe, and he says the combination of world view and time a 24-hour trading day rather than, say,
trading pool he went fishing in wasn’t zone positioning. the International Monetary Market in
much different from the pool of talent “There are distinct advantages to Chicago. But that is the norm around
you’d find in the United States. being a currency trader in the the world these days.”
“Whether based in Chicago or London, European time zone,” Hecht says.
every commodity trading advisor “First, there's the cultural element: We NATIONAL NICHES
(CTA) follows his own model, and all grew up changing currencies every But perhaps the most particularly, if
those models vary more depending on time we traveled in one direction or not typically, European players are
the individual than on where he is the other. And then we have a time those like Michael Rothman, who spe-
located,” he says. “We have commodity zone that enables us to get the meat of cializes in Danish Mortgage Bonds
traders in London who are trading pri- Asia, Europe and North America, (see “Nordic Niche,” right). “Most of
marily in Chicago, and they use the which you won't find in Chicago, and the people who trade like we do aren't
same methods any would use to analyze definitely not in California.” CTAs,” he says. “As a result, the global
markets and identify trends.” Thorup, who runs Zurich-based funds took a while to find us.” Similar
He adds, however, that he specifical- CTA Capricorn Group, agrees. “We niche markets exist in most European
ly sought out traders who were active get coverage of several time zones,” member states, including Germany, Italy
in the world’s most deep and liquid he says. “We get the late part of the and France.
markets and used automated systems. Far East, Sydney, all of Europe and “There is a tendency for European
“These people have trading desks that the full open when the U.S. guys traders to look for the smaller, ineffi-
are manned 24 hours a day, but the come in around 1 p.m. European time.” cient, niche market, where they can
actual trades are on autopilot,” he says. Plus, he adds, they grew up keeping achieve large basis-point gains on

smaller trades,” says Simon Rostron, ally ensured by putting most of the 1983, guaranteed funds are considered
a media consultant for hedge funds. money into zero coupon bonds that a bona fide value-added product.
“In the United States, the emphasis mature at the same time as the guaran- Rostron offers a reason.
is on larger trades with smaller basis- tee runs out. In the United States, such “There is a tendency of people in the
point gains.” funds are generally perceived as little U.S. to dismiss guaranteed funds,
But if di Montorio-Veronese's expe- more than marketing sleight of hand, because they figure they can just go out
rience is any indication of the future, but in Europe, where Man Group has and buy the bonds themselves,” con-
growth among European traders will been offering such programs since cedes Rostron. “But if you're sitting in
come among those in the deepest, most
liquid markets employing algorithmic
programs. “The new wave of traders
making their name in Europe are com-
ing out of American banks with a pres-
ence here,” he explains. “They don't
Nordic Niche:
trust illiquid markets.”
Danish mortgage bonds
STRUCTURAL DRIVERS
Both the European love of niche trading
and the tendency of American-trained
L ike the United States, Europe is a land of deep, broad liquidity pools, but
it also a land of niche markets, such as Danish callable mortgage bonds,
which have become hugely popular among traders both inside and outside
traders to pursue pan-European strategies of Denmark throughout the past decade.
flow from the evolving structure of Add to that the surging demand for managed investment products of all
European markets, which are harmoniz- stripes in Denmark (see “That’s a lot of shoes”), and you can see why money
ing slowly (see “Hitchhiker’s guide to managers like Michael Rothman have chosen to inhabit the niche.
the EU,” July 2005) and still have local
markets dominated by local banks. His company has generated a smooth 12% to 15% annually trading in
American banks, on the other hand, the secondary market, using mainly cash and forward contracts/repos in
bonds maturing in the next one to five years.
have been the greatest believers in a uni-
fied market and have been the biggest
players in pan-European products.
“It makes sense that European THAT’S A LOT OF SHOES
traders who learned their trade at Funds aimed at both retail and institutional investors have grown rapidly in Denmark.
American banks will be attracted
to international markets, like curren- 2000 2001 2002 2003 2004 2005 YTD
TYPES OF FUNDS (through Nov.)
cies,” di Montorio-Veronese says, a
veteran of Goldman Sachs himself who RETAIL 177.957 177.722 188.028 249.505 297.56 374.271
did a stint with Morgan Stanley before INSTITUTIONAL 72.117 98.184 91.203 108.669 215.5 323.262
heading Man Group’s European sales FOREIGN 7.127 6.429 5.256 6.098 6.136 10.331
operation. “But it also makes sense
TOTAL 257.201 282.335 284.487 364.272 519.196 707.864
they will develop systems that can be
adapted to the most deep and liquid The total assets under management in retail funds, institutional funds and funds marketed abroad in millions DKK.
markets worldwide.” Source: The Federation of Danish Investment Associates
The differences in the trading rooms
reflect a variety of differences in the
structure of markets themselves. Even The Copenhagen Stock Exchange does not list bond futures, but Danish
as cross-border clearing and settlement banks do administer an OTC trading platform that can be accessed by high
becomes more practicable, cross-border net-worth individuals via member banks. Rothman, however, warns of low
marketing of retail products remains a liquidity. “If you want to cover a position using futures, you are best using
sticky issue. One result: the prevalence the German Schatz or Bund,” he says, adding that an active spread market
of guaranteed funds in Europe. has developed between Danish mortgage bonds and Bund futures.
Investors in such funds are guaran- Since 1986, Rothman's niche within the niche has been finding opportu-
teed a certain return if they stay in the nities in less-actively traded series, so-called “off-the-run” bonds. Rothman
program long enough (see “Guaranteed says Danish pension funds and institutional investors are not active in the
profits: Pipe dream or reality,” sector. “This lack of market participation and the illiquidity it creates, cou-
December 2002). The guarantee is usu- pled with the inherent valuation complexity resulting from the redemption

Managed Money continued
Bahrain, buying the bonds is easy in

concept but less easy in fact.” And,
profile of mortgage bonds (the call feature found in mortgage bonds), has lacking a home market the size of the
led to an inefficient market in this niche sector and a consequent yield arbi- United States, European hedge funds
trage opportunity.” are marketing themselves aggressively
The strategy relies on long-standing relationships with institutional partic- in multiple jurisdictions.
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- HARMONIZATION
er spreads than might normally be expected,” he explains. Switzerland is second only to the United
Kingdom in the number of hedge funds
“It has been a good business for years but suddenly, over the past few
years, we are getting a lot of money from abroad, although not much yet
servicing continental institutions. But,
from the United States.” since Switzerland is outside the
European Union, Switzerland stands to
The market has a fascinating history and predates the securitization of lose out on the retail boom as the
U.S. mortgages by 180 years, having been launched by a consortium of European Union moves towards harmo-
issuers in 1796 to dilute the risk of default on masses of mortgages issued
nizing financial services.
after a fire destroyed one quarter of Denmark one year earlier. The bonds
Laws regarding brokerages based
have been a cornerstone of the nation's real estate apparatus since, but for-
in one member state but with
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.
branches in another have come more
clearly into focus since we visited
“This is the seventh-largest mortgage bond market worldwide,” explains the subject in July. On Jan. 1, several
Rothman. “That's not just because it has been around so long, but also countries came into compliance
because Danes can mortgage up to 80% of the value of their homes. Plus, with the “passport” requirements
we've never had a failure, and they're rated AAA.”
of the E.U.'s Markets in Financial
The market began taking its current form in the 1950s, when old mutual Instruments Directive. As of that
credit associations gave way to independent mortgage banks that offered date, for example, brokerages based
easy credit. In 1970, the government simplified loan structures and gave the in, say, Lichtenstein could open
Minister of Housing authority to deny licenses for new institutions. The result branch offices in other member
was a gradual drop in the number of lenders from 24 to seven as existing states without being licensed locally.
entities merged and new ones stopped popping up. The market benefited Instead, Lichtenstein’s Financial
with fewer, but deeper and more liquid bond series. Supervisory Authority will keep tabs
The Danish bond market continued its simplification and in the 1980s, on the activities of companies based
they started allowing loans based on a property's cash value and raised the there and send reports to regulators in
loan-to-value rate to its current 80% of a property's total value. other countries.
But there are still plenty of issues to
Whether or not the growth in participants will cause Rothman to lose the
inefficiencies that he has been able to exploit is yet to be seen.
be resolved in terms of hedge funds,
which often fall into a no-regulator’s
land between institutional and retail.
The European Fund and Asset
Management Association has come up
with two proposals for harmonizing
ECB: Hedge funds off the hook and streamlining hedge fund laws
across the European Union. One focus-
es on the structure of supply, or how
T he European hedge fund industry breathed a collective sigh of relief in
early December when the European Central Bank published a 54-page
paper stating banks had learned from past disruptions, and that hedge funds
funds are structured, perhaps through
amendments to the existing UCITS
were not destabilizing EU banks. The report did, however, find areas of con- Directive. The other focuses on the
cern: poor stress-testing, poor aggregation of risk and poor disclosure in structure of demand, or who is allowed
some cases, for example, as well as huge differences from bank to bank. to invest in hedge funds.
Futures readers interested in learning more about the However, with retail brokerages
structure of the European hedge fund industry will find the across the continent gearing up to sell
report and excellent backgrounder available for download at: the things to private investors, you can
http://www.ecb.int/pub/pub/prud/html/index.en.html. bet which proposal will get the biggest
industry push. FM

New For Traders
INDEX FUNDS Send new product information to: including new synthetic order types
Dow Jones Indexes (DJI) has launched Futures, 833 W. Jackson Blvd. 7th Floor
like stop market and stop limits with
the Dow Jones EPAC Select Dividend Chicago, Ill. 60607, Fax: (312) 846-4638 trigger quantities, timed orders, market
Index, which tracks the top 100 yield- Attn: Chris McMahon on open and market if touched.
ing stocks in Europe, Asia and Canada. E-mail: cmcmahon@futuresmag.com www.tradingtechnologies.com.
Components were selected from the
Dow Jones World Developed-Ex. U.S. Index, representing Numerator has launched its flagship service, nuFed, which
95% of free-float market capitalization for developed coun- delivers Federal Reserve data on America’s largest 150
tries excluding the U.S. DJI also launched the Dow Jones banks, reflecting more than $1.2 trillion of market cap, or
Canada Select Dividend Index, which tracks the country’s more than 9% of the entire U.S. market. Users can gener-
top 30 yielding stocks. The 30 components were selected ate and download a single bank analysis or reports compar-
from the Dow Jones Canada Total Market Index, representing 150 banks across line items. Important features are total
ing 95% of the country’s float-adjusted market capitaliza- anonymity and security for customers and no up-front costs
tion. The index is weighted by indicated annual dividend, or minimums. www.nuFed.com.
and the weight of any one component is capped at 10%.
www.djindexes.com. FUTURES
The Chicago Mercantile Exchange (CME) plans to launch
SOFTWARE a futures contract based on the MSCI EAFE Index on
Dynamic Trend Inc.’s Dynamic Trend Profile, a technical March 20, which will trade exclusively on Globex. The
analysis program, will be powered by eSignal’s real-time contract is designed to help investors participate in interna-
data. The combination brings eSignal’s technical charts tional equity markets. The MSCI EAFE Index comprises 21
and indicators together with Dynamic Trend Profile’s spe- MSCI country indices, representing the developed markets
cialized market scans to help traders identify market trends outside of North America. The EAFE Index is the basis for
the second largest exchange traded fund in the world, with
approximately $1.5 trillion is benchmarked to it.
www.cme.com/mscieafe.
The Chicago Board of Trade (CBOT) has launched two

new market maker programs designed to support options
trading on Two-year U.S. Treasury note futures. Participants
in the electronic market marker program will provide contin-
uous two-sided quotes and respond to requests-for-quote for
options on Two-year U.S. Treasury note futures traded on
Dynamic Trend Profile is now powered by eSignal’s real-time data. eCBOT, its electronic trading platform. Participants include
Capstone Fixed Income LLC, Citigroup Corporate and
in real time and allows traders to scan thousands of stocks, Investment Banking, Consolidated Trading LLC, DRW
forex and futures using color-coded graphical windows Investments LLC and Optiver US LLC. Participants in the
to help determine trading opportunities. Traders then may primary market marker program will do the same on the
use the Matrix function to generate trade setups, automati- open auction platform. www.cbot.com.
cally perform analysis and locate opportunities based on
user-defined criteria. (800) 833-1228, www.esignal.com. CLEARING
(330) 645-0800, www.dynamictrend.com. Fortis has acquired O’Connor & Company and will combine
its Chicago clearing operations with O’Connor, more than
Trading Technologies (TT) has released X_Trader 7 tripling its size. The combined organization will operate as
trading software. The enhancement to its platform O’Connor until the integration is completed, when it will
includes new exchange connections and more powerful assume the Fortis name. Fortis Clearing is one of the largest
tools. X_ Trader 7 is built on a new API and incorporates independent third-party clearers in Europe, Asia/Pacific and
a new messaging layer. X_Trader 7 platform is faster the U.S. and offers clearing services for the derivatives, equi-
than X_Trader 6 and provides increased functionality ties, bonds and commodities markets. Fortis Clearing has
to further optimize trading performance. Price updates offices in Amsterdam, Frankfurt, Hong Kong, London,
are more rapid, automated tools get orders into the Singapore and Sydney and has general clearing memberships
market quicker and overall order send time has been in 21 exchanges and access to other major exchanges
improved. X_Trader 7 also supports more order types through third party relationships. www.fortis.com.

Funds Review
2005 public funds returns (through December)
Starting Unit value Change Starting Unit value Change

Date unit through for Date unit through for
Name of fund Trading advisor(s) started value 12-31-05 2005 Name of fund Trading advisor(s) started value 12-31-05 2005
U.S. Closed Smith Barney AAA Energy AAA Capital Management Mar-98 1000 5337.09 91.10%
Dean Witter Cornerstone Fund II Northfield Trading; J.W. Henry Jan-85 975 3753 -19.43% Smith Barney Diversified Futures Multiple managers Jan-94 1000 1611.36 -7.73%
Dean Witter Cornerstone Fund III Sunrise; Graham Jan-85 975 3961 -6.09% Smith Barney Diversified Futures II Multiple managers Jan-96 1000 1516.78 1.74%
Dean Witter Cornerstone Fund IV J.W. Henry; Sunrise May-87 975 5880 -19.31% Smith Barney Global Markets Futures Fund Multiple managers Aug-93 1000 2712.37 -3.14%
Dean Witter Diversified Futures Fund II LP Morgan Stanley Jan-89 1000 2693 -21.51% Smith Barney Mid-West Futures II J.W. Henry Jan-96 1000 1552.78 -24.32%
Dean Witter Diversified Futures Fund III LP Morgan Stanley Nov-90 1000 1673 -21.93% SSB Fairfield Futures Fund L.P. Multiple Managers Jun-02 1,000 1389.59 -21.23%
Dean Witter Diversified Futures Fund LP DW Futures/Currency Mgmt. Apr-88 1000 1001 -22.16%
U.S. Open
Dean Witter Global Perspective Portfolio EMC; Millburn Ridgefield Mar-92 1000 1132 -0.18%
Campbell Strategic Allocation Fund LP Campbell & Co. Apr-94 1000 3007.37 9.54%
Dean Witter Multi-Market Portfolio L.P Morgan Stanley Aug-88 1000 1191 -21.77%
Citigroup Diversified Futures Fund Multiple managers May-03 1000 930.98 -4.46%
Dean Witter Portfolio Strategy Fund J.W. Henry Feb-91 1000 2727 -24.25%
Citigroup Emerging CTA Portfolio Multiple Managers Jan-04 100 1078 10.39%
Dean Witter Principal Plus Fund SSARIS Feb-90 1000 1895 -3.81%
Citigroup Fairfield Futures Fund II Graham Capital Management Mar-04 1000 798.1 -12.12%
Dean Witter World Currency Fund LP J.W. Henry; Millburn Ridgefield Apr-93 1000 1132 -14.63%
IDS Managed Futures I J.W. Henry; Welton Invst. Jun-87 75 366 -21.52%
Hutton Investors Futures Fund II J.W. Henry; Trendlogic Jul-87 1000 8178.21 -18.68%
JWH Global Trust J.W. Henry Jun-97 100 142.15 -4.30%
JWH/Millburn (B) J.W. Henry; Millburn Ridgefield Feb-91 100 290.32 -7.38%
Marathon Currency & Financials (CFE) Portfolio Multiple Advisors Jan-01 1000 4088.43 -3.67%
JWH/Millburn (C) J.W. Henry; Millburn Ridgefield Jan-92 100 226.29 -7.38%
Marathon Diversified Portfolio Multiple Advisors Mar-95 1000 2787.7 -6.77%
JWH/Millburn LP J.W. Henry; Millburn Ridgefield Jan-90 100 357.74 -7.37%
Marathon FX Portfolio Multiple Advisors Jan-98 1000 2051.7 -3.12%
ML Global Horizons LP Athena; Chesapeake Jan-94 100 221.81 -3.47%
Marathon Macro Strategic Portfolio Multiple Advisors Jul-98 1000 1368.64 -6.49%
Salomon Smith Barney
Diversified 2000 Futures Fund Multiple managers Jun-00 1000 1284.36 -4.68% Marathon Plus Portfolio Multiple Advisors Apr-98 1000 2501.93 -9.29%
Salomon Smith Barney Global Diversified Multiple managers Feb-99 1000 1480.68 10.94% Marathon System Financial Portfolio Multiple Advisors Mar-95 1000 2891.39 -10.35%
SB AAA Energy Fund L.P. II AAA Capital Management Jul-02 1,000 2171.92 88.91% Millburn World Resource Trust Millburn Ridgefield Sep-95 1000 1095.15 1.22%
Shearson Mid-West Futures Fund J.W. Henry Dec-91 1000 2373.6 -24.17% MS Charter Campbell Campbell & Co. Oct-02 10 12.71 9.66%
Shearson Select Advisors Futures Fund J.W. Henry Jul-87 1000 3045.05 -23.92% MSDW Charter Graham LP Graham Cap. Mgmt. Mar-99 10 18.59 -16.11%
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 Total

J.W. Henry/Millburn LP $20 Hutton Investors II $200
See page 18 for top CTA performance rankings.

Starting Unit value Change Starting Unit value Change
Date unit through for Date unit through for
Name of fund Trading advisor(s) started value 12-31-05 2005 Name of fund Trading advisor(s) started value 12-31-05 2005
MSDW Charter Millburn LP Millburn Ridgefield Mar-99 10 10.45 -0.67% Blue Danube Fund - Futures Select Multiple managers Oct-95 1000 1310.12 6.76%
MSDW Charter MSFCM Morgan Stanley Mar-94 10 15.73 -19.62% FTC Futures Fund Balanced FTC Asset Mgmt. Apr-03 1000 1138 2.25%
MSDW Spectrum Global Balanced Fund SSARIS Nov-94 10 15.23 4.32% FTC Futures Fund Classic FTC Asset Mgmt.; Pomeranz & Prtnr. May-98 1000 1246.47 -0.05%
MSDW Spectrum Select L.P. Multiple Advisors Aug-91 10 28.46 -1.45% FTC Futures Fund Dynamic FTC Asset Mgmt. May-02 1000 1250.06 15.99%
MSDW Spectrum Strategic Fund Blenheim Capital; Eclipse Capital Nov-94 10 14.17 -2.68% Global Futures Fund IX Ltd. Man Investments Jan-02 1,000 10230.17 6.15%
MSDW Spectrum Technical Fund Multiple Advisors Nov-94 10 22.36 -5.45% Global Futures Fund VI Ltd. (DM) Man Investments Nov-96 10000 14780.14 7.30%
Quadriga Superfund, L.P. Series A Quadriga Capital Mgmt. Nov-02 1000 1328.33 -9.43% Global Futures Fund VII Ltd. (DM) Man Investments Apr-97 10000 13548.17 7.33%
Quadriga Superfund, L.P. Series B Quadriga Capital Mgmt. Nov-02 1000 1521.61 -12.06% Global Futures Fund VIII Ltd. Man Investments Jun-04 10,000 12530.07 7.19%
Salomon Smith Barney Orion Futures Fund Multiple managers Jun-99 1000 1613.81 17.94% Global Futures Fund X Ltd. Man Investments Jan-02 1,000 9080.12 7.17%
Smith Barney Potomac Futures Campbell & Co. Oct-97 1000 1817.4 6.92% Global Futures Fund XI Ltd. Man Investments Jan-02 1,000 1559.74 8.90%
Smith Barney Tidewater Futures Fund Chesapeake Capital Corp. Jul-95 1000 2150.06 -2.92% Global Futures Fund XII Ltd. Man Investments Jan-02 1,000 1656.77 9.49%
Smith Barney Westport Futures Fund J.W. Henry Aug-97 1000 1262.39 -22.82% GSL-JWH Financial & Metals J.W. Henry Jan-93 100 493.89 -13.97%
Triad Trading Fund LP AAA Capital Management Nov-94 1000 7226.3 74.81%
GSL-JWH Strategic Allocation J.W. Henry Oct-02 100 106.79 -9.25%
TriFex Trading Fund LP Treasury Management Service Inc. Jan-04 1000 1132.25 9.74%
Hasenbichler Commodities AG Hasenbichler Trading Services Jul-90 1000 13186.93 0.26%
Wimbledon Alternative Diversified Strategies III Multiple Advisors Jul-02 1000 1120.25 3.97%
Man AHL Alpha plc Man Investments Oct-95 100 530.17 9.98%
Wimbledon HDN Fund LP Multiple Advisors Feb-03 100 148.14 12.69%

Man AHL Diversified plc Man Investments Mar-96 10 40.17 -23.21%
Wimbledon Marathon LP Multiple Advisors Feb-04 100 98.83 -7.58%

MAN-IP 220 Fusion Ltd. Man Investments Apr-98 1 2.32 10.48%
Wimbledon Sand Spring Fund Class L Shares Multiple Advisors Jul-00 1000 1426.33 4.43%
Northfield International Northfield Trading Mar-91 10 19.17 6.56%
Offshore SMN Alternative Investment Fund Class ASMN Investment Services Ltd. Mar-97 100.03 143.31 -1.77%
AHL Capital Markets Ltd Man Investment Prod. Ltd. Aug-93 10 74 22.94% SMN Diversified Futures Fund SMN Investment Services Ltd. Oct-96 72.67 158.52 -3.66%
AHL Currency Fund Man Investment Prod. Ltd. Aug-93 10 60.1 -9.23% Wimbledon Fund Ltd. Class A Shares Multiple Advisors Jan-97 1000 1749.99 -0.31%
AHL Diversified Guaranteed II Man Investments Aug-96 10 40 -1.09% Wimbledon Fund Ltd. Class B Shares Multiple Advisors Sep-96 1000 2334.49 2.28%
Alternative Opportunities Fund Karin Kisling Mar-04 100 114.5 9.31% Wimbledon Fund Ltd. Class C Shares Multiple Advisors Jun-96 1000 7142.05 18.68%
Athena Gtd. Futures Adam, Harding & Lueck Dec-90 10 82.12 7.64% Wimbledon Fund Ltd. Class M Shares Multiple Advisors Apr-96 1000 2508.62 2.52%
Blue Danube Fund - Currency Opportunity Multiple managers May-99 1000 1226.05 4.09% Wimbledon Fund Ltd. Class TT Shares Multiple Advisors Jan-99 1000 2129.51 9.54%
Blue Danube Fund - Futures Aeneas Multiple Advisors Jul-03 1000 715.95 -12.18% Wimbledon HDN Fund Ltd. Offshore Multiple Advisors Jan-03 1000 1505.11 14.63%
Blue Danube Fund - Futures Dynamic Multiple managers May-02 1000 1127.81 0.94% Wimbledon Multi-Strategy Fund Ltd. Multiple Advisors Apr-01 100 115.84 4.87%
TRADE TRENDS
The move to for-profit status accelerated in earnest in 2005 as three exchanges
and one futures firm went public and others were targets for capital raising
firms eager to cash in. While equity volatility continued to wane, futures and
options exchanges set records. Here is an offbeat look at some of
the events of last year.
Tops & bottoms

of 2005
BY DANIEL P. COLLINS
Tops CBOT STOCK PRICE

IPO-MANIA 130.00
The successful IPOs of 2005 ran the gamut in terms of 120.00
market models: The Chicago Board of Trade (CBOT), 110.00
the oldest futures exchange in the United States, finally 100.00
took the plunge after years of fighting legal battles that 90.00
delayed the offering; the International Securities 80.00
Exchange (ISE), one of the newest exchanges, launched 70.00
in 2000, and the first all-electronic options exchange; IPO offering price 60.00
and the Intercontinental Exchange (ICE), which is actu-
24 31 7 14 21 28 5 12 19 27
ally an OTC bilateral trading platform that is also the Nov Dec
parent of ICE Futures, the former International Source: eSignal
Petroleum Exchange.
Chicago Board of Trade

CBOT’s IPO was actually more successful than everyone’s ISE STOCK PRICE
exchange IPO model, the Chicago Mercantile Exchange.
32.50
CBOT opened trading above $80 despite an offering price
of $54, which was raised twice in months preceding the 30.00
offering, and quickly rallied above $100. However, ques- 27.50
tions regarding its growth potential led some analysts to
downgrade the stock leading to a dip as the year closed out. 25.00
22.50
International Securities Exchange IPO offering price 20.00
The most successful launch of a new exchange, ISE in a
few short years went from start-up to volume leader in 21 4 18 2 9 23 6 20 5 18 226 19 3 10 24 7 21 5 12 27
Apr May Jun Jul Aug Sep Oct Nov Dec
individual options and challenges the Chicago Board
Source: eSignal
Options Exchange for overall leadership.

Intercontinental Exchange ICE STOCK PRICE
The Intercontinental Exchange (ICE) benefited from energy
exemptions in the Commodity Futures Modernization Act of 37.50
2000 and established itself as a platform for OTC energy trad-
35.00
ing. The fall of Enron created an opportunity for the creation of
cleared OTC products and ICE has been battling the New York 32.50
Mercantile Exchange (Nymex) to fill that space.
30.00
EXCHANGE SEAT PRICES
IPO offering price 27.50
Chicago Board Options Exchange. CBOE announced plans
early in 2005 to explore demutualization and a possible 21 28 5 12 19 27
Dec
IPO. While issues relating to CBOT exercise rights holders Source: eSignal
continues to be a drag on its value, the possibility of another
Chicago exchange IPO has helped CBOE seat prices nearly
triple during the course of the year (see “Chartview,” NYSE YEARLY SEAT PRICES
Trendlines page 14).
$4,500,000
New York Mercantile Exchange. Seemed liked everyone $4,000,000 High
wanted to get a piece of the energy exchange as Nymex took bids $3,500,000 Low
from multiple suitors. They apparently settled on a $135 million $3,000,000
Seat prices
bid from General Atlantic for a 10% stake in the exchange. The $2,500,000
interest pushed seat prices to a record $3.1 million. $2,000,000
While many New York Stock Exchange specialists talked $1,500,000
about the NYSE getting the short end of the $1,000,000
NYSE/Archipelago Holdings merger, in the end they voted $500,000
by a 95% margin to approve the deal. And why not, seat $0
1994 1996 1998 2000 2001 2002 2004 2006
prices exploded as the year wore on.
Source: NYSE
Bottoms
KATRINA
In 2005 Mother Nature once again proved to be a cruel mis-
tress. Hurricane Katrina ravaged the Gulf coast and breached
the New Orleans levy system flooding virtually all of the Big
Easy. Oil rigs broke from moorings, natural gas distribution was
all but stopped, the Port of New Orleans was closed for busi-
ness. The human toll was worse.
HEDGE FUND TIMING: BAYOU

In a year that saw a hurricane destroy the levy system pro-
tecting the City of New Orleans causing massive flooding, REFCO STOCK PRICE
multiple deaths and destroying much of the Crescent City, it
was bound to be a bad year for a hedge fund named Bayou. 30.00
25.00
REFCO IMPLOSION
People in the trading business understand how quickly fortunes 20.00
can turn, but even hardened traders had to be shocked at this
reversal. If ousted Refco CEO Phillip Bennett took care of his 15.00
outstanding debt, perhaps with the money awarded him prior 10.00
to the Refco IPO, this Refco story could have been a top.
22 29 6 12 19 26 3 10
Instead, the largest independent futures commission merchant Sep Oct
fell into bankruptcy and many dedicated employees where left Source: eSignal
with worthless stock, and clients with an uncertain future.

Trade Trends continued
Fights Off the charts

of the year MYSTERY SOLVED!
On June 9 the CBOT rededicated two 12-foot 5.5 ton
DEUTSCHE BORSE VS. TCI statues representing agriculture and industry that had
been missing for years at a 75th anniversary celebration
A s 2005 began Deutsche Borse
was preparing for another
go at the London Stock Exchange
of the CBOT building. The statues disappeared in 1929
after demolition of the original 1885 CBOT building.
They were discovered in 1978 in a suburban forest pre-
after it rejected a $2.6
serve, which curiously enough used to be the estate of
billion DB bid
Arthur Cutten, a prominent CBOT trader in the early
to purchase
1900s. The CBOT noted it does not know how the
it. But one of
5.5 ton statues got from LaSalle Street to the Cutten
DB’s newer
Estate more than 30 miles away.
shareholders, a
hedge fund called The Children’s LOVE/HATE TRIANGLE
Investment Fund (TCI) had other The year started out with speculation as to who would win the battle to purchase the
ideas. A very public letter-writing London Stock Exchange: Deutsche Borse or Euronext. A shareholder revolt pushed
campaign ensued when TCI DB out of the game and then Euronext appeared to get cold feet. The hot rumor as we
Managing Partner Christopher move into 2006 is of a DB/Euronext merger. Maybe then the LSE will have a buyer.
Hohn asked for an extraordinary
shareholder meeting to debate NO QUIB(BL)ING, THAT’S A LOT OF COPPER
the LSE bid and replace the A scare was averted as China appears to have honored the large (approximately
entire supervisory board. DB CEO 220,000 metric ton) short copper position accumulated by Liu Qibing, a trader for
Werner Seifert claimed Hohn’s China’s State Regulation Center of Supply Reserve (SRB). SRB initially distanced
actions were damaging the itself from Qibing’s trades, saying Qibing acted on his own.
board and that TCI had
ulterior financial motives. FAT FINGERS
Tokyo Stock Exchange President and CEO Takuo Tsurushima resigned along with
The German exchange pulled
two TSE directors after what has been described as a fat finger error by a Mizuho
its LSE bid and announced it
Securities broker caused a 40 billion yen ($345 million) loss. According to the
would use the capital for a 10%
TSE, the fat fingered broker mistakenly placed a sell order for 610,000 shares of J-
share buy-back and a dividend to COM at 1 yen instead of one share at 610,000 yen. The error could not be
shareholders. Hohn was not yet canceled due to a system irregularity.
satisfied though, and in May
Seifert and three other supervisory ETHANOL WARS?
board members resigned. On March 15 the CBOT moved up the launch of
its much-ballyhooed ethanol futures contract to
TT VS. RCG
March 23 from April 8 after the CME announced
In defending its software patents, earlier in the week they would launch an all-electron- Learn how to trade
independent software vendor ic ethanol contract. the foreign exchange
Trading Technologies (TT) agreed market (Forex)...
to out of court settlements with FOREX FOREVER The potential is huge!
more than a dozen firms. But Has the growth in retail forex gotten out of
there are still holdouts: Rosenthal hand? We’re not sure but an indication may be
Collins Group (RCG), apparently when brokers start using approaches usually
reserved for college students offering study help or
under the belief the best defense
trying to unload old furniture.
is a good offense, countersued TT
This ad was posted in the entrance of a super
for numerous Sherman Act viola- market in suburban Chicago. Regulation of retail
tions. An Illinois court on Dec. 26 forex may become more structured as legislation
dismissed most of RCG’s claims. reauthorizing the Commodity Futures Trading
Commission will close some loopholes.

Signs of the times Records
• CBOT: More than 674 million con-
tracts traded at the CBOT in 2005,
a 12.9% increase over 2004 and
the fourth consecutive year of
record volume.
• CBOE: More than 468 million
contracts traded on CBOE in 2005,
a 30% increase over 2004’s
NOT SO FAST! record year.
Two things are clear at Nymex: They want to become a public company and
they need help getting there. For a while it looked like they settled on where • CME: The CME traded 1.05 billion
that help would come from, General Atlantic. But recently they appeared to contracts in 2005, a 34% increase
reopen the bidding and the new hot contender is the CME. The CME knows a from 2004 and the sixth consecu-
thing or two about a successful IPO and will be free to compete directly with tive year of record volume.
Nymex by the middle of the year, giving Nymex added incentive to cut in the Average daily volume was nearly
CME. (See Trendlines, page 14.)
4.2 million.
EVERYONE SHOUT! • Eurex set a record turnover of
That loud noise was a shout for joy from business 1.25 billion contracts in 2005, a
journalists as the Securities and Exchange
17% increase from 2004.
Commission in June unanimously agreed to
eliminate initial public offering quiet periods. • OneChicago: The security futures
product exchange completed its
third full year of existence in 2005
and traded 5.53 million contracts,
Rogues Gallery a 188% increase from 2004. In
December OneChicago set an
Phillip Bennett. Revelations of the
open interest record of 1.6 mil-
former Refco CEO hiding $430 mil-
lion contracts.
lion in bad debt led to the Refco
bankruptcy. While segregated • Minneapolis Grain Exchange: The
futures accounts remained safe, MGEX set a volume record of
retail forex customers had to wait 1.422 million contracts in 2005,
two months before they learned the majority of which came from
that they would be made whole and its Hard Red Spring Wheat con-
retail investors in the Roger Raw tract, which traded a record 1.39
Materials Fund are still in limbo. million contracts.
NYSE Specialists. On April 17
Sam Israel III. The slick CEO of former NYSE specialists were • New York Board of Trade: Nybot
hedge fund Bayou Management charged by the NYSE enforce- traded 37.9 million futures and
LLC with the Wall Street pedigree ment division with securities options contracts, which was 20%
proved to be much more style than fraud. The specialists were more than 2004 and the third
substance. Israel created a false alleged to have violated their straight record volume year.
accounting firm to mask a massive fundamental obligation to prior-
• New York Mercantile Exchange:
fraud in the $440 million hedge itize public customers’ orders
Explosive volatility in the energy
fund. It was discovered and Israel over the proprietary interests of
complex led to record volume at
was charged with fraud. their specialist firms.
Nymex.

Trade Trends continued
Just deserts Ch-ch-changes

On March 15 Bernie Ebbers, the former Reserve Board Chairman Alan
CEO of Worldcom, was convicted on Greenspan, the maestro, steps aside.
charges of conspiracy, securities fraud Greenspan could have been the
and false regulatory filings in con- inspiration behind the old E.F.
nection with the $11 billion Hutton add, ‘When E.F. Hutton talks,
fraud which brought people listen.’
down the telecom- Trading floors grew quiet when
munication company. Ebbers was later Greenspan gave testimony and traders
sentenced to 25 years in prison. and brokers attempted to discern Fed
Many other of the corporate crooks of policy through the maestro’s careful
recent years finally faced retribution. word selection.
• Joe Nacchio, former Qwest

Communications CEO, was indicted on IN MEMORIAM
42 counts of insider trading. CME
• Adelphia Communications founder Fred Arditti, who passed away in INNOVATION
John Rigas, in June, was sentenced to October, was responsible for devel- AWARD
15 years in prison for defrauding oping the process for cash settlement
customers. His son Timothy was sen- of Eurodollar futures at the Chicago
tenced to 20 years. Mercantile Exchange. The CME has
• Former Tyco CEO Dennis Kozlowski named its annual innovation award
was found guilty by a New York court of in his honor.
fraud, conspiracy and grand larceny.
Boca Beat
T he 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 industry
today understand the contributions made by those who came before them. We are benefiting from the
ground they broke and the programs and policies they put in place.” Here are the inductees:
FUTURES HALL OF FAME

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

Dateline
FEBRUARY
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY
30 31 1 2 3
Crop summary. Japan
Employment, Merchandise
trade. France Unemployment,
Japan Production index PPI COT report, Employment
6 7 8 9 10 COT report, Merchandise

Cotton ginnings, Crop trade. Japan PPI. France
Crop summary. Germany U.K. Production index. production. U.K. Merchandise Production index,
Production index Germany Merchandise trade trade. Australia Employment Merchandise trade
13 14 15 16 17
Japan Balance of payments. Crop summary. U.K. CPI. COT report, PPI. Japan
German Balance of Germany National accounts, Australia Merchandise National accounts. France
payments CPI Production index trade Balance of payments
20 Holiday: U.S.
21 22 23 24
Crop summary, CPI.
Germany PPI France CPI Canada CPI COT report
27 28 Crop summary. Japan 1 2 3

Production index,
Merchandise trade.
Canada Balance of Germany Employment.
payments France Employment, PPI COT report
C O N T R A C T D AT E S
1 LTD: BM&F Alcohol OF, iBrX 50 F, Euronext-Liffe Mar White sugar OF. 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.
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. 20 LTD: BM&F Mar IGP-M F.
3 LTD: CME Jan Frozen Pork Bellies OF, Live cattle OF, Pork bellies, frozen OF, 21 FND: BM&F Live cattle F, Feeder cattle F, LTD: Eurex Bobl OF, Bund OF,
Rand OF. Schatz OF, Nymex Mar Crude oil F.
22 LTD: BM&F Mar IGP-M F.

8 LTD: BM&F Alcohol F, Sugar F, Nybot Mar Sugar #14 F.
23 LTD: CME Jan Frozen Pork Bellies F, Pork bellies, frozen F, Nymex Mar Heating
9 FND: BM&F Mar Soybeans F, LTD: Euronext-Liffe Mar Feed wheat OF.
oil OF, Mar Natural gas OF, Mar Unleaded gas OF, Mar Aluminum OF, Mar
10 LTD: BM&F Mar Arabica coffee OF, Mar Conillon coffee OF, Mar Arabica Copper OF, Mar Gold OF, TGE Azuki F, Non-GMO soybeans F.
coffee OF, Mar Conillon coffee OF, CBOE, Amex, PCX, Phlx, ISE, OneChicago 24 LTD: BM&F Live cattle F, Feeder cattle F, Mar Ei bond F, Mar Euro F, Mar
Currency O, Nybot Mar Cotton OF, Mar Sugar OF. Gold F, Mar IDI O, Mar Soybeans F, Mar US dollar F,O,OF, CBOT Gold F, Mar T-
13 LTD: BM&F Mar Cotton F, CME Eurodollar F, Libor F,OF, Peso F, Rand F, Eurex bonds/10-,5-,2-yr. T-notes/inflation-indexed Treasuries OF, Mar Grains and oilseeds
OF, Mar Soybeans OF, Mar Soybean meal OF, Mar Soybean oil OF, Mar Wheat
3-mo. euribor F, Nymex Mar Brent Crude oil F, Safex Rand F.
OF, Mar Corn OF, Mar Oats OF, Mar Rice OF, KCBT Mar Wheat OF, MGEX Mar
14 LTD: CBOT Ethanol F, CFE Vix F, CME Lean hogs F,OF, Mexican Cetes F. Wheat OF, Nymex Aluminum F, Gold F, Silver F, Palladium F, Platinum F, Copper
F, Mar Aluminum F, Mar Silver F, WCE Mar Agricultural OF.
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, 27 LTD: Euronext-Liffe Mar Long gilt/bund OF.
TGE Soybeans F. 28 FND: KCBT Mar Wheat F, MGEX Mar Wheat F, LTD: BM&F Mar 1-day
16 LTD: BM&F Mar Soybeans F, CBOE, Amex, PCX, Phlx, ISE, OneChicago A.M. deposits F, Mar US dollar F,O,OF, Mar IDxUS dollar F, Mar Ei bond F, Mar Euro F,
settled index O, Eurex SMI OF, Euronext-Liffe Equities (Italy, Nor) F. Mar IDI O, Mar Gold F, CBOT Fed funds OF, CME Mar Ethanol F, Live cattle F, Mar
Real F,OF, Mar Real F,OF, Mar Ethanol F, Mar Lumber OF, Eurex Eonia F,
17 LTD: CBOE, Amex, PCX, Phlx, ISE, OneChicago P.M. settled index O, CBOT DJIA Euronext-Liffe Eonia F, Mar Cocoa OF, Mar Cocoa OF, MGEX HWI/NCI/NSI F,OF,
OF, Eurex Dax OF, Dutch equity O, Finnish equity O, French equity O, German Nybot Mar Sugar #11 F, Nymex Mar Heating oil F, Mar Natural gas F, Mar
equity O, Italian equity O, Swiss equity O, Stoxx 50 OF, Titans OF, Euronext-Liffe Unleaded gas F, Mar Propane F

Dateline continued
MARCH
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY
27 28 Crop summary.
Japan Production index,
1 2 3 COT report, Annual
Livestock slaughter.
Merchandise trade. Japan Employment, CPI.
Canada Balance of Germany Employment. Canada PPI. Australia National Australia Merchandise
payments France Employment, PPI accounts trade
6 7 8 9 Merchandise trade. 10 COT report,

Crop production,
Canada Merchandise trade. Employment. Canada
U.K. Production index, Employment. Japan PPI.
Merchandise trade. Germany France Production index,
Crop summary Production index Merchandise trade
13 14 15 16 17
COT report, Production
U.K. PPI. Japan Balance Crop summary. Germany CPI. Canada CPI. index. France Balance of
of payments CPI. France CPI U.K. Employment Germany Balance of payments payments
20 21 22 23 24
COT report, Livestock
Germany PPI Crop summary, PPI Cotton ginnings slaughter
27 28 29 30 31 COT report, Grain stocks,

Quarterly Hogs and pigs.
Crop summary, U.K. National accounts, Japan Production index Canada Production index.
Japan Merchandise trade National accounts Balance of payments Germany Employment France Employment
ABOUT THE CALENDAR… Dates are believed to be correct but sometimes do change. Holidays may affect government offices or banks
but not trading. Check with your broker or the exchange. Reports are U.S. reports unless indicated otherwise. Contracts traded are for
current month unless indicated. Abbreviations used with contracts: F futures. OF options on futures. O options. LTD last trading day. FND first notice day. LND last notice day.
Last trading day Last trading day Last trading day Last trading day Last trading day Last trading day
Contract month FEB MAR FEB MAR FEB MAR FEB MAR FEB MAR FEB MAR
CBOE, Amex, PCX, Soybean oil F........................-........3/14 2-yr. Swap F ........................-........3/13 Lumber OF............................-........2/28 E-mini Russell 2000 F,OF....-........3/17
Phlx, ISE, OneChicago Soybean oil OF......................-........2/24 5-yr. Swap F ........................-........3/13 Mexican Cetes F..............2/14........3/14 E-mini S&P 400 F ................-........3/17
A.M. settled index O........2/16........3/16 Soybeans F ..........................-........3/14 Agencies F............................-........3/22 Mexican TIIE F ................2/15..........3/1 E-mini S&P 500 F,OF ..........-........3/14 Nybot
Currency O ......................2/10........3/10 Soybeans OF ........................-........2/24 Butter F ................................-........3/22 Mid-sized milk OF ............3/2........3/30 Nasdaq 100 F,OF ..................-........3/16 Cocoa F ................................-........3/16
P.M. settled index O........2/17........3/17 Swaps F ................................-........3/13 Butter OF ..............................-..........3/3 Midcurve eurodollar OF ......-........3/10 Nikkei 225 F,OF ....................-........3/10 Coffee F ................................-........3/21
T-bonds/10-,5-,2-yr. Canadian dollar F ................-........3/14 Milk F,OF............................3/2..........3/2 Russell 1000 F......................-........3/17 Cotton F ................................-..........3/9
T-notes/inflation-indexed Canadian dollar F,OF............-..........3/3 Peso F..............................2/13 ............- Russell 2000 F,OF ................-........3/16 Cotton OF ..............................-........2/10
CBOT Treasuries OF..................1/27........2/24 Currencies F ........................-........3/13 Pork bellies, frozen F ....2/23........3/28 S&P 400 F,OF........................-........3/16 Currencies F ........................-........3/13
2-yr. T-notes F ....................-........3/31 T-bonds/10-,5-yr. Currencies OF ......................-..........3/3 Pork bellies, frozen OF ....2/3..........3/3 S&P 500 Barra Growth F,OF-........3/16 Currencies OF ......................-..........3/3
Corn F....................................-........3/14 T-notes/inflation-indexed Diammonium phosphate F..-........3/15 Pound F,OF ..........................-........3/13 S&P 500 Barra Value F,OF ..-........3/16 Dollar index F ......................-........3/13
Corn OF ................................-........2/24 Treasuries F..........................-........3/22 Ethanol F..........................1/31........2/28 Pound OF ..............................-..........3/3 S&P 500 F,OF........................-........3/16 Dollar index OF ....................-..........3/3
DJIA F....................................-........3/16 Wheat F ................................-........3/14 Euro F....................................-........3/13 Rand F..............................2/13........3/13 S&P 600 F ............................-........3/17 Forint F..................................-........3/10
DJIA OF ............................2/17........3/16 Wheat OF ..............................-........2/24 Euro OF..................................-..........3/3 Rand OF ............................2/3 ............- Orange juice F......................-........3/13
Ethanol F..........................2/14........3/14 Eurodollar F ....................2/13 ............- Real F,OF..........................1/31........2/28 Orange juice OF....................-........3/17
Fed funds F ..........................-........3/31 Eurodollar F,OF ....................-........3/13 Ruble F,OF ............................-........3/15 Rand F ..................................-........3/13
KCBT
Fed funds OF ..................2/28 ............- CFE Euroyen F,OF ........................-........3/10 Urea ammonium nitrate F ..-........3/16 Reuters CRB Index F.OF ......-........3/10
Value Line F..........................-........3/16
Gold F ..............................2/24 ............- China Index F........................-........3/17 Euroyen Libor F....................-........3/10 Weather F ..........................3/2 ............- Stock Index F,OF ..................-........3/16
Value Line OF ..................2/17........3/16
Grains and oilseeds OF ..1/21........2/24 Variance F ............................-........3/18 Feeder Cattle F,OF................-........3/30 Weather F,OF........................-..........4/3 Sugar #11 F ..........................-........2/28
Wheat F ................................-........3/14
Oats F ....................................-........3/14 Vix F ................................2/14 ............- GSCI F,OF ............................-........3/16 Sugar #14 F ..........................-..........2/8
Wheat OF ..............................-........2/24
Oats OF..................................-........2/24 JGB F ....................................-........3/10 Sugar OF ..............................-........2/10
Rice F ....................................-........3/22 Lean hogs F,OF ..............2/14 ............- Indexes
Rice OF..................................-........2/24 CME Libor F,OF ........................2/13........3/13 CME $ Index F ......................-........3/13
S.A. Soybeans F....................-........3/24 10-yr. Swap F ......................-........3/13 Live cattle F ....................2/28 ............- CME $ Index OF ....................-..........3/3 MGEX Nymex
Silver F..................................-........3/29 10-yr. Swap OF....................-........3/13 Live Cattle F..........................-........3/31 CPI F......................................-........3/16 HWI/NCI/NSI F,OF............2/28........3/31 Aluminum F ....................2/24........2/24
Soybean meal F....................-........3/14 13-wk. T-Bills F,OF ............-........3/13 Live cattle OF ....................2/3 ............- E-mini Nasdaq 100 F,OF......-........3/17 Wheat F ................................-........3/14 Aluminum OF ..................1/26........2/23
Soybean meal OF ................-........2/24 13-wk. T-Bills OF ..........1/27 ............- Lumber F ..............................-........3/14 E-mini Russell 1000 F ........-........3/17 Wheat OF ........................1/27........2/24 Brent Crude oil F ..................-........2/13

Next month in Futures
Stock market forecast

AD INDEX The stock market has meandered
ADVERTISER PAGE ADVERTISER PAGE directionless in 2004 and 2005. Are we
Ablesys . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Interactive Brokers . . . . . . . . . . . . . . . . . .47
in for another flat period in 2006 or will
Alaron . . . . . . . . . . . . . . . . . . . . . . . . . . . .c3 MG Financial . . . . . . . . . . . . . . . . . . . . . . . .9
CBOE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 National Futures Association . . . . . . . . . . .3
the market finally pick a direction? Our
Chicago Board of Trade . . . . . . . . . . . . . .c4 Ninja Trading . . . . . . . . . . . . . . . . . . . . . .29 analysts answer that and other
CMC Markets . . . . . . . . . . . . . . . . . . . . . .31 New York Board of Trade . . . . . . . . . . . .13 questions regarding equities.
CoesFx . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 New York Mercantile Exchange . . . . . . .25
Direct Trade . . . . . . . . . . . . . . . . . . . . . . .30 Open-E-Cry . . . . . . . . . . . . . . . . . . . . . . . .29
Esignal . . . . . . . . . . . . . . . . . . . . . . . . . . . .c2 Pricecharts.com . . . . . . . . . . . . . . . . . . . . .53
Top traders of 2005
Fidelity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Real Tick . . . . . . . . . . . . . . . . . . . . . . . . . .41 It was another difficult year for CTAs.
Futures Magazine Subscriptions . . . . . . .23 Quote.com . . . . . . . . . . . . . . . . . . . . . . . .11 We feature several managers
Futures Magazine Subscriptions . . . . . . .30 Sonic Futures . . . . . . . . . . . . . . . . . . . . . . .28 who were able to navigate TOP
Futures Magazine Subscriptions . . . . . . .36 Tradebolt . . . . . . . . . . . . . . . . . . . . . . . . . .28 the tough waters in 2005 TRADERS
Gain Capitol . . . . . . . . . . . . . . . . . . . . . . .37 Traders Expo . . . . . . . . . . . . . . . . . . . . . . .63 and discuss the main OF 2005
Global Forex Trading . . . . . . . . . . . . . . . .19 Tradestation . . . . . . . . . . . . . . . . . . . . . . .4-5
trends of last year. Who did
Global Forex Trading . . . . . . . . . . . . . . . .33 XpressTrade . . . . . . . . . . . . . . . . . . . . . . .12
better? Diversified or niche
Go Futures . . . . . . . . . . . . . . . . . . . . . . . . .19 XpressTrade . . . . . . . . . . . . . . . . . . . . . . .49
traders? Systematic of discretionary?
SEE CLASSIFIED ADVERTISING ON PAGES 80–85
EVENTS COMING UP Statistical analysis
Call the numbers listed for more information. For other seminars, see the classifieds on pages 80-85. We look at the time-proven tool of
linear regression analysis and how it
Managed Funds Association’s Network 2006. FIAs 31st Annual International Futures can give you a solid idea of where
FEB. 5-7. The Ritz-Carlton. Key Biscayne, Fla. Industry Conference. MAR. 15-18. Marriott Boca
prices are likely to move based on
www.mfainfo.org. (202) 367-1140. Raton Resort and Club. Boca Raton, Fla.
www.futuresindustry.org. (202) 466-5460. widely available fundamental data.
International Traders Expo. FEB 18-21.
Marriot Marquis, New York. www.tradersexpo.com.
Advanced Options Class. MAR. 27-28.
12:30 p.m. to 5 p.m. National Futures Association,
Trading rectangles
(941) 955-0323.
Chicago. www.theifm.org. (202) 223-1528. Trading setups can be geometrical and
Nybot Futures and Options for Kids Dinner technical. We examine the notion of
Foreign Exchange & Commodity Summit.
Dance 2006. FEB. 23. The Ritz Carlton. Battery Park, APRIL 2-4. Marriott Beach & Gold Resort.
trading rectangles and how they can
New York. www.futuresandoptionsforkids.org. Hilton Head, S.C. www.opalgroup.net. (212) 532-9898. be interpreted for possible profit.
Last trading day Last trading day Last trading day Last trading day Last trading day Last trading day
Contract month FEB MAR FEB MAR FEB MAR FEB MAR FEB MAR FEB MAR
Copper F ..........................2/24........3/29 Arabica coffee OF ..........1/14........2/10 3-mo. euribor F,OF ..............-........3/13 Euronext-Liffe Robusta coffee F ..................-........3/31 Non-GMO soybeans F ....2/23 ............-
Copper OF........................1/26........2/23 Conillion coffee F ................-........3/31 Bobl F....................................-..........3/8 Bund F ..................................-........3/14 Robusta coffee OF................-........2/15 Robusta coffee F ..................-........3/16
Crude oil F ......................1/20........2/21 Conillon coffee OF ..........1/13........2/10 Bobl OF ............................2/21........3/24 Cocoa F ................................-........3/16 Schatz F ................................-........3/14 Soybean Meal F....................-........3/16
Crude oil OF ....................1/17........2/15 Corn F....................................-........3/22 Bund F ..................................-..........3/8 Cocoa OF ..............................-........2/28 Short sterling F,OF ..............-........3/15 Soybeans F......................2/15 ............-
Gold F ..............................2/24........3/29 Cotton F ................................-........2/13 Bund OF ..........................2/21........3/24 Eonia F ............................2/28........3/31 Swapnote F,O ......................-........3/13 Sugar OF..........................1/13 ............-
Gold OF ............................1/26........2/23 Ei bond F..........................1/31........2/24 Buxl F ....................................-..........3/8 Equities (Den, Fin, Fra, White sugar F ......................-........3/13
Heating oil F ....................1/31........2/28 Euro F ..............................1/31........2/24 CONF F ..................................-..........3/8 Ger, Gre, Ire, Net, Spa, White sugar OF ....................-..........2/1
Heating oil OF..................1/26........2/23 Feeder cattle F ................2/24........3/31 Dax F,OF................................-........3/17 Swe, Swz, UK, USA) F ....2/17........3/17 WCE
Natural gas F ..................1/27........2/28 Feeder cattle OF..............2/15........3/15 Dax OF..............................2/17 ............- Equities (Italy, Nor) F ......2/16........3/16 Agricultural F........................-........3/14
Natural gas OF ................1/26........2/23 Gold F ..............................1/31........2/24 Dutch equity O ................2/17........3/17 Agricultural OF ....................-........2/24
Equities O ........................2/17........3/17 Euronext-Paris
Palladium F ....................2/24........3/29 Gold O....................................-........3/18 Eonia F ............................2/28 ............-
Euribor F,OF..........................-........3/13 Cac 40 F ..........................2/17........3/17
Platinum F ......................2/24........3/29 Ibovespa F,OF..................2/15 ............- Finnish equity O ..............2/17........3/17
Eurodollar F,OF ....................-........3/13 Rapeseed F......................1/31 ............-
Propane F ........................1/31........2/28 iBrX 50 F ............................2/1 ............- French equity O ..............2/17........3/17
Euroswiss F,OF ....................-........3/13 Rapeseed OF ..................1/13 ............-
Silver F ............................2/24........2/24 IDI O..................................1/31........2/24 German equity O ............2/17........3/17
Euroyen F..............................-..........3/9
Silver OF ..........................1/26........3/29 IDxUS dollar F ......................-........2/28 Italian equity O ................2/17........3/17
Feed wheat F........................-........3/23
Unleaded gas F ..............1/31........2/28 IGP-M F ..........................1/24........2/20 Omxh258 F,OF ......................-........3/17
Feed wheat OF......................-..........2/9 Safex
Unleaded gas OF ............1/26........2/23 Live cattle F ....................2/24........3/31 Schatz OF ........................2/21........3/24
Shatz F ..................................-..........3/8 FTSE 100 F,O ........................-........3/17 Bonds F..............................2/2 ............-
Live cattle OF ..................2/15........3/15
SMI OF..............................2/16........3/16 FTSE 100 O ......................2/17 ............- Equity indexes F ..................-........3/16
Soybeans F ..........................-........2/24
Stoxx 50 F,OF........................-........3/17 FTSE Eurotop F ....................-........3/17 Jibar F..............................2/15........3/15
Sugar F ..............................2/8 ............-
BM&F Stoxx 50 OF......................2/17 ............- FTSEurofirst F,O....................-........3/17 Rand F..............................2/13........3/13
US dollar F,O,OF ..............1/31........2/24
1-day deposits F..................-........2/28 Swiss equity O ................2/17........3/17 FTSEurofirst O ................2/17 ............-
1-day deposits OF ..........1/31 ............- TecDax F ..............................-........3/17 JGB F ....................................-........3/14
Alcohol F............................2/8..........3/8 Titans F,OF ............................-........3/17 Long gilt F ............................-........3/28 TGE
Alcohol OF..........................2/1..........3/1 Eurex Titans OF..........................2/17 ............- Long gilt/bund OF............1/23........2/27 Arabica coffee F ..................-........3/16
Arabica coffee F ..................-........3/23 3-mo. euribor F ..............2/13 ............- US equity O ..........................-........3/17 MSCI F ..................................-........3/17 Azuki F ............................2/23........3/28

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Trader Profile
BY YESENIA SALCEDO
Bernie Carey — Trading is in the blood

ernie Carey measures his success as a trader by the well because it gave his account some early breathing room.
B 40 years he traded grain futures at the Chicago Board

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


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

www.futuresmag.com February 2006

Trading systems come and go

PICTURED: JIM ROGERS

6 FUTURES | February 2006

18 Managed Money Review advertising coordinator Abby Dahlinghaus

F E AT U R E S classified & web sales manager

FUTURES 101 TRADE TRENDS international sales representatives

page 72 Futures is a unit of Highline Media

president and ceo Andrew L. Goodenough

8 FUTURES | February 2006

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Illinois court decision in the Zelener

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www.futuresmag.com | February 2006 15

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Man agrees to release info

Comparing index returns public funds summary

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www.futuresmag.com | February 2006 19

Webber to head Patsystems

Notes stuck in range Minis looking large

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How to benefit from an inverted yield curve

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Energy markets could

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www.futuresmag.com | February 2006 27

WORLD OIL DEMAND GROWTH

Source: Energy Information Administration

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Bcf/d SHUT-IN FEDERAL OFFSHORE GULF NATURAL GAS PRODUCTION $/Mcf.

www.futuresmag.com | February 2006 29

NATURAL GAS DUE TO STABILIZE

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