0206 Futures Mag

Energy market's feisty future 26 2005's tops & bottoms 72 www.futuresmag.com

February 2006

TOP TO

10 TRADING TR SYSTEMS OF ALL TIME US $6.95 CAN $8.95

page 42

Reproduction or use of the text or pictorial content in any manner without written permission is prohibited. Copyright 2006 by Futures Magazine Group, 833 W. Jackson Blvd., 7th Floor, Chicago, IL 60607

Titles you can't find anywhere else

Try Scribd FREE for 30 days to access over 125 million titles without ads or interruptions! Start Free Trial Cancel Anytime.

























































































































Contents FEBRUARY 2006

NUMBER 3

VOLUME XXXV

42 Top ten systems

y r o t s r e v o c

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. : Y B N O I T A R T S U L L I

PICTURED: JIM ROGERS

F

E

A

T

U

R

E

S

MARKETS

TRADING TRAD ING TEC TECHNI HNIQUES QUES

TECHNOLOGY & TRADING

26 Energy markets could find home in the range

38 Understanding the arb trade

60 Intermarket analysis: What works today

By Carla M. Bauch

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

EQUITY TRADING TECHNIQ TECHNIQUES UES 34 The versatility of buy-write strategies By Mike Oyster

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

By Ben Lichtenstein

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

By Murray A. Ruggiero Jr.

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

By Darrell Jobman

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

Contents Continued, page 8



















































Contents

continued group publisher / editorial director

DEPARTMENTS 10 Editor’s Note Taking a long view

32 Forex Trader The gift of the break-even trade

12 Sound Off! 14 Tre ndl ine s CFTC half way way home • Chartview: A run on seat prices • New DB boss joins merger mania • CBOT moves in on Asia • When is a deal a deal? • International news • Musical CEOs • Oil giant charged with violating CEA

18 Managed Money Review

58 Software Review NinjaTrader 64 Online Trading Growing options volume electronically

69 New for Traders 70 Funds Review

Ginger Szala managing editor Daniel P. Collins associate editor Yesenia Salcedo associate editor Chris McMahon editor at large Steve Zwick contributing editors

James T. T. Holter Holter Murray A. Ruggiero Jr., Carla M. Bauch art director Carl Walanski graphic designer Sean Kealey advertising coordinator Abby Dahlinghaus

20 Tra din g P lac es Webber to head 77 Dateline February and March

Patsystems

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

24 Market Strategy How to benefit from an inverted yield curve

advertising director

79 Ad Index 86 Tra der Pro fil e Bernie Carey — It’s in the blood

FEATURES FUTURES 101

TRADE TRENDS

60 Step-by-step into the ag markets

72 Tops & bottoms

By Chris McMahon

By Daniel P. Collins

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

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

MANAGE MAN AGED D MONE MONEY Y 66 The Great Divide(s) By Steve Zwick

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

west/east coast sales manager Tracey Goldvarg phone:: (312) 846-4611 fax phone fax:: (312) 846-4638 classified & web sales manager

Jennifer Jennif er Testa Testa phone:: (847) 526-7434 fax phone fax:: (847) 526-7435 international sales representatives

Europe: Carolyn Hicks London, England phone:: (44) 208-340-3273 phone Japan: Ken Masunaga Hiroyuki Naruke M.K. News, phone News, phone:: (81) 03-3664-9271 futures learning center sales manager

Gary Kamen (312) 846-4618 futures magazine group office

833 W. Jackson Blvd.• 7th Floor Chicago, Ill. 60607

















































Takii n g t h e l o n g v i e w Tak EDITOR’S NOTE

L

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

C U S T O M E R

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

S E R V I C E

C E N T E R



















































Sound Off!

Thank you. Futures will soon expand our perform ance reporti ng of the altern alternative ative investment arena in the Managed Money Review section of the magazine. In addition to commodity trading advisors, Futures will pres pr es en entt th e re rece ce nt pe rf rfor orma ma nc e history of several of the most popular hedge fund strat strategie egiess based on the Barclay Barclay/Glo /Global bal HedgeSource indexes. — Ed

vided by the Commodity Futures Trading Commission (CFTC). We compile the list based on those responses. Because the Refco bankruptcy occurred after the most recent recent CFTC data was released, our Top 50 Story did not reflect the most current information. Futures has subsequently posted on our Web site, at www.futuresmag.com/mid_month_ update/images/Mid-month_spread.xls, an updated ranking based on October numbers. That, however, did not include the full scope of change including Man Financial’s acquisition of Refco. We will post another updated ranking when data is available. — Ed

TOP 50 BROKERS? Every year we get questions about how we collect data for our annual December Top 50 Brokers story. Futures faxes a questionnaire to the top 70 or so futures commissions merchants based on current segregated fund data pro-

JOHN GELDERMANN Jo h n Ge ld er m an n , fo u nd e r of Geldermann Inc., passed away in early Ja nu ar ary. y. Ge ld er ma nn , 80 , wa s lo ng known in the futures industry as an innovator. Not only did he and his brother Tom start a clearing business in the

MORE ALTERNATIVE INVESTMENTS I read your managed money piece “Alternatives abound,” January 2006. Nicelyy done. Nicel done. Steve Lamb, via e-mail

Have an opinion, question, objection, idea or beef? Let us know. Sound Off! Futures, 833 W. Jackson Blvd., 7th Floor Chicago, Ill. 60607, Fax: (312) 846-4638 E-mail:

[email protected]

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

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

















































Trenn d l i n e s Tre

News, trends and insights for traders ONE CHAMBER DOWN...

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

the Chicago Mercantile Exchange (CME) in particular, likes the bill because of three things, none of them related to energy. The bill closes loopholes related to retail forex trading, mandates a structure to allow risk based margining for security futures products (SFP) and equity options and authorizes the trading of certain debt and foreign security indexes by June 30, 30, 2006. 2006. CME Chairman Emeritus Leo Melamed says the exchange worked with the Congress to correct some small problems in the last reauthorization. “It is fixing some of the things that were wrong with the [Commodity Futures Modernization Act of 2000]. We are looking for the Senate to pass substantially the same legislation. Right now we are very pleased that the

CHARTVIEW: A RUN ON SEA SEAT T PRICES

House did,” Melamed says. Damgard is not as confident the Senate will follow through. “It is unfortunate that we are not getting the CFTC reauthorized. The reason we are not is that they are amending the act to require the CFTC to do stuff that is beyond its mission.” Damgard is joined by several trade organizations and members of the President’s Working Group (PWG) who are unhappy with the amendment. In a Dec. 12 letter to Michael Oxley, R-Ohio, chairman of the House Committee on Financial Services, Department of Treasury (DOT) Under Secretary Randal Quarles expresses concern about the energy amendment on behalf of DOT Secretary John Snow. The letter points out the Treasury and other PWG members are concerned about provisions that could affect OTC derivatives markets, including energy and natural gas. Quarles calls the scope of the amend-

























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

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

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

























International News DEUTSCHE CDO TRADER BURIES LOSSES

While auditing its trading accounts for year-end bonuses in December, Deutsche Bank’s London office uncovered a little discrepancy — if you consider £30 million little. In January, the bank told the Financial Services Authority it had zeroed in on the problem: collateralized debt obligation (CDO) trader Anshul Rustagi had been covering up his losses. At press time, it’s not clear whether Rustagi will face criminal charges, but he certainly won’t be qualifying for bonuses any time soon. STEAK WELL DONE

Japan has opened its door to some U.S. and Canadian beef. The ban relating to North American cases of mad cow disease has been in effect since 2003. Japan lifted the ban on beef from cows younger than 21 months, if the heads and spinal cords

by an NFA hearing panel, is a result of an NFA complaint issued on May 26, 2005, and reflects a settlement offer submitted by Wallstreet and DiCrisci. The NFA complaint charged Wallstreet, DiCrisci and Mitchell with making deceptive, misleading and high-pressured sales solicitations, which included false statements, exaggerated profit claims and inadequate risk disclosures. The complaint also charged Wall Street and DiCrisci with failing to diligently supervise employees and agents in the conduct of their commodity futures activities. The reason DiCrisci can reapply but Mitchell can not is because of the severity of the offenses. DiCrisci acted more as a manager while Mitchell was the one making deceptive solicitations. “The common bad practices in the industry remain the same, it’s just the topics that change,

Trendl Tren dlin ines es continued Euronext and Australia’s Macquarie Bank Ltd were preparing their offers for the London Stock Exchange (LSE). Although it was Deutsche Boerse’s bid for LSE that brought Francioni to the helm of Deutsche Boerse, he has said nothing to indicate he won’t lead the exchange into merger talks with the LSE. Meanwhile, the LSE has taken a page from Deutsche Boerse’s book, offering to return £250 million to investors if it stays independent through 2006. Whatever the exchange bosses decide, competition authorities will be looking at the derivatives market. The big question: Do you look at exchange-traded products like those on Eurex and Euronext.Liffe, or do you look at OTC products cleared via Eurex Clearing, Euroclear, and LCH.Clearnet? By Steve Zwick



























amend the bylaws and elect directors. The GA deal is subject to a vote by the Nymex shareholders. Any changes would have to be agreed to by GA and there is no penalty for either party killing the deal. Cataldo J. Capozza, owner of three authorized Nymex trading shares, filed a lawsuit against Nymex demanding records to investigate whether the GA deal is fair, protects open outcry, undervalues Nymex, and whether the board seriously considered other offers. It also includes the assertion that there

shareholders as the board tries to close the GA deal. A petition to call a special meeting to elect a new 25-member board at Nymex has been temporarily shelved, giving the board breathing room to forge a deal with the CME. Typically, only a third of board seats are open to election in a single year. “Nymex has asked for a period of a month or so, give or take, for the opportunity to try to renegotiate some deal. And they have said that they would like the opportunity to negoti-

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

Musical CEOs • Refco Inc. named Harrison J. Goodin CEO, replacing interim chief Robert Dangremond. Goodin was senior managing director of Goodin Associates LLC and the fourth CEO named since the implosion. Unsecured

























Managed Money Review BY DANIEL P. COLLINS

Man agrees to release info

A

fter a testy exchange between lawyers for Man Financial and U.S. District Court Judge Michael Baylson at a Dec. 16 hearing, Lee A. Rosengard, attorney for receiver C. Clark Hodgson, withdrew the receivers contempt motion against Man after Man agreed to release all of the requested information related to its role as broker to the defunct hedge fund

PAAM and its affiliates. Judgee Baylson Judg Baylson also request requested ed Thomas Thomas Gilmartin, Man Financial SVP, who is on leave from Man and was a shareholder in PAAM, be deposed. Much of the information requested is related to emails and audiotapes of conversations between Gilmartin and PAAM officials. In response to the motion, Man claimed they had complied with their

between Refco Group Ltd. and Cargill. The objection argues the notice to hold Cargill to a five-year exclusive agreement with Refco and its affiliate entities should not be enforced without assigning to Refco obligations related to its purchase of Cargill’s futures commission merchant business. Under the purchase and sales agreement, Refco agreed to a post closing “earnout” of

























Trendl Tren dlin ines es continued Trendlines Continued, page 17

business and the 35% interest in FXCM owned by Refco Capital Markets (RCM). The likely buyer is FXCM. RCM claims to owe customers $4.16 billion. Refco Inc. still owes $16.8 billion to unsecured creditors. • Refco Securities LLC now faces liquidation after a bankruptcy judge ordered the company to return $117 million that was already transferred to RCM. • Thomas H. Lee, founder of the

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

Oil giant charged with violating CEA

on Nymex, a violation of the Commodity Exchange Act. The order assesses a $200,000 fine against Stasco and a $100,000 fine against Catteral. Royal Dutch Shell is the parent of both firms. According to the order, traders for Stasco Stasc o and Stus Stusco co prear prearrang ranged ed and and executed non-competitive crude oil futures trades on five occasions between November 2003 and March 2004. Traders for the two related firms agreed to take the opposite side of crude oil trades with the quantity

























Tradd i n g P l a c e s Tra B Y C H R I S MCMAHON

Webber to head Patsystems

D

avid Webber replaces Kevin

Ashby as CEO of Patsystems PLC as of Jan. 03, 2006. Previously, Webber was managing director of software company AttentiV, where he worked for 10 years. “Pats has built itself up into a big platform made up of blue chip customers,” Webber says. “They have a very

Prior to AttentiV, Webber was an accountant with Price Waterhouse. Edward T. Tilly will serve as vice chairman of the Chicago Board Options Exchange for a third and final term. The vice chairmanship is the highest member-elected position at the exchange. Tilly has been a CBOE member since 1989.

Send news of personnel moves to: Futures, 833 W. Jackson Blvd., 7th Floor

Chicago, Ill. 60607, Fax: (312) 846-4638 Attn: Chris McMahon E-mail:

[email protected]

Russ Rausch will rejoin Trading Technologies Inc. as executive vice president global support and chief information officer after a short stint as head of Calyon Financial’s electronic broker-



















































Hot Commodities BY CHRIS MCMAHON

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

















































Market Strategy BY MICHAEL BENHAMOU

How to benefit from an inverted yield curve

















































MARKETS Willl crud Wil c rude e oil o il pri prices ces con contin tinue ue to coo cooll off o ff thi thiss year y ear or is the rec recent ent pul pullba lback ck 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















































































































































































































































































































































































































































































































































































































































































































































Futures 101

continued

VOLATILITY VOLA TILITY (20-DAY MOVING AVERAGE)

Notice the higher volatility during the most important part of the U.S. growing season, and the jump in volatility entering the South American growing season. 760’0 740’0 720’0 680’0 660’0 640’0 620’0 600’0 580’0 560’0 540’0 35.00

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

MSD (%S1!, 20)=12.91

25.00 15.00 May

Jun

16

Jul

Aug

17

Sep

Oct

Nov

Dec

‘06

0.00 Daily

Source: CSI Unfair Advantage Advantage

“They are going to concentrate on the markets where they can expand their position size to match the amount of money they have under management. For example, you take a John Henry or a Campbell, where they are trading in the billions of dollars, 45 million bushels is a pimple on an elephant’s back. If the market moved a dime, that would only be $4.5 million; when you have $5 billion under management, why waste your time?” Carper too has noticed that the order flow and the composition of the order flow has changed dramatically. “The amount of hedging pales to what it was when I first started trading,” he says, adding that the grain companies were the dominant order flow, with locals playing the role of speculators. Now the CTAs and hedge fund operators are the dominant order flow. “The locals on the floor at the Board of Trade are a minor part of the scale volume that once existed.” The new alternative investment managers don’t have a lot of experi-

the water that needs to run through it from time to time,” Carper says. That is particularly true with the newest entrant entrant in the market: market: longonly funds benchmarked to indexes like the Goldman Sachs Commodity Index (GSCI). These funds take massive positions on hold the indefinitely (see “Dr. Strangefund,” September 2005). Hawkins says the markets need to rebalance. “There appears a time when the index fund is by far the dominant force on the crop,” and prices will probably be higher for some time. “One of these days they’ll have their boat load and then the market will wait because there won’t be anyone other than the funds buying it.” Large fund positions can distort markets but they also create opportunities. “My basic mode of trading is waiting for market disequilibrium, expecting it to move to equilibrium; and then to be there when it happens. And I believe the funds are pushing the market into greater disequilibrium,” Bell says.

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

















































Online Trading BY YESENIA SALCEDO

Growing options volume electronically

T

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

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

























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 REASONS FOR GROWTH 50,000 indicatively quoted packages for Eurodollars,” Ross 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 gravitatcan be transacted upon.” ing toward markets that are volatile and present trading opporTina Lemieux, director of CME equity products says electunities. “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 mar2004. 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 direcOPTIONS FOR ELECTRONIC OPTIONS there, but it’s still a tional bias and small percentage of any time horizon.” Here’s a screen shot of a typical option order entry screen. Many of the same our total volume. Ross attributes trading tools once available only to futures traders are now being adapted to suit There’s still more volume growth in option traders as well. 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 product that trades priRECORDS 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 Ju ly 20 05 av aver erag agee da il vo volu lume me fo forr op ti tion onss on CM CME E expensive for both traders and brokers. From the exchanges

























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

P

aolo di Montorio-Veronese

runs a company called PdMV Capital. The letters come from his aristocratic name, and the fund of funds he just launched, the PhD Fund, boasts an impressive 16.6% proforma return, with volatility of just 5.1% and a Sharpe ratio of 3.1. To assemble it, he reviewed scores of traders across Europe, and he says the trading pool he went fishing in wasn’t much different from the pool of talent you’d find in the United States. “Whether based in Chicago or London, every commodity trading advisor (CTA) follows his own model, and those models vary more depending on the individual than on where he is located,” he says. “We have commodity traders in London who are trading primarily in Chicago, and they use the same methods any would use to analyze markets and identify trends.” He adds, however, that he specifical-

WORLD'S TIME ZONE

While algorithmic traders can be in all time zones, discretionary traders need to be on top of their markets. Several discretionary currency traders like Michael Hecht (see Trader Profile, Januaryy 2006) and Mikkel Thorup say Januar the consistent high numbers posted by European currency traders grow from a combination of world view and time zone positioning. “There are distinct advantages to being a currency trader in the European time zone,” Hecht says. “First, there's the cultural element: We all grew up changing currencies every time we traveled in one direction or the other. And then we have a time zone that enables us to get the meat of Asia, Europe and North America, which you won't find in Chicago, and definitely not in California.” Thorup, who runs Zurich-based CTA Capricorn Group, agrees. “We

track of fluctuating currency crosses the way Americans keep track of box scores. Both men shy away from algorithmic trading and focus instead on discretionary approaches. “I’m not sure we are looking at anything differently than what people look at in the U.S.,” Thorup says. “We take our signals from a 24-hour trading day rather than, say, the International Monetary Market in Chicago. But that is the norm around the world these days.” NATIONAL NICHES

But perhaps the most particularly, if not typically, European players are those like Michael Rothman, who specializes in Danish Mortgage Bonds (see “Nordic Niche,” right). “Most of the people who trade like we do aren't CTAs,” he says. “As a result, the global funds took a while to find us.” Similar niche markets exist in most European



























smaller trades,” says Simon Rostron, a media consultant for hedge funds. “In the United States, the emphasis is on larger trades with smaller basispoint gains.” But if di Montorio-Veronese's experience is any indication of the future, growth among European traders will come among those in the deepest, most liquid markets employing algorithmic programs. “The new wave of traders making their name in Europe are coming out of American banks with a presence here,” he explains. “They don't trust illiquid markets.” STRUCTURAL DRIVERS

Both the European love of niche trading and the tendency of American-trained traders to pursue pan-European strategies flow from the evolving structure of European markets, which are harmonizing slowly (see “Hitchhiker’s guide to the EU,” July 2005) and still have local markets dominated by local banks. American banks, on the other hand, have been the greatest believers in a unified market and have been the biggest players in pan-European products. “It makes sense that European traders who learned their trade at American banks will be attracted to international markets, like currencies,” di Montorio-Veronese says, a veteran of Goldman Sachs himself who did a stint with Morgan Stanley before heading Man Group’s European sales

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

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

Nordi Nor dicc Ni Nich che: e: Dani Da nissh mo mort rtga gage ge bo bond ndss

L

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

THAT’S A LOT OF SHOES Funds aimed at both retail and institutional investors have grown rapidly in Denmark. TYPES OF FUNDS

2 000

2 001

2 002

200 3

2 004

2005 YTD (through Nov.)

RETAIL

177.957

177.722

188.028

249 . 5 05

297 . 5 6

3 74 . 2 71

INSTITUTIONAL

72.117

98.184

91.203

108.669

215.5

3 23. 26 2

O

G

























Managed Money

continued

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

Bahrain, buying the bonds is easy in concept but less easy in fact.” And, lacking a home market the size of the United States, European hedge funds are marketing themselves aggressively in multiple jurisdictions. HARMONIZATION

Switzerland is second only to the United Kingdom in the number of hedge funds servicing continental institutions. But, since Switzerland is outside the European Union, Switzerland stands to lose out on the retail boom as the European Union moves towards harmonizing financial services. Laws regarding brokerages based in one member state but with branches in another have come more clearly into focus since we visited the subject in July. On Jan. 1, several countries came into compliance with the “passport” requirements of the E.U.'s Markets in Financial Instruments Directive. As of that date, for example, brokerages based in, say, Lichtenstein could open branch offices in other member states without being licensed locally. Instead, Lichtenstein’s Financial Supervisory Authority will keep tabs on the activities of companies based there and send reports to regulators in other countries. But there are still plenty of issues to be resolved in terms of hedge funds, which often fall into a no-regulator’s

























New For Traders INDEX FUNDS

Send new product information to:

including new synthetic order types like stop market and stop limits with trigger quantities, timed orders, market on open and market if touched. www.tradingtechnologies.com.

Dow Jones Jones Indexes (DJI) has launched Futures, 833 W. Jackson Blvd. 7th Floor the Dow Jones EPAC Select Dividend Chicago, Ill. 60607, Fax: (312) 846-4638 Attn: Chris McMahon Index, which tracks the top 100 yieldE-mail: [email protected] ing stocks in Europe, Asia and Canada. 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 coundelivers 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 genertop 30 yielding stocks. The 30 components were selected ate and download a single bank analysis or reports comparfrom 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 capitalizaanonymity 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%. FUTURES www.djindexes.com. 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 internadata. The combination brings eSignal’s technical charts tional equity markets. The MSCI EAFE Index comprises 21 and indicators together with Dynamic Trend Profile’s speMSCI country indices, representing the developed markets cialized market scans to help traders identify market trends outside of North America. The EAFE Index is the basis for the second largest exchange traded fund in the world, with approximately $1.5 trillion is benchmarked to it. www.cme.com/mscieafe. The Chicago Board of Trade (CBOT) has launched two

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

in real time and allows traders to scan thousands of stocks,

new market maker programs designed to support options trading on Two-year U.S. Treasury note futures. Participants in the electronic market marker program will provide continuous two-sided quotes and respond to requests-for-quote for options on Two-year U.S. Treasury note futures traded on eCBOT, its electronic trading platform. Participants include Capstone Fixed Income LLC, Citigroup Corporate and Investment Banking, Consolidated Trading LLC, DRW

























Funds Review

2005 public funds returns Name of fund

Trading advisor(s)

Date started

Starting Starti ng Unit value value Chang Changee unit through for value 12-31-05 2005

U.S. Closed

(through December)

Name of fund

Date started

Starting Starti ng Unit value value Chang Changee unit through for value 12-31-05 2005

AAA Capital Management

Mar-98

10 0 0

5337.09 91.10%

Trading advisor(s)

Smith Barney AAA Energy

Dean De an Witter t ter Co Corn rner erst ston onee Fu Fund nd II

Nort No rthf hfie ield ld Tr Trad adin ing; g; J. J.W. W. He Henr nryy

JanJa n-85 85

9755 97

3753 37 53 -1 -19. 9.43% 4 3%

Smith Ba Barney Di Diversified Fu Futures

Multiple ma managers

J a n-9 4

1 000

1611.36 -7.73%

Dean Witter Cornerstone Fund III

Sunrise; Graham

J a n -8 5

9 75

3 961

Smith Barney Diversified Futures II

Multiple managers

J a n-9 6

1 0 00

1516.78 1.74%

Dean Witter Cornerstone Fund IV

J.W. Henry; Su S unrise

May-87

9 75

5880 -19.31%

Smith Ba Bar ne ney Gl Glo ba bal Ma Mar ke kets Fu Futur es es Fu Fu nd nd

M ul ult ip le ma ma na na ge ge rs rs

A ug ug -9 -9 3 1 00 00 0

2 71 71 2. 2.3 7 - 3.3.1 4% 4%

Dean Wi Witter Di Diversified Fu Futures Fu Fund IIII LP LP

Morgan St Stanley

Jan-89

1 0 00

2693 -21.51%

Smith Barney Mid-West Futures II

J.W. Henry

J a n-9 6

1 00 0

1552.78 - 24 24.32%

De an an Witte r Diver sisif ied Futures Fund III LP

Morgan Stanley

Nov-90

1 0 00

16 73 73 -2 1.1.9 3% 3%

SSB Fairfield Fu Futures Fu Fund L.P.

Multiple Ma Managers

J un-0 2

1,000

1 3 8 9 . 5 9 -2 1 . 2 3 %

AprAp r-88 88

1000 10 00

1001 10 01 -2 -22. 2.16 16%%

Campbell & Co Co.

Apr-94

1 0 00

3007.37 9.54%

Citigroup Diversified Futures Fund

Multiple managers

May-03

1 00 0

930.98 -4.46%

Citigroup Emerging CTA Portfolio

Multiple Managers

J a n-0 4

10 0

10 7 8

C it ig ro ro up up Fa Fa ir fifi elel d F ut ut ur ur es es Fu Fu nd nd IIII

G ra ra ha ha m C ap ap it alal Ma Ma na na ge ge me me nt nt

Dean De an Witt t ter e r Divers v ersif ifie iedd Fut Futures u res Fu Fund nd LP DW Fut Futur ures es/C /Cur urre renc ncyy Mgmt Mgmt..

-6 . 0 9 %

U.S. Open Dean De an Witt t ter e r Global o bal Pe Pers rspe pect ctive i ve Po Port rtfoli f olio

EMC; EM C; Mil Millbur l burnn Ridgef d gefie ield ld

MarMa r-92 92

1000 10 00

1132 11 32 -0 -0.1 .18% 8%

Dean Wi Witter Mu Multi-Market Po Portfolio L. L.P

Morgan St Stanley

Aug-88

1 00 0

1191 -21.77%

J.W. Henry

Feb-91

1 00 0

2 72 727 - 24 24.2 5% 5%

SSARIS

F e b-9 0

10 0 0

1 89 5

J.W. J. W. He Henr nry; y; Mill Millburn b urn Ri Ridg dgef efie ield ld

AprAp r-93 93

1000 10 00

1132 11 32 -1 -14. 4.63% 6 3%

J.W. Henr y;y; Tr Trendlogic

J ul ul-87

10 0 0

8 17 178.21 - 18 18.6 8% 8%

J.W. Henry; Millburn Ridgefield

Feb-91

100

290.32 -7.38%

Campbell St Strategic Al Allocation Fu Fund LP LP

De an an Witte r Po rtrtf ololio Stra tegy Fund Dean Witter Principal Plus Fund Dean De an Witt t ter e r Wo Worl rld Cur Curre renc ncyy Fun Fundd LP LP

M ar ar -0 -0 4 1 00 00 0

7 98 98 .1 - 12 12 .1 2% 2%

J.W. Henry; We Welton Invst.

Jun-87

75

3 66

J.W. Henry

Jun-97

100

142.15 -4.30%

Mar arat athon Cur urre renncy& FiFina nanc ncia ialls (C (CFE FE)) Po Portfol f olio Mu Mult ltip iple le Ad Advi viso sors rs

JanJa n-01 01

1000 10 00

4088 40 88.4 .433 -3 -3.6 .67% 7%

Marathon Diversified Portfolio

Multiple Advisors

Mar-95

1 0 00

2787.7 -6.77%

Marathon FX Portfolio

Multiple Advisors

J a n-9 8

1 00 0

2051.7 -3.12%

Marathon Macro Strategic Portfolio

Multiple Advisors

J ul -9 8

1 00 0

1368.64 -6.49%

IDS Managed Futures I Hu t on Investors Fu Future s Fund II

JWH Global Trust JWH/Millburn (B) JWH/Millburn (C) JWH/Millburn LP ML Global Horizons LP Salomon Smith Barney


Jan-92

100

10.39%

-3 . 8 1 %

-2 1 . 5 2 %

226.29 -7.38%


Jan-90

100

357.74 -7.37%

Athena; Chesapeake

J a n-9 4

100

2 2 1 . 8 1 -3 . 4 7 %

























Starting Starti ng Unit valu valuee Chang Changee unit through for value 12-31-05 2005

Name of fund

Trading advisor(s)

Date started

MSDW Charter Millburn LP

Millburn Ridgefield

Mar-99

10

Morgan Stanley

Mar-94

SSARIS

Date started

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

Name of fund

Trading advisor(s)

1 0 . 4 5 -0 . 6 7 %

B lu e D an an ub ub e F un un d - F ut ut ur ur es es S elele ct ct

Mu lti pl pl e m an an ag ag er er s

O ct ct -9 -9 5

1 00 00 0

10

1 5 . 7 3 -1 9 . 6 2 %

FTC Futures Fund Balanced

FTC Asset Mgmt.

Apr-03

10 00

Nov-94

10

15 .2 3

F TC TC Fu Fu tu tu re re s F un un d C la ss ss ic

Multiple Advisors

Aug-91

10

2 8 . 4 6 -1 . 4 5 %

FTC Futures Fund Dynamic

FTC Asset Mgmt.

May-02

MS DW DW S pe pe ct ctr um um St St ra ra te te gi gi c F un un d

B le nh nh eiei m Ca Ca pi pi ta ta l; E cl cli ps ps e C ap ap it alal

N ov ov -9 -9 4

10

1 4.4. 17 17 - 2.2. 68 68 %

G lo ba ba l F ut utu re re s F un un d I X L td td .

M an an I nv nv es es tm tme nt nts

J an an -0 -0 2 1 ,0 00 00 1 02 02 30 30 .1 7 6 .1 5% 5%

MSDW Spectrum Technical Fund

Multiple Advisors

Nov-94

10

2 2 . 3 6 -5 . 4 5 %

Global Futures Fund VI Ltd. (DM)

Man Investments

Nov-96 10000 14780.14 7.30%

Quadriga Su Supe rfrfund, L. L.P. Se Ser ies A

Qu ad adriga Ca Capital Mg Mgmt.

Nov-02

100 0

1 32 328.33 -9.43%

Global Futures Fund VII Ltd. (DM)

Man Investments

Apr-97 10000 13548.17 7.33%

Quadriga Su Supe rfrfund, L. L.P. Se Ser ies B

Qu ad adriga Ca Capital Mg Mgmt.

Nov-02

10 0 0

1 52 521.61 -12.06%

G lo ba ba l F ut utu re re s F un un d V IIIII L td td .

M an an I nv nv es es tm tme nt nts

J un un -0 -0 4 1 0,0,0 00 00 1 25 25 30 30 .0 7 7 .1 9% 9%

S alalo mo mo n Sm ith Ba Ba rn rn ey ey Or Or io n F ut utu re re s F un un d Mu lt ip le ma ma na na ge ge rs rs

J un un -9 -9 9

1 00 00 0

1 61 61 3.3. 81 81 1 7.7. 94 94 %

Global Fu tures Fund X Ltd.

Man Investme nt nts

J a n-0 2

1,000

90 80 80.12 7.17%

Smith Barney Potomac Futures

Campbell & Co.

Oct-97

100 0

1817.4 6.92%

Global Fu tures Fund XI Ltd.

Man Investme nt nts

J a n-0 2

1 ,0 00

15 59 59.74 8.90%

Smit Sm ithh Ba Barn rney ey Ti Tide dewa wate terr Fu Futu ture ress Fu Fund nd

Ches Ch esap apea eake ke Ca Capi pita tall Co Corp rp..

JulJu l-95 95

1000 10 00

2150 21 50.0 .066 -2 -2.9 .92% 2%

Global Fu tures Fund XII Ltd.

Man Investme nt nts

Jan-02

1, 00 0

16 56 56.77 9.49%

Smith Barney Westport Futures Fund

J.W. Henry

Aug-97

1 00 0

1 2 6 2 . 3 9 -2 2 . 8 2 %

GSL-JWH Financial & Metals

J.W. Henry

J a n-9 3

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

1 0 6 . 7 9 -9 . 2 5 %

TriFex Trading Fund LP

Treasury Management Service Inc.

Jan-04

1000

1132.25 9.74%

Hase Ha senb nbic ichl hler er Co Comm mmod odit itie iess AG

Hase Ha senb nbic ichl hler er Tr Trad adin ingg Se Serv rvic ices es

JulJu l-90 90

1000 10 00 13 1318 186. 6.93 93 0. 0.26 26%%

Wimbled edon onAlter erna nattive Dive vers rsiified Stra rattegies III Mu Mult ltip iple le Ad Advi visors s ors

JulJu l-02 02

1000 10 00

1120 11 20.2 .255 3. 3.97 97%%

Man AHL Alpha plc

Man Investments

Oct-95

100

5 3 0. 17 9 .9 8%

Wimbledon HDN Fund LP

Multiple Advisors

F e b-0 3

1 00

148.14 12.69%

Man AHL Diversified plc

Man Investments

Mar-96

10

40.17 -23.21%

Wimbledon Marathon LP

Multiple Advisors

F e b-0 4

100

9 8 . 8 3 -7 . 5 8 %

MAN-IP 220 Fusion Ltd.

Man Investments

Apr-98

1

2.3 2

1 0. 48 %

Wimbled on on Sa nd nd Sp riring F un und C la ss ss L S ha har es es Mu lt ip le Ad Ad vivis or or s

J ul ul- 00 00

1 00 00 0

Northfield International

Northfield Trading

Mar-91

10

19.17

6.56%

MSDW Charter MSFCM MSDW Spectrum Global Balanced Fund MSDW Spectrum Select L.P.

4 .3 2%

1 42 42 6.6. 33 33 4 .4 3% 3%

F TC TC As As se se t M gm gm t. ; P om om er er an an z & Pr Pr tn tn r.r. M ay ay -9 -9 8 1 00 00 0 1 0 00

1 31 31 0.0. 12 12 6 .7 6% 6% 1 13 8

2. 25 %

1 24 24 6.6. 47 47 - 0. 0.0 5% 5% 1250.06 15.99%



























TR T R A D E T TR RENDS 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

























Intercontinental Exchange

The Intercontinental Exchange (ICE) benefited from energy exemptions in the Commodity Futures Modernization Act of 2000 and established itself as a platform for OTC energy trading. The fall of Enron created an opportunity for the creation of cleared OTC products and ICE has been battling the New York Mercantile Exchange (Nymex) to fill that space.

ICE STOCK PRICE 37.50 35.00 32.50 30.00

EXCHANGE SEAT PRICES Chicago Board Options Exchange. CBOE announced plans

early in 2005 to explore demutualization and a possible IPO. While issues relating to CBOT exercise rights holders continues to be a drag on its value, the possibility of another Chicago exchange IPO has helped CBOE seat prices nearly triple during during the course of the year (see (see “Chartv “Chartview,” iew,” Trendlines page 14). New York Mercantile Exchange. Seemed liked everyone wanted to get a piece of the energy exchange as Nymex took bids from multiple suitors. They apparently settled on a $135 million bid from General Atlantic for a 10% stake in the exchange. The interest pushed seat prices to a record $3.1 million. While many New York Stock Exchange specialists talked about the NYSE getting the short end of the NYSE/Archi NYSE/ Archipelago pelago Holdings merger, in the end they voted by a 95% margin to approve the deal. And why not, seat prices exploded as the year wore on.

IPO offer offering ing price price 21

28

Dec

27.50 5

12

19

27

Source: eSignal

NYSE YEARLY SEAT PRICES $4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 1994

High Low

s e c i r p t a e S

1996

1998

2000

2001

2002

2004

2006

























Trad e Tren ds

Fights Figh ts of the year DEUTSCHE BORSE VS. TCI

A

s 2005 began Deutsche Borse was preparing for another go at the London Stock Exchange after it rejected a $2.6 billion DB bid to purchase it. But one of DB’s newer shareholders,, a shareholders hedge fund called The Children’s Investment Fund (TCI) had other ideas. A very public letter-writing campaign ensued when TCI Managing Partner Christopher Hohn asked for an extraordinary shareholder meeting to debate the LSE bid and replace the entire supervisory board. DB CEO

continued

Off the charts MYSTERY SOLVED!

On June 9 the CBOT rededicated two 12-foot 5.5 ton statues representing agriculture and industry that had been missing for years at a 75th anniversary celebration of the CBOT building. The statues statues disappeared in 1929 after demolition of the original 1885 CBOT building. They were discovered in 1978 in a suburban forest preserve, which curiously enough used to be the estate of Arthur Cutten, a prominent CBOT trader in the early 1900s. The CBOT noted it does not know how the 5.5 ton statues got from LaSalle Street to the Cutten Estate more than 30 miles away. LOVE/HATE TRIANGLE

The year started out with speculation as to who would win the battle to purchase the London Stock Exchange: Deutsche Borse or Euronext. A shareholder revolt pushed DB out of the game and then Euronext appeared to get cold feet. The hot rumor as we move into 2006 is of a DB/Euronext merger. Maybe then the LSE will have a buyer. NO QUIB(BL)ING, THAT’S A LOT OF COPPER

A scare was averted as China appears to have honored the large (approximately 220,000 metric ton) short copper position accumulated by Liu Qibing, a trader for

























Signs of the times

Reco Re corrds • CBOT: More than 674 million contracts traded at the CBOT in 2005, a 12.9% increase over 2004 and the fourth consecutive year of record volume.

NOT SO FAST!

Two things are clear at Nymex: They want to become a public company and they need help getting there. For a while it looked like they settled on where that help would come from, General Atlantic. But recently they appeared to reopen the bidding and the new hot contender is the CME. The CME knows a thing or two about a successful IPO and will be free to compete directly with Nymex by the middle mid dle of the year, ye ar, giving givi ng Nymex added incentive to cut in the CME. (See Trendlines, page 14.) EVERYONE SHOUT!

That loud noise was a shout for joy from business journalists as the Securities and Exchange Commission in June unanimously agreed to

• CBOE: More than 468 million contracts traded on CBOE in 2005, a 30% increase over 2004’s record year. • CME: The CME traded 1.05 billion contracts in 2005, a 34% increase from 2004 and the sixth consecutive year of record volume. Average daily volume was nearly 4.2 million. • Eurex set a record turnover of 1.25 billion contracts in 2005, a 17% increase from 2004.

























Trad e Tren ds

Just Ju st de dese sert rtss On March 15 Bernie Ebbers, the former CEO of Worldcom, was convicted on charges of conspiracy, securities fraud and false regulatory filings in connection with the $11 billion fraud which brought down the telecommunication company. Ebbers was later sentenced to 25 years in prison. Many other of the corporate crooks of recent years finally faced retribution. • Jo Joee Nac ch chio io,, fo forme rme r Qwe st Communications CEO, was indicted on 42 counts of insider trading. • Adelphia Communications founder John Rigas, in June, was sentence sentenced d to 15 years in prison for defrauding customers. His son Timothy was sentenced to 20 years. • Former Tyco CEO Dennis Kozlowski was found guilty by a New York court of fraud, conspiracy and grand larceny.

continued

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

IN MEMORIAM

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

CME

INNOVATION AWARD



























Dateline FEBRUARY MONDAY

30 Japan Production index

6

31

1

THURSDAY

2

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

7 14

FRIDAY

3 COT report, Employment

8 Crop summary. Germany Production index

13

WEDNESDAY

TUESDAY

U.K. Production index. Germany Merchandise trade

15

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

16

10

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

17

























Dateline continued

MARCH MONDAY

27

28 Canada Balance of payments

6

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

7

1

14

FRIDAY

2

3

8

9

10

15

16

17

Canada PPI. Australia National accounts

Crop summary

13

THURSDAY

WEDNESDAY

TUESDAY

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

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

























Next month in Futures

Stock market forecast AD IN INDE DEX X ADVERTISER

PAGE

Ablesys . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Alaron . . . . . . . . . . . . . . . . . . . . . . . . . . . .c3 CBOE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Chicago Board of Trade . . . . . . . . . . . . . .c4 CMC Markets Markets . . . . . . . . . . . . . . . . . . . . . .31 CoesFx . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Direct Trade Trade . . . . . . . . . . . . . . . . . . . . . . .30 Esignal . . . . . . . . . . . . . . . . . . . . . . . . . . . .c2 Fidelity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Futures Magazine Magazine Subscriptions Subscriptions . . . . . . .23 Futures Magazine Magazine Subscriptions Subscriptions . . . . . . .30 Futures Magazine Magazine Subscriptions Subscriptions . . . . . . .36 Gain Capitol Capitol . . . . . . . . . . . . . . . . . . . . . . .37 Global Forex Trading . . . . . . . . . . . . . . . .19 Global Forex Trading . . . . . . . . . . . . . . . .33

ADVERTISER

PAGE

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

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

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

























THH E F C M IB NETWORK T Where Introducing Brokers, Associated Persons and Futures Commission Merchants make the Right Connections.

Existing IBs & Start-Ups Unlimited Earning Potential Best Quality Leads & Products! When it comes to providing unique products, eager to please service, and top quality leads we have no equals! We are Vision L.P., ranked within the top 30 largest FCMs, and one of the largest providers of IB services in America! We offer: • Some of the highest payouts in the industry. • Reliable, cutting edge Internet trading platforms. • Top ranked trading systems, & managed accounts.

























DORMAN TRADING LLC

Where Chicago Trades Clearing Member CBOT & CME

Dorman IBs enjoy the same personal attention and service that we offer to our local floor traders. • Online Account Statements • Electronic Access to All Markets • Lightning Fast Day Trading Platform • Commission Rates that only a Clearing FCM can Offer We encourage you to contact us about the Dorman Difference, the personal attention of a small firm



























Classifieds

INTRODUCING BROKER DIRECTORY Are you looking for a new broker? Look no further, our new IB directory will help you find the right broker to meet your needs. For more information on how to be listed in our new IB directory contact Jennifer Testa at 847-526-7434 or email: [email protected]

Advisory Services

“KNOW THE CLOSE” What if you knew the Markets

























Classified advertising works! works! Call Jennifer Testa @ 847-526-7434 • [email protected] [email protected]

Brokerage Services

Brokerage Services

Data POSITION TRADING or DAY TRADING? This FREE informative report explains the merits and pitfalls of trading each way.

























Classifieds Discount Brokerage

Educational Education al Services

Educational Services

FIELD FINANCIAL GROUP Super-Discount Rates: Rates: Futures & Options FREE Online Pivot Point Calculator 1-800-800-6304 / www.fieldfinancial.co

w w w . T r a d i n g Z o o . c o m

Trade LIVE with a Master Trad er

Frustrated with the market? Tired of shorting rallies or buying breakdowns? breakdowns? Thinking that the

Ranked “Best” by Traders World Magazine

Experience Unbelievable Performance Make money as you learn

























Classified advertising works! Call Jennifer Testa @ 847-526-7434 847-526-7434 • [email protected]

Professional Services

BERNARD MADUFF Life Coach for Traders Masters Degree in Counseling, USC Formerr Member CME, Forme CME, CBOT & IMM

Trading Methodologies Revolutionary New Book Demonstrates how to Pinpoint Tops & Bottoms MONTHS in Advance using Natural Natural Law, Vibration, Vibration, & Resonan Resonance. ce. www.market-esoterica.com

























Trad Tra der Profile BY YESENIA SALCEDO

Bernie Carey — Trading is in the blood



















































0206 Futures Mag

Recommend Documents