Futures Dec 2013

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CONTENTS
6 Ad Index
8 Editors Note
From the ashes...
10 Forex Trader
NZ dollar is soundest
developed country
currency heres why
12 Options Strategy
Combining long put spreads
and short call spreads
46 Trader Profile
Ziemba: Leveraging a
lifetime of research
DEPARTMENTS
DECEMBER 2013 // VOLUME XLII NUMBER 10
Top 50 Brokers: Bruised and battered,
but coming back strong
By Ginger Szala & Michael McFarlin
Five years ago markets were reeling in the throes of the financial crisis.
Since then, Congress has mandated, bad actors have been exposed
and futures commission merchants are more efficient than ever,
all while swaps are poised to revolutionize the futures industry.
COVER STORY
14
4 FUTURES December 2013
For reprints and e-prints of FUTURES articles, please contact
PARS International at reprints@parsintl.com or (212) 221-9595.
FEATURES
MARKETS
20 2014 Hot Markets:
Stuck on taper
By Daniel P. Collins
Entering 2014, markets are stuck on
Fed tapering prospects. Heres which
markets to watch for big moves.
TRADING TECHNIQUES
24 Correlated opportunities in
the Swiss franc
By Nick Mastrandrea
The simplest strategies often are the
most effective. A pattern just needs to be
identifiable and reliable to make money.
28 Using fractals in forex
By Leslie K. McNew
Heres how to exploit market moves
using the Fractal Market Hypothesis
and exponential moving averages.
TECHNOLOGY & TRADING
32 Trading system analysis:
Then and now
By Murray A. Ruggiero Jr.
Trading system technology advanced
quickly in the 1980s and 1990s. Heres
a look at how we got the systems we
use today, and where they might go.
TRADING 101
38 10 rules successful
traders follow
By Jean Folger
Although there are numerous trading
strategies, following these 10 simple
rules can help you get an edge.
MANAGED FUNDS
42 House of AlphaMetrix
falls hard and fast
By Kristin Fox, Michael McFarlin
& Ginger Szala
AlphaMetrix made a name for
itself with lavish events. Now its
making another name for itself.
Heres where it stands today.
For additional information,
visit futuresmag.com
DIGITAL
EXCLUSIVE
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ADVERTISER PAGE
ADMIS . . . . . . . . . . . . . . . . . . . . . . . . 26-27
Classifieds . . . . . . . . . . . . . . . . . . . . . . . 45
CME Group . . . . . . . . . . . . . . . . . . . . . . . 47
Daniels Trading . . . . . . . . . . . . . . . . . . 18-19
Direxion . . . . . . . . . . . . . . . . . . . . . . . 34-35
Fidelity Investments. . . . . . . . . . . . . . . IFC-3
Interactive Brokers LLC . . . . . . . . . . . . . . . 5
OptionsXpress. . . . . . . . . . . . . . . . . . . . . 13
TD Ameritrade . . . . . . . . . . . . . . . . . . . . . 39
TradeStation . . . . . . . . . . . . . . . . . . . . . . . 9
TradeStation . . . . . . . . . . . . . . . . . . . . . . BC
The Trading Show . . . . . . . . . . . . . . . . . . . 7
SEE CLASSIFIED ADVERTISING ON PAGE 45
Publisher & Editor-in-Chief
Ginger Szala
Associate Editor
Michael McFarlin
Editors At Large
Daniel P. Collins
Steve Zwick
Contributing Editors
James T. Holter
Murray A. Ruggiero, Jr.
Art Director
Michael Beckett
Vice President of Advertising Sales
& Associate Publisher
Chris Casey
phone: (312) 846-4606
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TRADING TECHNIQUE
In Opportunities in equity
options, Paul Cretien explores
how option pricing models can
uncover pricing discrepancies in
the equity markets, and how to
exploit them for profit.
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BOOK REVIEWS
Patrick Kelly
reviews The
Foreign Exchange
Matrix (2013)
by Barbara
Rockefeller and
Vicki Schmeizer.
Desmond
MacRae reviews
The Trend
Following Bible
(2012) by Andrew
Abraham.
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the interconnection &
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From the ashes...
EDITOR'S NOTE
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I
ts ironic that Im writing this
on the day the insurance study
commissioned by the industry
after the MF Global and PFG blow
ups was released. Ironic because
if implemented in some form, it
would mean more costs and more
rules for futures commission merchants (FCMs) and probably
their customers.
Very simply, the studys findings werent ground breaking:
Insurance is doable but at a cost. One example of a private
option for insurance provided by the FCM would be in a pool
of one medium and five small firms, and the cost would range
from $3 million to $4.5 million in premiums per FCM per year.
After hearing about the expenses FCMs have footed in imple-
menting new rules and regulations to be compliant, I doubt
they would jump at that option, the one that has the most
potential (see Top 50 Brokers: Bruised, battered but com-
ing back strong, page 14).
FCMs have taken it on the chin the last few years, and mostly
because of others bad behavior. I know all are tired of hearing
the names MF Global and PFG, but the fact remains those are
the main culprits behind the new customer protection rules.
And its not surprising the FCMs are grumpy about the
new rules because they are squeezing firms profitability. A
TABB Group study found that of the FCMs they interviewed,
addressing regulation remains the most time consuming and
energy resource heavy activity. Yet, 43% of FCMs say they do not
factor regulations into pricing, while 21% are still evaluating
their decisions on how to charge for it.
Although MF Global and PFG customers were violated the
most in those demises, collateral damage was spread across the
industry: To regulators, to exchanges, and yes, to other FCMs.
Perhaps some brokers may have gotten some new customers,
but it probably netted out in the end with other clients leaving
due to lack of confidence in a system that had operated fairly
well for years.
So an insurance program, which is admirable and may work
one day, probably isnt a priority for a group of firms that
already believe theyve complied and spent a lot of money to
do so. Also, with new customer protections in place, insurance
might be a redundancy that isnt necessary.
Furthermore, it might not accomplish what it is meant to do
protect and reimburse customers. According to the Compass
Lexecon, the group that did the study, the most positive private
option would depend on the amount of the total customer asset
loss. If, for example, the FCM had $100 million in losses, and
was insured up to $50 million, customers would only get 50%
of their money back. The government-mandated option might
be so poorly funded that in PFGs case only 12% of customer
loses would have been covered. So the industry has some talking
and deciding what to do. But after hearing from our panel of
FCMs, my belief at this point is 1) the insurance study findings
just came out so its too early to make any determination, and
2) that said, I highly doubt FCMs want to absorb more costs.
This is especially true with news that came out in early
November that the CME Group would be implementing new
and higher fees. Thats another story. But we did ask the FCMs
what the impact of fewer futures exchanges had on their busi-
ness. Many thought it made life easier as far as connectivity and
systems, but they rue the lack of competition between exchanges.
One FCM that also is in the equity options space, which has close
to 13 exchanges, notes that a high number of exchanges can be a
headache, but it sure keeps fees competitive.
The good news is that after the last several years, including
the 2008 financial crisis, most FCMs see daylight from imple-
menting new rules and are actually optimistic; finally they can
get back to what they do best: Execute, trade and make money.
E-mail me at gszala@futuresmag.com
TradeStations tools help you spot opportunities
before other traders do. See for yourself. Go to
TradeStation.com and take the TradeStation Tour.
1.800.264.8516 | TradeStation.com
No offer or solicitation to buy or sell securities, securities derivatives, futures products or off-exchange foreign currency (forex) transactions of any kind, or any type of
trading or investment advice, recommendation or strategy, is made, given or in any manner endorsed by any TradeStation affliate. Trading commodities futures, options
and off-exchange foreign currencies carries a high level of risk and may not be suitable for all investors. There is a possibility that you may sustain a loss equal to or
greater than your entire investment, therefore you should not invest or risk money you cannot afford to lose. Please visit our website www.TradeStation.com for relevant
risk disclosures. Equities, equities options, and commodity futures products and services are offered by TradeStation Securities, lnc. (Member NYSE, FlNPA, NFA and
SlPC). Forex products and services are offered by the TradeStation Forex divisions of lBFX, lnc. (Member NFA) and lBFX Australia Pty Ltd, ABN 84 142 210 179, holder
of AFSL 363972. TradeStation Securities, lnc., lBFX, lnc. and lBFX Australia Pty Ltd are separate but affliated companies. 2013 TradeStation. All rights reserved.
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W
ith most developed nations opting to debase their
currencies, the Reserve Bank of New Zealand is
going the other way and preparing to raise interest
rates and keep inflation low. As a result, the New Zealand dollar
stands out as one of the lone buying opportunities. The country
of New Zealand is politically stable, has exports in underval-
ued agricultural assets, a favorable business climate and most
importantly, is the only developed nation seriously inclining
toward raising interest rates.
The primary case for buying the New Zealand dollar is the
Reserve Bank of New Zealands likelihood of raising interest
rates. With New Zealands GDP growth rate much higher than
other Western nations (2.6% vs. 1.6% in the U.S. and 0.6% in the
European Union), and inflation accelerating to a 3.6% annual-
ized pace in the second quarter of 2013, the country has the
flexibility to raise rates. Because of growing inflation pressures,
rates are expected to rise as early as March 2014.
The increasing strength of the New Zealand dollar also will be a
product of continued easy money elsewhere. With the Australian
economy slowing down because of less commodity exports, the
European debt crisis, continued Abenomics related stimulus
and the Feds refusal to back down on unlimited QE, no other
developed nation will be raising rates in the intermediate-term.
Slow growth in these countries also is bearish for their currencies.
Even if developed economies recover, interest rates will not rise
because the central banks are using their easy policies not as a mea-
sure of economic stimulus, but actually as a tool to monetize their
countries debt burdens. Central bankers deny this, but without
this financial repression, borrowing costs would be too high for
these countries to finance their government spending without
default or politically unacceptable reductions of the social welfare
state. Because New Zealand has a debt-to-GDP ratio of only 36%,
higher interest payments do not cripple its sovereign finances. The
end result is that the New Zealand dollar will replace the Australian
dollar as the high-yield currency in carry trades and will be the only
place where bank deposits will yield a positive real return.
New Zealands economy also is on a stable footing. The country
has some of the worlds highest degrees of economic freedom
(ranked 4th by the Heritage Foundation) and lower personal and
corporate income tax rates (33% and 28% with dividend imputa-
tion respectively) than the United States. Exports mostly consist
of agricultural and livestock products that are recession-resistant
consumer durables. New Zealand also is one of the beneficiaries
of the growth of meat and dairy consumption in Asian markets.
Low population density and a highly educated population also
are bullish signs for New Zealands economic sustainability.
Overall, outlook is strong on the New Zealand dollar because
of the likelihood of increased capital inflows resulting from
higher rates and economic stability. With markets at stretched
valuations, global inves-
tors need a place to store
their cash. New Zealand is
one of the few places with a credible banking system, low cor-
ruption and economic stability where an investor can do that
while having a positive real return on deposits.
Nicholas Pardini is founder and managing partner of investment firm
Nomadic Capital Partners, which specializes in investing in emerg-
ing and frontier markets around the globe. His book, The Definitive
Guide to Emerging Market Currencies, was written in response to
his inability to find research on the subject. You can reach him at
nick@nomadiccapitalpartners.com.
NZ dollar is soundest developed country
currency and heres why
BY NI CHOLAS PARDI NI
FOREX TRADER
For daily forex updates:
futuresmag.com/Forex
COUNTRY STRONG
STEADY AS SHE GOES
Source: eSignal
Source: Statistics New Zealand, The Treasury
Jul 2011 Jul 2012 Jul 2013 Jul
2012 2013 2014 2015 2016 2017
0.90000
0.88000
0.86000
0.84000
0.82000
0.80000
0.78000
0.76000
0.74000
0.72000
0.70000
0.68000
0.66000
6
5
4
3
2
1
0
-1
-2
-3
-4
0.82540
New Zealand dollar (spot) weekly
Percentage point contribution
Years ended March 31
Even the IMF has commended New Zealand on its economic plan.
New Zealands GDP is projected to run 2%-3% for the next four years.
w
Exports
Non-residential investment & stocks
Imports
Residential investment
Total GDP (annual average growth %)
Total consumption
BREAKING BREAKING NNEW EWS
EEE CLUSIVE XCLUSIVE RREPORTS & EPORTS & AANALYSIS NALYSIS
E CATION DUCATION
TRADING RADING SS ATEGIES TRATEG
L VE MARKE IVE MARKET UPDATES P
THEE 24/7 RESSOU 24/ RESOURRCE FO CE FORR TODAYS TODAYS TRRADE ADERSS
N
ow that the markets are at all-time highs, most people
cant help but think of the idiom erroneously attrib-
uted to Isaac Newton: What goes up must come down.
Regardless of your opinion as to where the final destination of
this market move will conclude before reversing, you cannot help
but worry about the three blind mice coming our way in 2014.
Trifecta events
1. Fed stimulus taper
Historically, the market crashes within six months of a dramatic
negative Fed policy change. We have had many false tapering
alarms, but the markets are almost certain March will be the taper.
2. Government shutdown part II
Though known as a farce by the majority of the world, the fear
of the unknown is a negative for the market. The last shutdown
saw the Dow fall from 15,700 to 14,800.
3. New Fed chairman
Alan Greenspan took office on Aug. 11, 1987, and Black Monday
occurred on Oct. 19. Ben Bernanke took office on Feb. 1, 2006,
and two years later we had the world banking collapse. Whats
in store for Janet Yellens baptism?
Here is a riddle: Will the laws of physics dictate that this mar-
ket in bullish motion remains in motion, or will an inevitable
retrenchment occur?
Problem
Most option traders know the benefits of a vertical spread over
that of a naked option. If bearish in opinion, many option trad-
ers will contemplate the purchase of a long put spread or the
sale of a call spread.
Long Put Spread
Simply purchasing a put spread to take advantage of a possible decline
can be costly if the selling doesnt occur or is not strong enough. The
market could decline and the spread still would expire worthless.
Short Call Spread
Selling a call spread can work out nicely, but selling an out-of-
the-money $5 or $10 wide index call spread at $1 or $2 is not
the bang for the buck option traders look for in large moves.
Solution: The risk reversal
Strategically combining the long put and short call verticals
into one position can be a forgiving and powerful position that
affords the trader patience and more flexibility than utilizing
one spread alone.
Both spreads usually will be constructed with out-of-the-mon-
ey options. Having an
out-of-the-money call
spread provides room
for further stock advances without the short (bearish) spread going
in-the-money. Having an out-of-the-money put spread allows for
a less expensive entry cost, thus providing more potential profit.
For example, lets assume that the Dow Jones Industrial
Average is at all-time highs and trading at 15,900. The proxim-
ity to 16,000 may be enough to frighten people without the
economic and political events on the horizon. To have a position
on with some time to breathe, we can go out into the 45 days
until expiration expiry in the SPX when the SPX cash is at 1795.
The net credit received on the short 1855-1850 call vertical spread
($5.20+$6.20=$1.00) completely offsets the debit paid for the 1750-
1745 Put spread ($17.30+$16.30=$1.00). Should the market glide
slightly higher, remain constant or fall only slightly, the position
simply expired worthless with no loss other than commissions.
Option traders who appreciate both long and short vertical
spreads will find it difficult not to appreciate the alchemy cre-
ated when combining the two strategies. This particular strategy
affords time and forgiveness to the trader who is not able to pick
the exact moment when the market reverses.
J.L. Lord is an analyst and author at RandomWalkTrading.com, a
trading education firm employing retired floor traders (only) as their
instructors. He can be reached at RandomWalkTrading.com.
Question: How can I protect myself when upcoming events
could rock the market?
Answer: Use a risk reversal: Long put spread combined with
short call spread.
BY J. L. LORD
OPTIONS STRATEGY
For more options strategies:
futuresmag.com/Options
PUT SPREAD & CALL SPREAD
Source: RandomWalkTrading
$1500
$1000
$500
$0
-$500
-$1000
-$1500
1720 1730 1740 1750 1760 1770 1780 1790 1800 1810 1820 1830 1840 1850 1860 1870
Price of Standard and Poors 500 cash (SPX)
Short 1850 1855
Call spread
PPPPPPrrrrrrroooooooofffffffffiiitttttttttttttt AAAAAAAArrrrrrreeeeeeeaaaaaaa
LLoooossssssssss AAAAAAAAArreeeaaa
ATM 2.5% OTM
Long 1750 1745
Put spread
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OPTIONS SPECIALIST.
Our innovative, easy-to-use platform was also designed for futures traders.
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Risk Disclosure Statement for Futures and Options, available by calling 1-888-280-8020, prior to opening an account. Multi-leg option strategies may also be
subject to multiple commissions. Prots may be eroded by the commission expended to open and close the positions, and other risks apply. Online trading has
inherent risk due to system response and access times that may vary due to market conditions, system performance, volume and other factors. Website content
and tools are provided for educational and informational purposes only. Supporting documentation for any claims, comparisons, recommendations, statistics,
or other technical data will be supplied upon request. optionsXpress, Inc. (Member SIPC) and Charles Schwab & Co., Inc. (Member SIPC) are separate but afliated
companies and subsidiaries of The Charles Schwab Corporation. 2013 optionsXpress, Inc. All rights reserved. Member FINRA, SIPC, NFA.
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T O P B R O K E R S
For the derivatives industry, the financial crisis volatility that
many survived was hit with customer confidence issues caused by
the failures of MF Global and Peregrine Financial Group. With the
new customer protection rules released by the Commodity Futures
Trading Commission (CFTC) in October, the mandated residual
interest rule was put in place.
This rule basically forces brokers to shorten the current time
they collect margin from customers to one day, and in five years, to
the following morning. Although many firms are electronic, hence
collect payments at T+0 and T+1 rates, some have a large group of
clients that still write checks. To make this change would mean pre-
payment of the account, something that could curb usage of the
futures markets. But, as Mike Dawley, managing director of global
futures and OTC clearing securities division of Goldman Sachs,
noted on an FIA Expo panel, who knows who will still be around
in five years? This highlights what many
in the industry believe, that T+0 will never
happen, although T+1 is a good bet. Don
Roberts, managing director of futures &
forex for ThinkorSwim, the derivatives
arm of TD Ameritrade, summed it up that
the regulator (like Congress) kicked the
can down the road.
This is only one of the many issues on
which we questioned a score of top futures
commission merchants (FCMs) to discuss
for our annual review. New regulations and compliance issues have
become such the focus the last few years in the business, brokers
seem to finally see the light of day and are getting back to real busi-
ness. Matthew Simon, senior analyst and head of futures research
at TABB Group, which just completed its annual FCM study, noted
that after the past few years with the failure of MF Global and PFG,
the shrinking volumes, low interest rates and continuous money
flowing out to keep up with compliance, this year we found more
optimism, he says. Not so much that volumes will grow [rapidly],
but that efforts put in terms of [futurization of swaps], and that
rules that were talked about for years are now a reality and [FCMs]
can get back to making money on executing trades.
And hes correct, except that there still is some anger about
some of the regulations. Joe Guinan, chairman and CEO of
Advantage Futures, believes despite being one- and five-years
Bruised and battered,
but coming back strong
BY GI NGER SZALA & MI CHAEL MCFARLI N
TRADE TRENDS
F
ive years is a long time. Think about it: In 2008, the financial markets
were in upheaval, still reeling from the failure of Lehman Brothers
and the infamous bail-out of the too-big-to fail firms. Since that time
the U.S. Congress wrote and passed the Dodd-Frank Wall Street Reform and
Consumer Protection Act, mandating that the various regulatory agencies put
in place rules that would stem some of the bad behavior that happened during
the financial crisis. A lot, it seems, can change in five years.
futuresmag.com 15
out, the residual interest rules border on ridiculous. [For the
full transcripts of many of these interviews, go to www.futures-
mag.com/2013fcmspeakout.]
The impact will be for FCMs to require customers to hold larger
excess balances to avoid margin calls, causing a negative capital
impact to the FCM even from relatively minor market move-
ments and position marks. This increase in margin required by
FCMs effectively raises the clients cost to trade. The need to resolve
margin calls more quickly will tend to increase volatility at exactly
the wrong time (during extreme market moves) as the FCM will be
forced to liquidate more quickly (rather than take the appropriate
time and do it in an orderly manner). The rule also will preclude
people from initiating positions that may serve to temper a big
market move (for fear of generating margin calls) big moves in
any market will be exacerbated by this rule. Intuitively, regulators
should want to help foster liquidity that can dampen extreme mar-
ket moves. This rule will force more intraday liquidation to avoid
margin calls whenever a severe market movement occurs; some
market segments may utilize alternative markets (cash or spot,
forward, etc.) to hedge risk rather than deposit the extra funds,
further reducing futures liquidity, Guinan explains.
Gerry Corcoran, chairman and CEO of R.J. O Brien &
Associates, says We believe the residual interest rule went too
far, adding, This likely will have a profound impact on those
in the agricultural community even before the at all times
phase-in after five years which is very unfortunate.
Scott Gordon, chairman and CEO of Rosenthal Collins Group,
agrees. As currently constructed with the phase-in provision, we
have to be mindful of the prospective impact on clients whose
livelihoods make it difficult to comply with the provisions. For
example, smaller commercial hedgers, and also international
clients, may have operational difficulty posting funds with their
FCM to comply with the new deadlines being phased in.
And despite the tightening of rules it might appear to be,
says Tom Kadlec, president of ADMIS, its yet another cost for
the customer. Over time, the rule will increase the amount of
capital required to be maintained by FCMs, which will decrease
our returns. It also will increase the frequency of wire transac-
tions and the amount of customer funds posted at FCMs, and
increase the cost of hedging for mid-level accounts. This will
possibly drive customers to other risk management products
such as crop insurance or off-loading production to large pro-
cessors earlier in the cycle to avoid increased hedging costs.
The irony, muses TDs Roberts, is if these rules were written due
to the MF Global and PFG messes, Peregrine would have asked
you to prefund your account, [and] would have stolen more.
Instead of $200 million, [PFG] would have walked out with $400
million. [Jon]Corzines positions would have been exponentially
larger. Hes glad the regulator is taken iterative steps with this
rule to make sure it helps rather than hurts the business.
Granted, this is one rule of many, but when asked about how
the Dodd-Frank rules impact their business overall, all FCMs
were vocal. Keep in mind, according to the TABB Study, which
interviewed 16 U.S.-based FCMs, of which represented almost 75%
of the $157.7 billion in total seg funds, addressing regulation
remains the most time-consuming and energy-resource-heavy
activity, the report states, adding, Yet, 43% of FCMs say they do
not factor regulations into pricing, while 21% are still evaluating
their decisions on how to charge for it. For a business that has
razor-thin margins, regulation always has raised blood pressures.
Guinan, always to-the-point, notes, There are now manda-
tory and severely punitive fines for irrelevant, immaterial rule
violations that in times past were handled more reasonably. Not
long ago, exchanges and regulators employed a reasonable man
yardstick in evaluating mistakes made by an FCM. If an investiga-
tion revealed a minor human error had occurred and there was
no pattern of negligence or deception, fines were usually set to
a level acknowledging the error and economically encouraging
FCM actions to minimize any recurrence. Now, in the aftermath
of the great recession, the overarching regulatory goal seems to
be to fine every firm and market participant as much as possible
for any infraction that can be identified. Their need not be malice
or mal-intent or negligence a simple minor human error can
now be met with a severe financial penalty. Over time, this will cer-
tainly result in higher commissions and costs for clients as FCMs
will be forced to pass along this higher regulatory operating cost.
Dan ONeil, vice president of futures at optionsXpress, agrees.
The other big story is that the penalties for being non-compliant
After years of dealing with low interest rates, new regulations and rebuilding client
confidence, futures commission merchants are ready to break out and start doing
what they do best: Executing trades and hopefully making money. In our annual
review of the industry, we found frustrations with compliance and regulations still,
but also: Optimism.
are now more severe than ever before. The steady drumbeat of new
rules and regulations combined with the seriousness of being
non-compliant means firms are focusing intently on this sort
of thing.
You might be familiar with a recent ruling that requires all futures
industry participants to record and archive all communications
that lead to the execution of a futures order, and that is presenting
a number of problems for firms. Theres been very little interpretive
guidance from the regulators as to what this means exactly, but were
working hard on that right now.
Kadlec agrees about the need for guidance: The CFTC, NFA,
and the exchanges could help immensely with this by putting out
guidance letters and white papers that bridge the gap between theo-
retical rules and the practical implementation of the new rules.
Enter the SWAP teams
A new rule that bodes well for the business is the move of the
OTC swaps to be cleared via swaps execution facilities. And this,
according to the TABB Group report, could be a boon for the
industry. Of the FCMs that TABB interviewed, most saw this as
a major growth opportunity for them; in fact, it could mean a
15% increase in revenues. The futurization of the swaps markets
could be very good indeed for those firms who are approved,
or are planning to be approved, swaps dealers. This includes
typically the largest of the firms, such as Newedge, which was
in the first 18 firms to be approved, to mid- to large-firms, such
as FCStone Group. But for mid- to small-sized firms, the swaps
business may be good for their larger brethren, but wont be
an area they have clientele. Even some mid-sized firms, such as
TradeStation, cater mainly to retail business, so swaps arent
an area for growth.
Says Newedges new CEO David Escoffier: The futurization of
swaps as well as OTC clearing are both major growth drivers for us.
Clients have turned more and more to deliver-
able swap futures and we are actively engaged
with the respective CCPs as well as new provid-
ers and new exchanges such as GMEX and Eris.
Overall, the futurization of swaps is completely
synergistic to our business and as the market
leader in clearing of listed derivatives, we wel-
come this trend.
Pete Nessler, CEO of FCStone Group, also
believes this is a growth area for his firm,
largely because they have a sizeable ag clien-
tele that does swaps. He notes they already
have seen large increases in block trading.
TABB found that 90% of their respon-
dents believe swaps hold the potential to
bring new liquidity to the futures markets,
and in fact, the firm estimates swap futures
will capture 3% of the swaps market, mean-
ing huge growth, especially in the interest
rate futures contracts. TABB reports some
respondents already see a slowing down of
the OTC desk business as the expenses of
the OTC products increase.
So is there growth for non-swap firms? Apparently, yes.
TD Ameritrade, which purchased ThinkorSwim in 2009, has
seen huge growth in the appetite of its equity trader-clientele
base for derivatives. Steve Quirk, executive vice president, notes
that when they were first bought by TD Ameritrade, the group
brought in about 9% of the revenues. Today they account for
40%, and the main growth has been by providing current equity
clientele derivatives products. ONeil echoes the sentiment with
optionsXpress parent Charles Schwabs clientele that is looking
to hedge portfolios or trade derivatives.
Carl Gilmore, CEO of KCG (Knight Capital Getco), agrees
with this growth potential. Of course swaps are one thing,
but the traditional futures space needs to do a better job as
an industry telling our story to the world. The metric that
always gets used is that futures activity is about 8%-9% of all
activity in the capital markets in this country. So, if we were
to expand the users of our markets by 5% and go to 13%, then
the industry is now 50% bigger. I tend to see traditional market
participants coming back in, including retail traders that had
been on the sidelines.
TABBs Simon even sees this in the institutional space. More
traditional asset managers are seeing the benefit of using deriva-
tives; many are starting up derivatives trading desks.
But others see growth internationally, and as Simon notes,
when we ask where investors want to go, China is by far the
number one request.
Many of the mid-level firms on our panel agreed they were
or already have ventured into other regional arenas. Some have
a built-in business opportunity with sister or parent compa-
nies, such as ADMIS and FCStone. Other firms, such as RJO,
Advantage and RCG, have looked east and west to expand. And
on potential product growth, several saw options on futures as
TOP BROKERS BBBBB O continued
Despite the total customer assets remaining relatively level since mid-2011, the
number of FCMs has dropped, although some see that amount leveling off.
DIVERGENCE IN THE NUMBERS
175
165
155
145
135
125
115
105
95
85
75
D
e
c
-
0
7
M
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-
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c
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M
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J
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-
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S
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c
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p
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200
180
160
140
120
100
80
60
40
20
0
Number of FCMs & customer asset totals,
December 2007 December 2013
Customer funds
# FCMs
September 2008,
Lehman Brothers
September 2011,
Global
July 2012,
Peregrine
134
133
122
116
114
101
95
Source: CFTC, TABB Group
Top Brokers continued on page 23
Go to futuresmag.com/topbrokers
for an unabridged version of this interview.
futuresmag.com 17
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2013 Rank
1 GOLDMAN SACHS & CO.[6] 9/30/13 18,786.75 1 19,941.28 16,666.73 8,217.70 0.00 Y I
2 JP MORGAN SECURITIES LLC[7] 9/30/13 17,323.09 2 18,272.15 21,418.57 3,619.16 0.00 Y I
3 DEUTSCHE BANK SECURITIES INC 9/30/13 13,997.23 4 14,828.21 7,271.03 925.11 0.00 Y I
4 NEWEDGE USA LLC 9/30/13 13,725.67 3 16,470.66 1,807.01 3,016.53 0.00 Y DND DND I N
5 MERRILL LYNCH PIERCE FENNER & SMITH [8] 9/30/13 9,696.05 6 8,342.40 13,998.34 2,396.85 0.00 Y DND DND Both Y
6 MORGAN STANLEY & CO. LLC [9] 9/30/13 9,532.48 8 8,157.68 11,110.12 2,386.48 0.00 Y
7 UBS SECURITIES LLC [10] 9/30/13 8,179.55 5 9,070.17 10,742.12 4,382.49 0.00 Y
8 CREDIT SUISSE SECURITIES (USA) LLC 9/30/13 7,078.47 9 6,374.16 8,392.25 3,077.41 0.00 Y
9 BARCLAYS CAPITAL INC 9/30/13 7,068.90 10 5,904.94 6,377.01 3,838.19 0.00 Y DND DND DND DND
10 CITIGROUP GLOBAL MARKETS INC 9/30/13 6,195.37 7 8,018.19 6,343.81 929.13 0.00 Y
11 RJ OBRIEN ASSOCIATES LLC 9/30/13 5,526.56 11 4,001.52 192.63 147.75 1.34 N
12 BNP PARIBAS PRIME BROKERAGE INC[11] 9/30/13 3,303.92 19 1,768.41 4,953.87 1.54 0.00 Y
13 ADM INVESTOR SERVICES INC 9/30/13 2,904.91 12 2,975.11 274.21 157.03 0.00 N DND DND Both Y
14 INTERACTIVE BROKERS LLC [12] 9/30/13 2,692.81 14 2,320.72 2,391.99 291.46 40.06 Y 17,350.00 193.47 Both N
15 MIZUHO SECURITIES USA INC 9/30/13 2,284.50 20 942.78 426.53 388.34 0.00 Y DND DND I N
16 ABN AMRO CLEARING CHICAGO LLC 9/30/13 2,215.11 15 2,227.72 474.25 100.30 0.00 Y
17 JEFFERIES BACHE LLC 9/30/13 1,916.26 13 2,580.00 204.36 124.06 0.00 N
18 FCSTONE LLC 9/30/13 1,669.64 18 1,620.50 106.29 59.84 0.00 N DND 48.10 Both Y
19 ROSENTHAL COLLINS GROUP LLC 9/30/13 1,432.78 17 1,625.07 75.49 27.30 0.00 N DND DND Both Y
20 RBS SECURITIES INC 9/30/13 1,401.01 16 1,704.88 4,352.65 94.29 0.00 Y
21 MACQUARIE FUTURES USA LLC 9/30/13 1,277.86 23 736.55 144.55 23.49 0.00 N DND DND Both N
22 HSBC SECURITIES USA INC 9/30/13 924.07 22 857.96 1,004.44 73.93 0.00 Y
23 RBC CAPITAL MARKETS LLC 9/30/13 895.78 25 581.27 1,099.50 121.82 0.00 Y
24 MCVEAN TRADING & INVESTMENTS LLC 9/30/13 786.67 21 940.34 12.90 0.00 0.00 N DND DND Both Y
25 SANTANDER INVESTMENT SECURITIES INC 9/30/13 672.03 27 534.84 217.36 0.00 0.00 Y
26 KNIGHT CAPITAL AMERICAS LLC [13] 9/30/13 477.58 30 425.82 356.70 7.86 38.86 Y
27 ADVANTAGE FUTURES LLC 9/30/13 476.34 29 446.90 21.71 32.75 0.00 N DND 250.23 Both Y
28 VISION FINANCIAL MARKETS LLC 9/30/13 470.62 26 538.37 34.26 14.29 0.00 Y DND 23.97 Both Y
29 TRADESTATION SECURITIES INC 9/30/13 398.59 32 389.20 58.71 15.81 0.00 Y 14.48 8,994.26 Both N
30 RAND FINANCIAL SERVICES INC 9/30/13 300.82 31 389.56 79.31 9.01 0.00 N DND DND I N
31 STATE STREET GLOBAL MARKETS LLC 9/30/13 217.92 36 141.40 531.67 23.05 0.00 Y
32 EFL FUTURES LIMITED [14] 9/30/13 198.01 33 292.10 41.07 0.00 0.00 N
33 E D & F MAN CAPITAL MARKETS INC 9/30/13 181.78 NA NA 27.92 1.84 0.00 Y
34 CHS HEDGING INC 9/30/13 150.32 37 141.03 26.20 0.25 0.00 N DND DND Both N
35 GAIN CAPITAL GROUP LLC [15] 9/30/13 136.20 40 106.59 44.05 3.26 105.6 RFD
36 DORMAN TRADING LLC 9/30/13 134.45 38 138.43 11.12 1.95 0.00 N 2.50 32.00 Both Y
37 STRAITS FINANCIAL LLC 9/30/13 131.06 45 78.51 9.51 21.96 0.00 N
38 TD AMERITRADE INC 9/30/13 117.28 41 102.91 305.07 0.00 0.00 Y
39 BNY MELLON CLEARING LLC 9/30/13 116.56 35 144.59 285.89 15.99 0.00 N
40 PHILLIP FUTURES INC 9/30/13 105.91 34 185.46 28.12 2.95 0.00 N
41 MAREX NORTH AMERICA LLC 9/30/13 88.00 43 89.42 11.64 6.83 0.00 N 33.08 DND I Y
42 OPTIONSXPRESS INC 9/30/13 81.59 42 98.55 99.73 1.07 0.00 Y
43 CROSSLAND LLC 9/30/13 78.42 47 67.75 9.20 6.87 0.00 N
44 THE LINN GROUP 9/30/13 75.54 44 80.40 3.53 0.08 0.00 N
45 CUNNINGHAM COMMODITIES LLC 9/30/13 64.81 46 73.35 2.92 0.40 0.00 N
46 VELOCITY FUTURES LLC 9/30/13 59.83 49 58.06 1.26 0.80 0.00 N 1.20 12.00 Both N
47 NOMURA SECURITIES INTERNATIONAL INC 9/30/13 55.45 50 51.40 1,567.45 0.81 0.00 Y
48 YORK BUSINESS ASSOCIATES LLC [16] 9/30/13 50.51 48 63.97 4.96 1.92 0.00 N
49 AMP GLOBAL CLEARING LLC 9/30/13 42.65 NA 36.04 2.45 0.43 0.00 N
50 IRONBEAM INC 9/30/13 37.83 NA 50.59 2.28 0.00 0.00 N
[1] Customer equity represents the total amount of funds that an FCM is required to segregate on behalf of
customers who are trading on a registered U.S. futures exchange. This is the sum of all accounts with a net
liquidating equity and is reported to the CFTC. 4d(a)(2)
[2] A frms Adjusted Net Capital is the amount of regulatory capital available to meet the FCMs minimum net
capital requirement. The classifcation of assets and liabilities used in arriving at net capital, and the additional
capital haircuts that an FCM may be required to take, are set forth in CFTC Regulation 1.17.
[3] Secured amount represents the amount of funds an FCM is required to set aside for customers who trade on
futures exchanges located outside the United States. Part 30.
[4] Non-U.S. customer equity is the amount of funds FCMs hold for traders outside of the United States. This was
obtained from the FCMs on a voluntary basis. It is not reported to the CFTC.
[5] This is the number of trades cleared by the listed frm through September.
[6] Goldman Sachs & Co. includes amounts from Goldman Sachs Execution and Clearing LP.
[7] JP Morgan Securities LLC includes amounts from JP Morgan Clearing Corp.
[8] Merrill Lynch, Pierce, Fenner & Smith Incorporated includes amount from Merrill Lynch Professional Clearing
Corp.
[9] Morgan Stanley & Co. LLC includes amounts from Morgan Stanley Smith Barney LLC.
[10] UBS Securities LLC includes amounts from UBS Financial Services Group.
[11] BNP Paribas Prime Brokerage Inc. includes amounts from BNP Paribas Securities Corp.
[12] Interactive Brokers LLC includes Timber Hill LLC. RBC CM LLC formerly was known as RBC Capital Markets.
[13] Knight Capital Americas LLC was acquired by Getco and will be known as KCG.
[14] EFL Futures Ltd. was formerly known as Enskilda Futures Ltd.
[15] Open E Cry LLC is a a subsidiary of GAIN Capital Holdings
[16] York Business Associates LLC is doing business as TransAct Futures (TransAct).

DND Did not disclose NA Not applicable

F
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O
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E
S

H O T MA R K E T S
MARKETS
2014 Hot Markets:
Stuck on taper
BY DANI EL P. COLLI NS
When U.S. financial markets finished their temper tantrum over the Federal Reserve
acknowledging that QE3 would have to end, the prospects of more rational market
fundamentals emerged. But as we enter 2014, markets appear stuck on taper.
O
ne of the frustrating elements for
traders since the 2008 credit crisis
slashed value is the way markets
have traded and reacted to fundamental
news. There were no trends, just a constant
risk-on/risk-off world where opportunity
gave way to fear and fear to opportunity,
not so much based on the analysis of mar-
ket fundamentals but on how the Federal
Reserve and other central banks would
manage the so-called new normal.
This appeared as if it may give way this
summer as the Federal Reserve acknowl-
edged that the open-ended quantitative
easing (QE3) launched in 2012 would have
to come to an end. The plan was to begin
tapering the $85 billion in monthly fixed
income purchases near the end of 2013 and
get down to zero by mid-2014.
Treasuries: Is end near?
It turns out the anemic recovery of the last
few years was not quite ready to fly on its
own and even if it was, political dysfunc-
tion may have thrown a monkey wrench
into those plans by threatening the world
with a self-made economic crisis. While a
series of political missteps may have delayed
the onset of taper, its inevitability makes
Treasuries the most interesting market
going forward and adds to the possibility
of two-way volatility.
It will be an interesting market going
forward in the same way it was in 2013,
but I dont think it is necessarily because
the bull market will end, says Andrew
Wilkinson, Miller Tabaks chief economic
strategist. The market still has to come to
terms with the Feds forward guidance. The
market still has to come to terms with the
lack of inflation and the breakdown in cor-
relation between commodity prices and the
value of the dollar.
Treasuries overreacted to the initial taper
scare in May and since have frustrated those
waiting for the 30-year-plus bull trend to
end. I dont think that the Treasury bull
market is over. You have to recognize that we
really are living in a new normal and we have
a fiscal headwind restraining the economic
recovery and that there is a lack of infla-
tionary pressure that is going to maintain
a steady cap on interest rates, Wilkinson
says. It is very noticeable that the 10-year
yield got down to 2.46% since the September
non-taper meeting. I dont think that nec-
essarily is because the economy weakened
substantially. [It] is because the Fed has been
successful reaching an increasing number of
investors with its message that even beyond
finalizing its asset purchases the Fed Funds
rate will not increase.
Wilkinson, who sets the range in
10-year yields between 2.75% and 3.25%
in 2014, adds, To assume that yields
will rise simply because the Fed stops its
purchases is extremely Pavlovian. We just
lived through a period when fixed income
investors have been proven badly wrong
on such an assumption. Real yields are a
function of economic growth and activity
as well as the pace of gains in employment.
We shouldnt blindly assume that yields
necessarily go higher.
Martin McGuire, managing director at
TJM Institutional Services, is more bearish .
If we see 10-year yields move to 2.85%
from [the end of October yield of] 2.62%, it
suggests that a multi-month low will be in
place, McGuire says. While we might not
see a new low yield at all, we should not expect
to see one until after the end of the first quar-
ter of 2014 (see Is this the end? right).
McGuire says the hard sell off in fixed
income and equities this spring could have
been an upfront insurance policy paid for
future volatility. He says it could have pro-
Tempering the taper
New energy world
For daily commodity updates,
go to futuresmag.com
futuresmag.com 21
vided for lower levels of volatility as the Fed
moved toward tapering, but unfortunately
the Feds failure to pull the trigger on taper-
ing may be a lost opportunity. By backing
away from tapering in September, the Fed
is back to square one. The market is once
again wondering at every economic release
what will be the implications for tapering,
McGuire says, adding, I dont think the
Fed intentionally misled. They got together
at the meeting and they believed then and
there that the risk to their credibility from
misleading the market was not as great as
the risk of moving too early and taking the
accommodation away.
He expects 10-year yields to rise well
above 3%, likely to 3.5% in 2014, and 30-year
yields to move above 4% and approach 4.5%.
One of the reasons Wilkinson has been
less bearish than many analysts on Treasuries
is that he expects the Fed to hold onto its
portfolio through expiration. It is pretty
apparent that the Feds balance sheet is going
to be left to wind down of its own accord over
an extended time horizon, Wilkinson says.
So the descriptions of the bond market that
many are predicting simply [are] not going
to happen. The Fed will not sell bonds and
force yields up. That idea is so counterintui-
tive that it makes no sense whatsoever.
More interesting could be movement in
the yield curve. The 5-year/30-year yield
curve is going to flatten like a pancake
as the Fed moves through the tapering,
McGuire says. If you believe the Fed has
[the] intention to hold onto its portfolio,
the policy rate will be required to do more
of the heavy lifting. For any measure of eco-
nomic growth (potentially inflationary),
the Fed will need to raise policy rates more
because it will not sell out the portfolio.
Equities continue higher?
While there is consensus that equities are
dependent on the pace of tapering, there
is no consensus on what that pace will be.
Alan Bush, senior research analyst at
ADM Investor Services, expects the equity
bull market to continue its move upward,
but not based on any organic strength, just
on the tailwind the Fed is providing.
Equity indexes will continue to advance
mainly because the Fed will taper later
instead of sooner, Bush says, adding,
The influence that will prompt the Fed
to taper QE will be when inflation starts
to reemerge, which is likely to happen later
rather than sooner. Until the Fed is fright-
ened by inflation, they will not taper at all.
Anthony Lazzara, founder and principal
of Lido Isle Advisors, is more bearish. The
market is going to have to start pricing in
a more hawkish environment, he says,
adding, even if they dont taper, it will add
volatility (see Wheres the vol? above). The
market is going to be more proactive in pric-
ing in taper. It is going to be an interesting
year for financials; we have had all these
grinding up moves.
Bush, however, sees equities trending
higher aided only by QE. The trend is still
higher. Any bad news of any type will only
have a temporary downside move. When
they do taper, we will see a down move; I
just dont think they will taper any time
soon. In fact, if they do taper, whenever their
tapering announcement is, they may have
to delay the next [one] for the stock indexes
to recover, he says.
Bush acknowledges that equities could
McGuire believes a move in 10-year yields above 2.85% could trigger a large advance
in yields.
It seems strange that in a year with so much contentiousness, when there was a
government shutdown and a threat of default, the so-called fear gauge wallowed at
historic lows. This likely will change in 2014.
IS THIS THE END?
WHERES THE VOL?
Source: eSignal
Source: eSignal
3.100
3.000
2.900
2.800
2.700
2.600
2.500
2.400
2.300
2.200
2.100
2.000
1.900
1.800
1.700
1.600
50.00
48.00
46.00
44.00
42.00
40.00
38.00
36.00
34.00
32.00
30.00
28.00
26.00
24.00
22.00
20.00
18.00
16.00
14.00
12.00
10.00
2.763
12.67
10-year Treasury note yield
VIX (weekly)
2013 Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Jul 2011 Jul 2012 Jul 2013 Jul
MARKETS continued
face a major downturn if he is wrong and
the Fed tapers more aggressively. I dont
think they will. Whatever the consensus
view is on QE in [the] coming weeks and
months, I will be farther out in terms of
tapering expectations.
Both Bush and Lazzara expect greater
volatility in currencies, although they take
opposite views on the U.S. dollar. The cur-
rencies will be very volatile with the dollar
lower, Bush says. Lazzara sees a stronger
dollar with the onset of tapering.
Although Wilkinson expects tapering
to come, he says equities are ready to stand
on their own. I find it very difficult to view
equities negatively. They are not particularly
costly. In the absence of an economic down-
turn, I still think the trajectory on earning is
constructive. So the bull market goes on,
Wilkinson says, adding, The global econ-
omy is set to recover more strongly in 2014
and that lends itself to firming demand for
commodities, whose value has been falling
even as the 2013 recovery expanded.
Natural gas in demand
One of the more positive stories of 2013 was
the speed at which U.S. energy production
grew, which could make energies one of the
more interesting sectors to watch in 2014.
We are in a new era of lower energy
prices, declares Phil Flynn, senior ener-
gy analyst at The Price Futures Group.
What is happening in the United States
in terms of production is historic. It is
game changing and it is changing the
energy universe as we know it.
The shale gas and oil production in the
United States is putting downward pres-
sure on prices, which only may have been
scratched in 2013 because of concerns over
Middle East production.
It has been a choppy ride because of
Hurricane Sandy and other [geopolitical]
issues. But [with] the increase in oil pro-
duction and the increase in capacity from
many of our refiners, we are going to see
prices go down, Flynn says. He notes that
there is even the chance of cooperation with
Iran. If they decide to play ball and allow
inspectors in, they may come back [into] the
global energy market.
Near term, he expects crude oil to test
$88 a barrel, and if there is a mild winter,
he believes it can test or even fall below $80.
Lazzara also believes crude will test
$80. This sell off is just getting started,
Lazzara says. There are a lot of players
producing energy. Iraqs production is
getting stronger.
Perhaps more interesting is the natural
gas market.
Natural gas is almost like two differ-
ent markets the long-term market and
the short-term market, Flynn says. The
short-term market obviously is going to
be dependent on weather. Right now nat-
ural gas is under pressure. The long-term
picture for nat gas 5-10 years we are
near a historic low.
Flynn says just as high prices cure high
prices, low prices cure low prices; as the
shale revolution has brought down gas
prices and eventually will bring down crude
oil prices, low prices are creating increased
demand particularly internationally
for natural gas. There also has been a move
by big transportation firms to move, ala T.
Boone Pickens, to natural gas for fuel.
Fed Ex is changing all its short-duty
trucks to natural gas. Warren Buffet is
looking into running Burlington Northern
[freight] on natural gas, Flynn says, noting
the railroad is the biggest consumer of die-
sel fuel after the U.S. Navy.
Meanwhile, Europe wants an alternative
to its main natural gas supplier, Russia,
which likes to bully its neighbors. And
Japan has increased energy needs with
reductions in its nuclear energy output.
Russia is threatening the Ukraine, Japan is
begging us to step it up, Flynn says. Japan
and Europe want us to export natural gas.
Natural gas last winter was going for as
much as $20 in China.
Becoming a natural gas exporter will
require the United States to ramp up liq-
uefied natural gas (LNG) facilities, but
with price differentials where they are, it
should happen quickly. We were paying
$3 or $4 over here. With that kind of dis-
crepancy market forces wont let that con-
tinue forever, Flynn says. If you ever get
below $3 again, it is going to be a major
long-term buy. Shorter term, it looks like
$3.35. Over the next two years the demand
for natural gas is going to explode, similar
to oil prices in the late 1990s. What hap-
pened is the demand for that cheap prod-
uct exploded and then before you knew it
we had a major bull market.
An interesting natural play may be its
long-term price curve. The curve is rela-
tively flat,which to me is amazing, Flynn
says. If I were a big corporation and I
could lock in September 2020 natural gas,
I would be jumping all over it (see Hitting
the curve, above).
The June 2017 natural gas contract at the
With increasing international demand turning natural gas into a global commodity,
long-term prices may rise regardless of near-term fundamentals creating opportunities
spreading the long-term price curve, which likely will steepen.
HITTING THE CURVE
Source: eSignal
7.600
7.400
7.200
7.000
6.800
6.600
6.400
6.200
6.000
5.800
5.600
5.400
5.200
5.000
4.800
4.600
4.400
4.200
4.000
3.800
3.600
3.400
3.559
3.911
4.102
4.243
4.357
4.492
4.685
4.930
December 2020
December 2016
December 2018
December 2014
December 2019
December 2015
December 2017
December 2013
Sep Nov 2012 Mar May Jul Sep Nov 2013 Mar May Jul Sep Nov
Markets continued on page 44
futuresmag.com 23
TOP BROKERS BB continued c d
a major growth contract area, while others
noted the Vix contract as the rising star.
And although TradeStations CEO Sal
Sredni sees growth for the firm in Asia
and the Middle East, this is largely due to
licensing the firms technology and not its
brokerage business, which is mainly retail
and U.S.-based.
Interestingly, merging the CFTC and
Securities and Exchange Commission (SEC)
had few proponents on our panel. Nessler
noted that there would be more effective
rule making if the agencies merged, but
Escoffier notes that We do not believe a
merger of the CFTC and SEC is critical with
respect to the regulation of joint FCM/bro-
ker dealers in the U.S. Indeed, while the U.S.
is one of the few jurisdictions in the world
that bi-furcates the regulation of futures
and securities, there are numerous exam-
ples of instances in which the same entity is
governed by more than one regulator. Close
cooperation in regard to the issuance of
rules, examinations, enforcement and other
matters between regulators that govern a
particular entity is critical to optimize their efforts and mini-
mize any unnecessary disruptions to the regulated entity. We
also would like to see further harmonization of rule books to
eliminate inconsistent, duplicative or overlapping regulations.
Many shrugged at the potential merger. Sredni said Be careful
what you wish for, while Guinan noted that We cant know in
advance exactly how this would play out. It would likely be quite
a mess. We want efficient and good regulators. We dont necessar-
ily need fewer regulators. A decade ago, New York State Attorney
General Eliot Spitzer exposed the mutual fund timing scam that
Wall Street firms were facilitating. The SEC completely missed this
activity. The foxes have an ability to take over the chicken coops.
Two regulators are better than one.
New trends
On emerging trends, two reactions stand out. The first is many
saw more consolidation of an industry that already is consoli-
dating (see Divergence in the numbers, page 16). With the
combination of increased costs in meeting new regulatory
requirements and higher technology costs, we expect to see
continued consolidation among FCMs, Gordon says.
Escoffier concurs: I expect to see further consolidation in the
market. Regulation is making it harder for smaller FCMs to do
business, and clients will gravitate to scale and proven expertise,
i.e., the current top five players.
Corcoran believes the low-interest environment will continue,
affecting FCMs in many ways. In the low-interest-rate environ-
ment, in which there is slow growth in the industry and a high
cost of compliance, we will see fewer firms able to survive, and
therefore consolidation. We expect the low-interest-rate environ-
ment to continue for the next two to three years, and smart FCMs
will have to address their pricing structures and models.
Another focus would be continued regulation. Guinan says,
Greater regulatory costs will need to be passed on to clients in
some manner. However, he also notes, As this rash of regula-
tory over-reach subsides, the FCM industry can focus on expan-
sion and the exchanges can turn their attention to creating new
products rather than jousting in Washington.
TABBs Simon agrees that consolidation is definitely going to
continue, but he says its harder for me these days to believe there
will be a smaller number (of FCMs) as the number is starting to
level off, he says (see Bigger firms getting bigger piece of pie,
above). What he sees more likely is a large firm could leave the
business, allowing other firms to grab market share. However, he
does see business migrating to the biggest players with the big
balance sheets, and that capital is power in the business.
Escoffier agrees, stating: Managing cash and collateral have
become more important than ever with banks facing term
liquidity shortages and pressure to diversify their sources of
funding in the face of Basel III and CRD IV. Centrally cleared
OTC markets also require higher initial margin and collateral
capital. Hence, cash has become an asset class rather than a
borrowing class pre-crisis.
In the end, many FCMs are optimistic. Guinan notes As the
fixed income market descends, volume and return on investment
of client funds should rise concomitantly benefitting the entire
FCM community.
Gordon agrees, saying: Despite all that the FCM community
has been through in the past couple of years, there is tremendous
potential in the FCM model, and no one should underestimate
our ability to innovate and reinvent ourselves as new challenges
come our way.
are. H arket
the biggest players with the b t ee
capital is pow apit
stating: M ng:
portan or p rt r
rtages s a g
he fac
kets al
Hence n e
g cl l
e end e
comm
t fun
omm
on
n thr
al in
y to y to y
way.
After the 2008 financial crisis, the top five FCMs lost market share of customer
accounts. That trend is changing, with the top five garnering an estimated 55% of the
account balances.
BIGGER FIRMS GETTING BIGGER PIECE OF PIE
Source: CFTC, TABB Group
35%
23%
42%
34%
24%
42%
32%
25%
43%
28%
25%
47%
28%
26%
46%
19%
22%
59%
19%
24%
57%
21%
25%
54%
22%
24%
54%
23%
25%
52%
26%
25%
49%
15%
30%
55%
Percentage of account balances of top-tier FCMs,
December 2003 December 2014
FCM business is controlled
by bank, non-bank, and
futures only firms
Financial credit crisis
prompts large move to
top 5 FCMs
Futurization and OTC
clearing shifts business
to top 10 FCMs
Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
FCM rank 15 FCM rank 510 Other
Top Brokers continued from page 17
T
raders often seek repeated pat-
terns or repetitive relationships
that we can take advantage of
for profit. These patterns exist across
all markets and time frames, but some
are more easily identified than others.
One such exploitable pattern involves
the Swiss franc and the U.S. dollar. This
currency relationship typically repeats a
certain move at least once a day during
any given trading session.
The first step to understanding the
relationship between the Swiss franc and
the dollar is to examine the birth and evo-
lution of the foreign currency. While it
may seem unlikely that such ancient his-
tory has any impact on the intraday fluc-
tuations in the 21st century, it does help
us appreciate the connections between
the Swiss and U.S. denominations.
Prior to 1798, Switzerland as a coun-
try was divided into cantons or provinces,
each with its own currency. This is similar
to the early history of America when the
country operated under the Articles of
Confederation and each state minted its
own coin. Imagine how problematic that
was for conducting interstate commerce.
In the Helvetic Republic, a late-18th
century effort to bring Switzerland
under united rule, a currency pegged to
the French franc was created. France was
the premier world power at that time.
Initially, this common currency was
equivalent to 6.75 grams of pure silver or
1.5 French francs. This effort only lasted
a few years, however, before local curren-
cies regained favor.
A generation later, in 1850, the Swiss
Federal Constitution mandated that
only the federal government would be
allowed to mint money, replacing the
local currencies. Initially, the Swiss franc
was pegged to the French currency and
then directly to silver before Switzerland
joined the Bretton Woods system in
1945, pegging its value to the dollar.
Fundamental drivers
Today, the Swiss franc sees signifi-
cant fluctuations vs. other curren-
cies. Throughout 2011, it had massive
appreciation as the dollar slid. The
stronger Swiss franc was not good for
Switzerlands export economy, and the
Swiss National Bank began targeting a
value of 1.20 Swiss francs vs. one euro.
The Swiss central bank would sell for-
eign currencies to achieve that rate. This
is a common practice of central banks to
keep their countrys products cheaper,
and more attractive, overseas. Indeed,
this is a cornerstone of Japans current
so-called Abenomics principles.
In any case, the Swiss franc currently
sells at or below the threshold of 1.20
euros. Most likely the reason for the
mass appreciation was the Greek bail-
outs that occurred during that time.
Most Europeans were concerned that
the euro would devalue, and the Swiss
franc always has been the emblem of
stability. Be warned, however, this is not
to say that such a devaluation couldnt
happen again. Its the type of major mar-
ket-moving event that currency traders
always should anticipate.
Today, each tick on a Swiss franc
futures contract at the CME Group is
worth $12.50. Unto itself, this is quite
appealing, and better than other curren-
cies such as the Canadian dollar or the
Australian dollar.
In addition, the Swiss franc depicts
behavior that repeats across trading
sessions. This can be observed and rec-
Traders dont have to identify complex patterns to be successful. Simple reliable
relationships are all you need if you have the patience and discipline to exploit them.
Correlated opportunities
in the Swiss franc
BY NI CK MASTRANDREA
TRADING TECHNIQUES
C U R R E N C I E S
History lesson
How markets correlate
Anticipating intraday moves
For more from Nick, go to
futuresmag.com/Mastrandrea
ognized after following the market on a
day-to-day basis over an extended period.
One such pattern is relatively simple a
basic surge in either direction but alert
traders can be prepared to take advantage
of this surge when it happens. Here are
the parameters of the move:
Once a day, typically in the morning,
the Swiss franc will make a move that
is generally worth 20-30 ticks.
The move often is seen following a
major economic news announcement,
in which case it may happen much later
in the day. Case-in-point: On Sept. 18,
the move didnt occur until after the
2 p.m. statement of the Federal Open
Market Committee.
If no major news announcement is
planned, then generally the move will
occur anytime after 10 a.m. (EST) once
the markets have settled down post-
opening and there is a better sense of
direction.
This move corresponds to an opposite
move in the U.S. Dollar Index.
This post-10 a.m. move does not exclude
other moves throughout the day. Its
identified here as a repetitive pattern that
we can anticipate and exploit. Examples
of recent moves in the December futures
contract for both the Swiss franc and the
dollar index can be seen in Up surge
(right) and Order up (page 45).
Trading the move
The charts reflect the inverse relationship
between the Swiss franc and the U.S. dol-
lar. Clearly there is negative correlation
here a relationship that we would expect
given the history of the Swiss franc and
the fundamentals at work. The first step
to taking advantage of this move is know-
ing it exists. Then you can prepare for it.
Each day, watch the dollar at or around
10 a.m. and look for direction. Typically,
prices start to settle down a half-hour after
the 9:30 a.m. open of the day session. This
move usually breaks soon after.
Turn your attention to the greenback.
When the dollar appears to be establish-
ing a high or low near that time of day,
look for opposite direction confirma-
tion in the Swiss franc. For execution
purposes, the Swiss franc offers the big-
gest bang for the buck with a 25% larger
tick size. Among setup trades, this one is
relatively safe and easy to spot, especially
in the Swiss franc, which typically experi-
ences extended moves when it does have
a significant turn.
One method for getting into the mar-
ket is to place a bracket order that will be
executed in either direction at the time
of the move. Consider a 10-tick stop and
a 20-tick profit target. For most of these
moves, you can expect a 20- to 30-tick
advance in either direction. Be prepared
to modify the profit target if necessary.
Dont forget the stop loss, because any-
thing can happen in a volatile currency
market. A trailing stop is another layer
of risk management. With a trailing stop,
you enter with an initial stop loss then
for each 10-tick move in your favor, the
futuresmag.com 25
On Sept. 18, the December Swiss franc contract didnt make its big move until after the
FOMC statement (top chart). The December Dollar index futures had a corresponding
move lower, falling hard and continuing lower through the session (bottom chart).
UP SURGE
Source: NinjaTrader LLC
1.0930
1.0925
1.0920
1.0915
1.0910
1.0905
1.0900
1.0895
1.0890
1.0885
1.0880
1.0875
1.0923
81.400
81.300
81.200
81.100
81.000
80.900
80.800
80.700
80.600
80.500
80.400
80.300
80.200
80.100
14:00 14:00 14:00 14:00 14:01 14:03 14:04 14:05 14:09 14:13 14:14 14:17 14:27 14:42
10:00 12:00 14:00 16:00
Trading Techniques: Mastrandrea continued on page 45
80.245
H
ere, we will illustrate the prof-
itability of trading a currency
position using strategies based
on the Fractal Market Hypothesis as
discussed by Edgar Peters and Benoit
Mandelbrot. Well look at the fractal
from the slant of a time series analysis
provided by Mandelbrot in 1963.
Mandelbrot found that cotton prices
(1900-1963) were not normally distrib-
uted and instead showed clusters around
the mean with a greater frequency of
extreme variations (the tails) than that
found in a normal distribution. This type
of distribution is known as leptokurtic:
A distribution that displays a positive
value of excess kurtosis or sharpness of
the peak of the graph of distribution. In
other words, it has a higher peak than a
normal curve and fat tails or higher
density of values at the extreme end of
the probability curve. Fat tails imply
greater risk and suggest a nonlinear sto-
chastic process. Assets that exhibit price
jumps also display fat tail distributions.
Mandelbrots analysis led him to coin
the term fractal, although he did not
provide a concise definition. Fractals are
not limited to geometric patterns found
in nature (some common fractals include
seashells, snowflakes, ferns, coastlines
and broccoli), but can also describe pro-
cesses in time.
Fractals exhibit two quantifiable char-
acteristics: Self-similarity and the fractal
dimension. Self-similarity means that the
parts are related to the whole. Peters puts
it best: The object or the process is simi-
lar at different scales, spatial or temporal,
statistically. Each scale resembles other
scales, but is not identical.
An object is said to be self-similar if it
looks roughly the same on any scale.
For this discussion, we assert that the
trends found on a four-hour spot euro
candlestick chart are fractal shapes: Each
trend roughly resembles other trends,
but they are never the same.
The fractal dimension measures how,
in our particular case, a time series (a set
of historical data) deviates. A line has
dimension of 1, a plane has a dimension
of 2, and a cube has a dimension of 3. A
random line has a fractal dimension of
1.5. If a fractal dimension of a time series
is greater than 1 but less than 1.5, then
this particular time series exists between
a straight line and a Gaussian random
walk. Again, Peters proposes an excellent
definition: Regarding a time series, the
fractal dimension measures how jagged
the time series is.
We accept the fractal market hypothesis
as stated by Peter and discussed below.
Various empirical studies show that finan-
cial assets produced skewed and fat tail
return distributions (Mandelbrot, 1963;
Fama, 1965; Hols, et al., 1991). In fact, the
frequency distribution of currency returns
has a higher peak and fatter tails than U.S.
stocks or bonds. We define a short-term
investment horizon as a period of less than
five years and a long-term investment hori-
zon of greater than four years.
Portraying the market in five basic points:
1. The market is stable when it consists
of investors covering a large number
of investment horizons. This ensures
that there is ample liquidity for traders.
2. The information set is more related to
market sentiment and technical factors
in the short-term than in the longer-
term. As investment horizons increase,
longer-term fundamental information
dominates. Thus, price changes may
reflect information important only to
Traders are well aware of market-based fractal relationships spatial similarities that
can be captured across scales. All you need are the right tools.
Using fractals in forex
BY LESLI E K. MCNEW
TRADING TECHNIQUES
C U R R E N C I E S
Capturing trends across time frames
How market periods are self-similar
Forex profits on short-term time frames
For more from Leslie, go to
futuresmag.com/McNew
that investment horizon.
3. If an event occurs that makes the valid-
ity of fundamental information ques-
tionable, long-term investors either
stop participating in the market or
begin trading based on short-term
information. When the overall invest-
ment horizon of the market shrinks to
a uniform level, the market becomes
unstable. There are no long-term inves-
tors to stabilize the market by offering
liquidity to short-term traders.
4. Prices reflect a combination of short-
term technical trading and long-term
fundamental valuation. Thus, short-
term price changes are likely to be
more volatile or noisier than long-
term trades. The underlying trend
in the market reflects changes in the
fundamental (economic) environment.
There is no reason to believe that the
length of short-term trends is related
to the long-term economic trend.
5. If a security has no tie to the economic
cycle, then there will be no long-term
trend. Trading, liquidity and short-
term information will dominate.
Setting up the trade
Here are the basic facts of our trade sce-
nario:
Book balance $10,000
Position size 10,000
Instrument: Spot . No transactions
fees are paid when trading spot forex.
Backtested data: Spot four-hour data
(Jan. 1, 2007 to June 30, 2013). Data
provided from www.fxcm.com
Trading periods: Execute only on four-
hour candlestick window. Testing on
data with 1 a.m., 5 a.m., 9 a.m., 1 p.m.,
5 p.m. and 9 p.m. candlestick windows.
The importance of the timing of the four-
hour candlestick is stressed. Monthly U.S.
economic information is released at 8:30
a.m. and 10 a.m. It is important to note
that the model transaction will occur
after/before possible periods of market
stress (like on the release of the monthly
employment data).
Book leverage: Approximately 1.30
Trend indicator: Exponential moving
averages (EMA). Fast EMA: 10-period
(10 periods of four-hour blocks of
data). Slow EMA: 20. This pair was
backtested as optimal for this currency
and this time interval.
Transaction times: At the open of each
four-hour candlestick. No other trans-
actions are allowed
Transaction limit: 40 pips per 10,000
position; each pip is worth $1
Transaction stop: 20 pips
We have examined a set of trades that
are low risk, provide consistent low returns
with a leverage of less than 1.5 and can be
automated, which ensures low human cap-
ital fees. We consider this group of trades
the annuity trade of the portfolio, or the
first step of a return pyramid for a specula-
tive portfolio. In terms of a baseball meta-
phor, this model is the first base of firm
profit and not a home-run trade.
As the model operates in the short-
term, we use technical indicators, partic-
ularly EMAs, to indicate the possibility
of a trend. This is our only attempt to
create some logic out of the noise that is
produced at the short end of the market.
It has been shown that short-term inves-
tors rely heavily on technical indicators.
Think of the greed and fear patterns (the
positive and negative price movements) of
the four-hour candlestick chart as a countrys
coastline. Determining the length of a coun-
trys coastline is not as simple as it appears,
as first considered by L. F. Richardson
(1881-1953) and sometimes known as the
Richardson effect (Mandelbrot, 1983). In
fact, the answer depends on the length of
the ruler you use for the measurements. A
shorter ruler measures more of the sinuosity
of bays and inlets than a larger one, so the
estimated length continues to increase as the
ruler length decreases.
Traders do not know the optimal
ruler to use to catch the maximum
amount of profit for each inlet of price
futuresmag.com 29
We do not take a position if the EMAs cross during a four-hour window. The position is
only entered at the open of the next bar.
ORDER OF ANALYSIS
1.2950
1.2900
1.2850
1.29271
3) Limit order hit 40-pip profit
2) Enter into long position with limit
order and stop loss at open of
NEXT candlestick
1) EMA Cross during 4-
hour (No Action). Dotted
green line demonstrates
EMA cross
On some candlesticks, we cant be sure if the profit limit or stop loss was hit first.
WHICH CAME FIRST?
movement (trend). Our ruler is the limit
order and our inlets are the trends of the
four-hour market as depicted by the 10-
and 20-period EMAs. Each inlet has two
legs: The long trend (10 EMA > 20 EMA)
and the short trend (20 EMA > 10 EMA).
Because the optimal limit order is not
known and the frequency and magnitude
of each inlet are not consistent, we aim
for profitability by taking a small bite out
of each leg of each market wave.
The optimal EMA period lengths, limit
orders and stop order amounts for the
trading model were determined through
backtesting using data from 2007 to June
2013 (four-hour data from www.fxcm.com).
Regarding limit orders and stop orders, we
looked for a combination that supplied con-
sistent profits with low risk levels. Our back-
testing return analysis for this model is found
in Cumulative results (above). All returns
are produced using CFA-recommended
methodology: Geometrically linked returns.
Regarding the use of leverage in this
model, the mean hedge fund industry
leverage is approximately 2.13 with a
standard deviation of 0.616. Hence, we
sought to construct a model that tar-
geted this industry average.
Trade mechanics
A transaction only will be considered
at the open of each four-hour window
and, if necessary, executed. This means
that there are six four-hour candlestick
windows in a daily 24-hour period and,
thus, there are only six possible periods
of transaction.
To open a trade, evaluation of the pair
of EMAs occurs. If 10 EMA > 20 EMA,
then a long position is taken. If 20 EMA
> 10 EMA, then a short position is taken.
At the time of trade entrance, both limit
and stop orders are placed 40 and 20 pips
away from the entry price, respectively.
The transaction is automatically exited
when the limit or stop order is hit. Our
currency platform is FXCM and these
orders are executed with little slippage
except in the rare instances of complete
market chaos.
There is no transaction on the anticipa-
tion of an EMA pair cross. The EMA signal
must be firmly in place for trade entrance
(see Order of analysis, page 29). Because
of this, the model is considered a lagging
one. The trade entry only occurs firmly
after the EMA signal and only at the time
of the open of the four-hour candlestick
window. The exit of the trade occurs on a
pre-set limit or stop-order basis, or change
in trend direction.
The model would be more profitable
if the transaction took place as close to
the actual EMA cross as possible, without
the imposed time lag of execution only
at the four-hour window. However, our
available dataset for backtesting limited
us to the use of the four-hour candlestick
for trade entrance.
The ambiguity issue
This model was designed to trade on and
was historically optimized using four-hour
EUR/USD candlestick data. We have found
that backtesting the model produced, on
some occasions, an ambiguity issue: It is
impossible to tell in a transaction which
was hit first in the candlestick data the
limit or the stop. In other words, if the
candlestick price depth is such that both
the limit and the stock were met inside the
pricing period, it may not be certain which
order was executed first.
But the ambiguity issue does not sig-
nificantly alter the return profile of the
model. For example, in 2007-2013 there
were approximately 10,000 model entries
and the question of ambiguity arose
approximately 50 times. The spread-
sheet screenshot in Which came first?
(page 29) illustrates the small possibility
TRADING TECHNIQUES continued
Here we can see a quick comparison of the three methods of determining whether
the stop or limit was hit on the few instances the candlesticks were large enough to
capture both.
Our basic model provides consistent returns over time in the euro.
METHOD COMPARISON
CUMULATIVE RESULTS
Candlestick method Optimistic method Conservative method
Year Cumulative returns
2007 3.04% 3.04% 3.04%
2008 1.75% 2.91% -2.33%
2009 5.53% 6.60% 2.19%
2010 7.41% 7.25% 4.47%
2011 2.52% 3.46% 0.56%
2012 6.89% 7.65% 6.66%
2013 0.46% 0.89% -0.52%
BT ITD 30.840% 36.240% 14.640%
6 months 0.461% 0.889% -0.521%
Avg. year return 3.94% 4.54% 2.01%
Cumulative summary statistics fractal model A
EUR/USD 01/01/2007 - 06/30/2013
Candlestick method returns
Best month 1.86%
Worst month -1.36%
Positive months 75.64%
59
Negative months 24.36%
19
Trades win 45.16%
Trades lose 54.84%
futuresmag.com 31
of the double count of both the stop
order and the limit order being executed
within the same observation period.
There were three methodologies used
to test the bounds of historical model
returns in light of the ambiguity issue: The
most optimistic method is to assume that
all limit orders hit before stop orders. The
most conservative method is to assume
that all stop orders hit before limit orders.
Then theres the method that we settled
on, the candlestick method.
In implementing the candlestick
method, if the model is in a long posi-
tion and the four-hour candlestick closes
positively, then we assume that the limit
order was met before the stop order exe-
cutes. However, if the candlestick closes
negatively, then the stop order hits before
the limit order is met. If the model is in
a short position and the four-hour can-
dlestick closely negatively, then the limit
order hits before the stop order is met.
However, if the candlestick closes posi-
tively, then the stop order hits before the
limit order is met. Finally, if the four-
hour candlestick closes in a neutral posi-
tion, the opening price equals the closing
price, we assume that the limit order is
met before the stop order is hit.
The table Method comparison (left)
displays the results of the three tests to
resolve the ambiguity issue. Again, we use
the candlestick method when displaying
our results. We feel this is the most logi-
cal use of the data. In addition, because
our model is actually a lagging model
(we do not enter a trade until after the
EMA cross signal), the model itself has
a built-in degree of profit conservatism.
This simple model is an attempt to
catch the self-similar trends located with-
in the four-hour candlestick price set of
the spot EUR/USD. We know that these
trends occur, but we are not sure of their
magnitude or their temporal periodicity.
Using exponential moving averages as
our trend indicator, we capture a small
bite of each trend. Our goals are low cost
of execution, low risk and stable returns.
This model is meant to provide consis-
tent returns to add to the net return of
the firm; think trading this spot four-hour
model on five currencies at an average
yearly return of more than 15% with low
to no human capital cost.
Leslie K. McNew is the executive in resi-
dence, University of Scranton, Kania School
of Management. Reach her at lesmcnew@
gmail.com. Backtesting of this model was
provided by Hussien O. Saleh and Peyton
E. Veith of the University of Dayton School
of Business Administration. Model valida-
tion and supervisory work were provided by
Christine Muench, credit and risk analyst at
E.ON Global Commodities North America.
Additional model validation was provided by
Zachary Hadaway.
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SSH HH
CCCAAS ASH ASH H AS ASH H
CCCAAS ASH ASH H S ASH H
TTIO ON ON TTTION ON IO ONN ONN I NN O TTTION ON IO ONNNN I NN
L?? LL? LLL?? LL? ? LL? L? LL?? L?? LL? ? LL? L? L??
RRII RRRII RIICCCC RRII RRIIIICCC
?
EEEEEEEEEEEEEEEEEE ORRRRR OOORRRR OOR R OOOR RRR OOOOR OOOOOR OR OOORRRRRRRR O
BBBBBBBBBBBBBBBBBU BU BBU BU BBUU BUUUUU BUU BBBBBBU BB
?? LLLLLLL LL
EEEEEEEEEEEEE ORRRRR OOORRRR OOR R OOOR RRR OOOOR OOOOOR OR ORRRRRRR BBBBBBBBBBBBBBBBBU BU BBUU BUUUUU BU BBBBB
?? LLLLL LL
NN
GG
NNNNNNNN
GGGGGGGGGGGG
EEE
RRR ORRRRR OOOOOOR OOO
UU BBUUUU BBBBB LLLL
EEE
UU BBUUU BBBBB
EEE
UU BBUUU BBBBB
EEE
UU BBUUU BBBBB
EEE SSSS GGGNS GNS SSS WWH
EEE
WWH
EEE
WWH
EEE
WWH
ET ETT EEE S AA SSSS ET ETT EEE SS ET ETT EEE SS ET ETT EEE SS
EEEEEEEEEEEEE OOR RR OOOR ORRRRRRR OOOOOOOOR OR RRRRR OORRRR OOOOOOOR RR OOOOO
UUUUU BUUU BBBBBBBBBUUUUU BBBBBBU BBBBB LLLL L
EEEEEEEEEEE OORR OOR ORRRRRR OOOOOOOR RRRR ORRR OOOOORR OO
UUUUU BBBBBBBUUU BBBBBBB LLLL
EEEEEEEEEE ORRRRR OOOOOOOOR OR RRRRR OORRRR OOOOOOOR RR OOOOO
UUU BBBBUUU BBBBU BBB
EEEEEEEEEE ORRRR OOOOOOOR RRRR ORRR OOOOORR OO
UUU BBBBUUU BBBBBBB
EEEEEEEEEEE ORRRRR OOOOOOOOR OR RRRRR OORRRR OOOOOOOR RR OOOOO
EEEEEEEEEE ORRRRR OOOOOOOOR OR RRRRR OORRRR OOOOOOOR RR OOOOO
EEEEEEEEEE ORRRR OOOOOOOR RRRR ORRR OOOOORR OO
UUU BBBBUUU BBBBBBB
EEEEEE SSSSI S GGGGG
EE
EEEEEEE SSSSI S GGGGG
EE
EEEEEE SSSSI S GGGGG
EE
EEEEEEE SSSSI S GGGGG
EE
EEEEEEEEEEEE SSSI SI I SSSI I SSIGGGNS GNS GNS GNS GGGN GNS SSSS G SS WWH WH HEE
EEEEEEEEE SSI SI I SSSI I SSIGGGNS GNS GNS GNS GGNS SSSS G S WWH WH HEE
EEEEEEEEEEEE SSSI SI I SSSI IGGGGGGG
WWH WH HEE
EEEEEEEEE SSI II SIIGGGG
WWH HHEE
WWH WH HEE
WWH WH HEE
EEEEEEEEE SSI II SIIGGGG
WWH HHEE
EET TTSSS AAA S REEE RIS
EET TTSSS AAA S R
IS
EET TTSSS AAA S R
IS
EET TTSSS AAA S R
IS
EET ET TTTTT EET T ET EEEE SSSSSS AAA SSSSSS AA SSSSSS A S AA SSSS REEEE REEEE RI RIS RIS
EET ET TTTTT EET T ET EEEE SSSS AAA SSSS AA SSSSSSSSS REEEE REEE RI RI R
EET ET TTTTT ET T ET EEE SSSSSS AAA SSSSSSSS R RI RIS IS
EET ET TTTTT ET T ET EEE SSSS AAA SSSSS R RI RI
EET ET TTTTT EET T ET EEEE SSSSSS AAA SSSSSSSS R RI RIS IS
EET ET TTTTT ET T ET EEE SSSSSS AAA SSSSSSSS R RI RIS IS
EET ET TTTTT ET T ET EEE SSSS AAA SSSSS R RI RI RRI RRI RI RI
HHHHH
S NG I SSS
NNNNNNNN HHEN EN HHEN EN HEN EN EN EN HEN EN HEN EN EN EN
SSING N SSSSSS RISSS RISING IN I SSS RISING IN I IS SS RISII SSS RIS IS SS RISII IS SS RISII SSS RIS
AATTT AAAA
CCCC CC
AAAAT AT ATTTT AT AT ATT AAAAAT AT ATTT AAAT AT AAAAAAT AT ATTTT AT AT ATT AAAAT AT ATTT AAT AT
CCC CCC C CCCCCCC
OOP PPTT P OOP OP OPT PT PT OP OP OPT PT PT
BBBBBBB
AAAAAAAAA

OOOOOOOOOOOOOOOOOO
RRRII RRIIII RII RI RRII RICCCCCCCCCC RRII RRII RII RI RRII RICCCC
EE OOOR RRR OOO
BB
EEEEEEEE OOR RRRRR OOOOR OR RRR OOOOOOR O
BBBBBBBBBB
EEEEEE OR RRR OOOOR RRRR OOOOOR BBBBBBBBBB
WWWWWWWWAAAAAAAAAAA WWWWWAAA WWWWWAAA WWWWWAAA
TRRRA AA TT DDE DDE OOO
TTRRRA AA T DDE DDE OOO
TRRRA AA TT DDE DDE OOO
TTRRRA AA T DDE DDE OOO
WWWWWWWWWWWWWAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA WWWWWWWWWWAAAAAAAAAAAAAAAAAAAAAAAAAAAAA WWWWWWWWWWWWWAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA WWWWWWWWWWAAAAAAAAAAAAAAAAAAAAAAAAAAA WWWWWWWWWWWWWAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA WWWWWWWWWWWWWAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA WWWWWWWWWWAAAAAAAAAAAAAAAAAAAAAAAAAAA
TTO TO TO TO TTTTTO TTTTTTTT UUUSSSSSSSS US US USSEE EEE EEE
TTO TOO TTTO TTT UUUSSSSSSS US UU EEEEEEE
TTTTTTTTTTTTTTTT UUUSSSSSSSS US US USSEE EEE EEE
TTTTTTTT UUUSSSSSSS US UU EEEEEEE
TTTTTTTT UUUSSSSSSS US UU EEEEEEE
TRRRA A TR DDDDEE DE DE OOOOO
TRRR TR
EEE OOOOO
TRRR TR
EEE OOOOO
TRRR TR
EEE OOOOO
TRRA RA RA AA TRA TR TTR R TT A TTT DDDDE DE DE DE DDEE OOOOOOOO
TRRA RA RA A TRA TRR TTTT DDDDDE DE DE DEE OOOOOO
TRRA RA RA A TR TR TR RA T DDDDE DE DE DE DEE OOOOOOOO
TRRA RA RA A TR TRR T DDDDE DE DE DEE OOOOOO
TRRA RA RA A TR TR TTR R TT A TTT DDDDE DE DE DE DEE OOOOOOOO
TRRA RA RA A TR TR TR RA T DDDDE DE DE DE DEE OOOOOOOO
TRRA RA RA A TR TRR T DDDDE DE DE DEE OOOOOO
GGGGGGGG
W Y WW YYY WW Y YY GGGGGGG
WWWWW
GGGGGGG
WWWWW
GGGGGGG
WWWWW
GGGYYYYYYYY GGGYYYYYY GGGYYYYYY GGGYYYYYY GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG
W YY W Y W YYYYYYY W YYY W Y W YYYY W YYYY W YYYYYYYY W Y W Y W YYYY GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG
W YY W Y W YYYYYY W YYY WW YYYY W YYYY W YYYYYYY WW YYY GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG
WWW YYYYY W YY W YYY W YYYYYYYYY WW YY GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG
WWW YYYY W YY W YYY W YYYYYYY WW YY GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG
WWW YYYYY W YY W YYY W YYYYYYYYY WW YY GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG
WWW YYYYY W YY W YYY W YYYYYYYYY WW YY GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG
WWW YYYY W YY W YYY W YYYYYYY WW YY
TTTTOOOOOO UUUUU TTTTTTTTTTTTTTTTTTOO TO TOO TOO TOO TOO TTTTTTO TOOO TTTTTTO UUUUUUUUUUUUUUUS UUS UUSSS UUUS
TTTTTTOO TO TO TO TO TOO TTTO TOOO TTTO UUUUUUUUUUUUUUUUSS UUU TTTTTTTTTTTTTTTTTT UUUUUUUUUUS UUS UUSSS UUUS
TTTTTTTTTTTTT UUUUUUUUUUUUSS UUU TTTTTTTTTTTTTTTTTT UUUUUUUUUUS UUS UUSSS UUUS
TTTTTTTTTTTTTTTTTT UUUUUUUUUUS UUS UUSSS UUUS
TTTTTTTTTTTTT UUUUUUUUUUUUSS UUU
ASSSSSSSF F
OO OO OOK MMA!
G
BUUUUUUU BUULLLL L UUUUUUULLLL UU GG LL B TTER ET
NS NS NSSSS NNS NSSS WWH H WHH WWH H WHH WWH H WWH H WHHHHHHHH GES
TT S
F F
O F O OL
DD
OOOOOO
?
DDDDO OOWWNN? ?
DDDDOWNN?
CCCCEEEEES ESSSS D
CCCEESS DOW OW
OOO
??
DDDD
EEERRRRRRRRR RRRRRRR WWWWWWWWWW
DDDDDO DOWWN? NN? N? ?????
DDDDDOWWN? N? ????
RRMM RM RRM M
CCCEEEESS CCCCCCCEEEEEESSS DD
CCCEESS CCCCEESS DD
EEEEEEE
OOOW OOOW
E CCCCCCCEEE CCCEE CE CEE CCCCCCCEE CE CE CCCCCCCEEEE CCCCCCCEE CCCCCCCEE CCCCEE CCCCEE CCCEE CE CE CCCCCCCEE CCCCCCCEE CCCCCCCEE CE CE
TT
CCEE CCCCCCCCCCCCE CE CEE CCCE CCCCCEE CCCCCE CEE CCCEE CCCCCCCCCCEEE CCE CCCCCEE CCCCCE CE CE CCEE CCCCCCCCCCCCE CE CEE CCCCCCCCCE CEEESS EESSS E DDDDDDO
EESS ESS E DDDDDO
ES D S D EES ESSS DDDD ES D S D
ER ER
DDDDDDO OWN WN? NNN? WN WN WWWN WWW DDDDOWN WNNNN WWWWWN WW DOWN
DOWN
DDDD WN WNNN WN WN WWWN WWW DOWN
DOWN
EEESSSS EESSS E D EESSSS ESS E D ES D S D EEESSSS ESSS D ES D S D
PE PE
DDDDDO DO DO O DDO DDO DO OOO DOO DDDO DDDD WWWWWWWW DDDDDO DO O DO DDO DO OOO DOO DDO DD WWWW DOW DOW DDDDDDO DO O DDO DDO DO OOO DOO DDDO DDD WWWWWWWW DOW DOW
AP AP
S EEES ESSS EESSSSS EESSS EES ESSS ES ES ES E DDDDDD S EEESSS EESSSSS EES ESSS ES ES ES E DDD ES D ES D S EEES ESSS ESSS ESSS EES ESSS ES ES ES E DDDDDD ES D ES D EEEEEEEEEEEEEEEEEEEEEEEE
TTTT
EEEEEEEEEEE
RR OR OR WO WO WW
????????????
RRMM
EEEEDD A D A D C FFFFFE FE E HHHH TC C TCCCHHHHHHHHHH CCCCHHHHHHHH T HHHHHHHH ON HHHHHO HO TTT ATT AT AT AT AT AT AT AT AT AAT AT AT AAT AT AAT AT AT AT AT AT AT AAAT AT AAT AT AT AT AT ATT AT AT AT AT AT AT AT AT AT AT AT AT AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
HH
AAAT AT AT AT AAAT AT AAT AT AAAAAT AAAAT AAAT AT AAAAT AT AAAT AT AAT AAAAAAAAAAT AAAT AT AAAAT AT AT AT AT AT AT AT AAAT AT AT AT AT AT AT AT AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
OW O TCCCC TTTTTTTC CCCCCCCCCCCCC TTC CCCCCCCCCCCCCC TTC CC TC CC TC C TC CC TTC TC TC CCC TTCCCC TC T HHHHHHHHHH TTCCCCCCCCCCC TTC CCCCCCCCCCCCC TTC CCCCCCCCCC TC TC CCCCCC TCHHHHHHHH TCH TCH TTC CCCCC TTC CCCCCCCCCC TC CC TCC TC C TC CC TC TC TC CCCCCCC TC T HHHHHHHHH TCH TCH OO TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT FF HHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHED ED EE TT CT CT AC ACTION TION
LL A CCAA CCCCAAAAAS CCCCAAAAAS CCAAAS CC S L CCCCCCCCCCCCCCCC LL LL CCCCCCCCCC E C CCC E C E C C E C CCCCCCCCCCCCC E C CC E C CCC E C E C E C CC E C C EEEEEEEEEEEEEEEEEEEE SSSSSSEEE SE SSSSSEE SE SSSSSSSSSEEEEEEEEEE SSSSSEEEEEEE SSSSSSSEEEEEEEEEE SSSSSEEEE SSSSSSSEEEEEEEEEE SSSSSSSEEEEEEEEEE SSSSSEEEE SE SE SE SE SE SE SE SE SSSSSSSSEEEEEEEE SSSSSEEEEE SSSSSSSEEEEEE SSSSSEE SSSSSEE SSSSSSSEEEEEE SSSSSEE SE SE SE SE SE SE SSSS US USSSS USS US USSS USS US USSS US USSS USSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS
AA AAS AAS AS AAS AS AAS AS AAAS AS AS AS AS AAS AS AS AS SSSSSSSSSSFFF SH SHH SH HHHHH SH SHH SH HHHH SH SH SH SHH SH HHHH SH SHEECT ECT EE FF FF E OREXX OOOOOOOOORE ORE OO XX
LLLO LO LO LO LO LO LLO LLO LO LLLLO LLLO LLLLO
I
LL OK K OK OK OO OO OK K OK K MMMMAAAA MAAAAA MAAA MAAA MAA MA MA MAA MA M MMMMAA!!!!!!!!!!!! !!
LLL LL? L? L??? LL LL L? L???GGGGGGGGGGGG ?
BBBBBBBBBBBBBBBB
??
BBBBBBBBBBBBBBB
??
BBBBBBBBBBB
BBU BBBBU
BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB
BB
BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB
GGGG IL IL UULL UL UUL UL UUULLL? LL L????? L UUULLL LL L????? L ULL?
ULL?
UUULLL? LL L??? L ULL?
ULL?GGGGGG DIN IN ?????? L?? LL??? L? LL?
UU BUU BUU BU BUUU BBUUUU BUU BUUU BUUUUU BUUUUUU BUUUUUUUUUUUUUULLL? LL L?? LL? LL? LL? L? LLLLL LL L LL? LL? LL? L? LL? LL? LL? ? LL? LL LL? LL? LLL LL? L?? LL? LL? LL? ? LL LL? L? L? LL? L? LL? LL? LLL? LLLL LL LL? LL? LL? LLLL? LL LL?
UUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUULLL LL L?? LL? LL? LL? L? LLLL LL? L? L?? LL? LL? LL? ? LL? L LL? L? LLL LL? LL? LL? ? LL LL L ? L?? LL? LLL? LLLL LL LL? LL? LL? LLLL? LL LL?
BULL?
ULL?
U BUU BU BU BUUU BBUUUU BUU BUUUUUUUUUUUUUUUUUUUUUULLL? LL L?? LL? LL? ? L? LLLLLL L LL? LL? LL? L? LL? LL? ? L? LL? LLL LL? ? LL? LL? LL? ? LLL?? L? L ? L? LL? LL? LL? LLLL? L? L? LLL ? LL LL?
BULL?
ULL?GG NG N ???? ???????????????????? L UI UI UU BUUUUUUUUUU BUUUU BUUUU BUU BUUUU BUU BBUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUUU BUU BUUUU BUU BBUUUUUUUUUUUU BUU BBBBBBBBBBBBBBBBB TTT TTTEEERR EET ET EEEEEEETTER TTER ET ET
GG S VVVERA E AV AV V AAAV A NNNNNNNNNNNNVV W E W E W E W E WWWWWWWW EE WWWWW EE WWWW EE WWWW EE WWWW EE WWWW EE WWWW EE WWWW E WW E WWW E WW E WWW E WW E WWW E WW EEN EN EN N EN EN EN N EN EN EN EN EN EN EN EN EN EN EEE
NS NS NSSS NNS NSSS NNS NSSS NNS NSSS NS NS NS NNNSS NNSS NNSS NNSS NS NS NS NS NS NS NNSSSSSSS NS NS NNSSSSSS NS NS NSSSSS NS NS NSSSSS NS NS NSSSSS NS NS NSSSSS NS NS NSSSSS NS NS NS NS NS NS NS NS NS NS NNSSSSSS NS NS NNSSSSSS NS NS NSSSSS NS NNSSSS NS NNSSSS NS NS NSSSSS NS NNSSSS NS NS NS NS NS NS WWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWH HH WHE WH HH WHE WH HH WHE WH HH WHE WH WH WH HH WHHH WHHH WHHH WH WH WH WH WH WH HHH WWH HH WWH HHHEE WH HH WH HH WWH HHHEE WH HHH WWH HH WWH HHEE WH HH WH HH WWH HHEE WH HHH WWH HH WWH HHEE WH HHH WWH HH WWH HHEE WH HH WH HH WWH HHEE WHE WHE WHE WHE WHE WHE WHE WHE HHH WWH HH WWH HHEE H WH H WWH HHEE HHH WWH HH WWH HEE H WH H WWH HEE H WH H WWH HEE HHH WWH HH WWH HEE H WH H WWH HEE WHE WHE WHE WHE WHE WHE EEEEEEEEEE HHHHHEEEEEE HHHHEEEEEE HEEEE HEE HEEEE HE HE HEE HEE HEE HHHHEEEEEE HHEEEEE HEEEE HEEE HE HEE HEEE AAAA NN NN N NN NNNN NNNNNNN NNNNN NN NVVVVVVVV AAAAAA AGES GES ERAG ERA
SS AAAAAAAA SS AAAAA SS AAA SS AAAAA SS AAAAA SS AA SS AA SS AAAAAA SSSS AAAAA SSSS A SS AAA SSS AAAA S AAA SS AA AA SSS AAA SSS AAA S AA SS A SS AAA SSS AAA SSS AAA SSSS AAA SSS AAA SS A S A S A S A S A S A S A S A SS AAA SSS AAAAAAA SS AA AA SSS AAA SSS AAAAA SS A SS AAA SSS AAA SS AAA SSS AAA SSS AAA SS A S A S A S A S A S AARE ARE AR AR AR AR ARRRRRRRRR AAAAARRRRRRRRRRRRRR AAAAAAAAAARE RRE RE RRRRRR AAAAAAAAARRRRRRRR AR AR AR AR ARRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRREEEEEEEEEEEE EEEE EEEEE EEEEEEEE EEEEEE EEEEEEEE EEEEEEEEEEEEEEEEEEEEEEEEE
AAA MMA A MA A MA MMAAAAAAA MA AAAA
SSSSSSSSSSSSSSSSSSSSSS RRRRRRRRRRRRRRRRRRIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RIS RI RIS RI RIS RI RIS RI RIS RI RIS RI RI RIS RI RIS RIS RI RIS RI RI
MMMM
SSSSSSSSSSSSSSSSSSSSSS
AAAAAAAAATT TT TTTTTTTTTTTTTTT TT TT AA AAAAAAA EEEEEEERS RS ER ER
OO SSSSSSSSSS SS BE BBE BE BBE BE BE BBE BE T TTT TT TTT TT TTT T T T T T T SSSST T T TOOOOO BBEST EST EST ST EST ST OLS OLS TOO TOO OO TO TO TO TO FFFFFFFFFFFFFFFFFOR ORRR OORR OR OR OR OR OOR OR
OORT RTT GGGG PO PO P SSS MEASU MEASU URING URING MEASU MEAS OOORT ORT PO PO FFFFF OO IO IO LIO LIO OL OL
FFOO NCE NCE NNNN ORMAN ORMAN OO
T BER BER TEMB SEPT SEP SEPT SSSSSSEEEEEEPPPPPP BER BER TEMB TEMBBER BER TEMB TEMBBER BER TEMB EMB TTTT 33 2013 2013 2013 2013
FU FU FU FUTTTTTTUUUURE RE RE RESSSSSSMMAG.CO AG.COMMMM
AAAAAAAAAAAAAAA
NN
AA
NN
DDDDDDDDDDDDDDDDDDDDDDDDD
AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
NNNN
DDDDDDDDDDDDDDDD
AAAAAAAAAAAAAAAAA
NN
AAAAAAAAAAAAAAAAAAAAAAA
NNN
AAAAA
NNN
NNNGGGGG G
EEE
AAAAAAAAA
NNNN
NNNNNNNNGGGGGG G NNNNNNNGGGGGG
EEEEEEEEEEEEEAAAAAAD AD D AD AAD AAAAAAD AAAAAAAA EEEEEEEEEEAAAAAAD DDD AAAAD AAAAA
AAAAAAAA
N
A
N
A
N
A
N
AAAAAAAAA
NNNN
AA
NN
AA
N
AA
NN
DDDDDDDDDDD
AAA
DDDDDDDD
A
DDDDDDDD
AA
DDDDDDDDDDDDD
AA
DDDDDDDDDDD
A
DDDDDDDDDDDDDDD
AAAAAAA
DDDDDDDDDDDDDD
AAAAA
DDDDDDDDDDDDDDDDDD
AAAAA
DDDDDDDDDDDDDD
AAA
SSS FF S TTTI SIFTI SSS FF S TTTI SIFTI
EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE
SSSSSSSI SSI IFFF S FFFFF I SIFF S F S TTTTTIIN N TTTTTTTTTTIIN TT SSSI IFF S FFFF I SIF SS TTTIIN N TTIIN T SIFTIN SIFTIN SSIFF S FFFF SIFF S F S TTTTTIIN N TTTTTTTTTTIIN TT SIFTIN SIFTIN
BR BBR BR BRE BRE BR RRE BRE BR BBR BR BR RE BBBR BBR BR BR RE BBBRE BRE BR BBR RRRE BBRE BRE
DDDDDDDDDDDDDDDDDDDD
KKKKKKKKKKK
EEEEEEEEEEEE
RRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRR
DDDDDDDDDDDD
KKKKKKKKK
EEEEEE
RRRRRRRRRRRRRRRRRRRRRRRRRRRR
DDDDDD
IIIIICCCCCCCCCCCCCCCCC
KKKKKKKKKKKKKKKKKKKKKKKKKKKK
EEEEEEEEEE
DDDD
IIIIICCCCCCCCCCCCCCC
KKKKKKKKKKKKKKKKKKKKKKKK
EEEEEEE
SS EE DDAA D
NNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNN
AVIE AVIE A
AAAAAAAA
BBBEE BBBBEE
DDDDDDDDDDDDDD
AAAA
DDDDDD
AAA
D
A
D
A
DDDDDDDD
AAAA
D
A
D
AAAA
N
A
VVVVVVVVVVVVVVIIEEEEEEEEEEEE BBBEEENN DDDDDDDDDDDDDAAAAAAAAAA
DD
KK
EE
KK
EE
DD
KKKK
IIICCCCCCCCCC
KKKKKKKKKKKKKKKK
EEEEEEEEE
IIICCCCCC
KKKKKKKKKKKKK
EEEEEE
IIICCCCCCC
KKKKK
EEEEEEEE
IIICCC
KKK
EEEE
BBBB
DDD
EN EN
DD
IIIICCCCCCCCCCCCC
KKK
IIICCCC
KK
D
IC
K
IC
K
DD
IIIICCCCCCCCC
KKK
D
IC
K
IC
K
IIIICCCCCCCCCCCCCC
KKKKK
IIICCCCCCCCCC
KKKKK
IC
K
IC
K
IIIICCCCCCCCCCC
KKKKK
IC
K
IC
K
DDDD
NNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNNN
KKKKKKKKK
EEEEEEEEE
KKK
EEEEEEEE
K
E
K
E
KKK
EEEEEEE
K
E
K
E
KKKKKKKKKKKKKKKKK
EEEEEEEEEEEEE
KKKKKKKKKKKK
EEEEEEEEEE
K
E
K
E
KKKKKKK
EEEEEEEEEEEEE
K
E
K
E
AAAAAVVVIIEE AVIE AAVV
EEEE
RRRRRRRRRRRRR
EE
RRRRRRRRRRRRR
E
RR
EEE
RRRRRRRRRRR
E
RR
EEEEEEEEEEEE
RRRRRRRRRRRRRRRRRRRRRRRRRRRRRRR
EE
RRRRRRRRRRRRRRRRRRRRRRRRRRR
E
R
E
R
EEEEEE
RRRRRRRRRRRRRRRRRRRRRR
E
R
E
R
EEEEEEEEEEEEEEEEEEE
NNN
AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
BBBBBBBBBBBBBBBBEEEEEEEEEEEE BBBBBBBBBBBBBBEEEEEEEEEENNNN EN
DDDDDD
AAAAAAA
D
A
DDD
AAAAAAA
D
A
DDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDD
AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
DDDDDDDDDDDDDDDDDDDDDDDDDDDDDDD
AAAAAAAAAAAAAAAAAAAAA
DDDDDDD
AAAAA
DDDDDD
AA
DDDDDDDDDDDDDDDDDDDDDDD
AAAAAAAAAAAAAAAAAAAAAAAAAA
D
A
D
AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
NNNNNNNNNNN
AAAAAAAAAAAAAAAAAA
SSS SSSSSSS SSS
DDDDDDDD
ICCCCC
DDDDDDDDDD
IIIIICCCCCCCCC
K
DDDDDDDD
IIICCCCCC
K
OOO
YYY
T N ON T
N E N N HE HE N HEE EW W
EW W
EW W W W W WOR O
D
ORLDD
OOOOOOOOOOOOOOOOOO
RRGGGGGGGGGY YYYYY GG RRRRRRGGY Y GY GGGGGGGY YYYY GY GGGGGGY YYYYY GGGGY Y GGGGGY YYY GGGY GGGGY GY GGGGGY YYY RRRRRRGY Y GY GGGGGGGY YYYY GY GGGGYYYYYY GGY GGGGGYYY GGGY GGGY Y GGY
ON NN TTHE HE H
OO
NER
ENER NER NER RRR
E
ON T ON T N T N TTTT ON T NN T ON T N HE N HE N HE N E HE N HE N HE HE HE HE HHE N HE N HE HE N HEE EW W
EW W W
EW W W W WW
EW W
EW W W
D
OOO
D
ORL ORL RLD
ORLD D
O
ENER
ENER NER NER RRR
ENER RR ER R
ON N T N T N TTT ONNN T O T N HE N HE N HE N E HE N HE N HE HE HE HE HHE N HE N HE HE N HEE EW W
EW W W
EW W W W WW
EW W
EW W W
ORL ORL LD
ORLD D
O
NER
ENER NER NER RRR
ENER RRRR
T
DDDDDDD
I
DDDDDD
I
D
IIIIIIICCCCCCCCCCC
D S AND
BB
WWWWWWWWWWWWWWWWW
KK
OOO
D
ORLD
OR RLD RL LD D
OR D RL LD D
ORLD
ORLD FREE ARKET MA S
DDD
K
DDDDDDDDDD
IIIICCCCCCCCCC
KKKKKKKKKKKKKKK
EEEEEEEEEEEEEEE
RRRRRRRRRRRRRRRR
DDDDDDD
CC
KKKKKKKKKKKKKK
EEEEEEEEE
RRRRRRRRRRRRRR
DDDDDDDD
IIIICCCCCCCCCCC
K
DDDDDDDD
IIIICCCCC
K
DDD
KKKKKKKKK
EEEEE
RRRRR
DD
KKKKKKK
E
RRRRR
DDD
IICCCCCCC
K
DDD
IICCC
K S D
DDD
KKKKKKKKK
EEEEE
RRRRR
DD
KKKKKKK
E
RRRRR
DDD
IICCCCCCC
K
DDD
IICCC
K TT
DDDDDDD
I
DDDDDD
I
DDDDD
I
D
I
D
TT
DDDDDDDDDDDDDDDDDDDDDDDDD
IIII
DDDDDDDDDDDDDDDDDD
I
DDDDDDDDDDDDDD
II
D
I
DDDDDDDDDD
II
DDDDDDDDD
I
DDDD
I
D
I
D
IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIICC
LL
CCCCCC
KK
CCCCC
KK
C
K
C
K
CCCCC
KK
C
K
C
K
CCCCCCCCC
KKKKKKKKK
CCCCCCCC
KKKKKKKKK
CC
KK
CC
KK
CCCCCCCCCCCCCCCCCCCCCCCCCCCC
KKKKKKKKKKKKKKKKK
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T
he calculator was a major leap
forward in trading strategy imple-
mentation, not just in terms of
how it streamlined the work of profession-
al traders, but in how it allowed non-pros
to use advanced trading techniques. As we
saw in our first installment in this series,
the calculator soon was supplanted by the
computer and purpose-built software that
did the heavy lifting for you.
Profit Taker was the first commercial
trading platform that could backtest
trading strategies, but it offered a single
system for which the user only could
change parameters. Soon, traders could
not only test and modify trading
systems on their own, but they were able
to start from scratch, applying their own
ideas to the markets. Walk-forward test-
ing, portfolio-based analysis and real-
time optimization followed.
Today, this path has led us to fully
automated backtesting and algorithmic
trading, but this wasnt necessarily a
smooth progression, and it didnt hap-
pen without a few detours and speed
bumps. Here, well look at the software
and technology that created the frame-
work that most are familiar with today.
(Note that some of this software is still
commercially available. This historical
account is not intended to be a review
of current features, just a look at how
ideas, tools and analysis have evolved in
an effort to understand what the next
steps may be.)
Excalibur
Excalibur Testing Software by Futures
Truth was one of the first full-featured
backtesting platforms. The software
development process started in 1985
on a CROMEMCO 3 computer utiliz-
ing FORTRAN IV. The computer had a
whopping 64k of RAM and used 5-1/4-
inch floppy drives. Trader John Hill
spent nearly $20,000 for the computer
and hard drive an enormous sum for
a machine with the fraction of the com-
puting power available today for a few
hundred bucks.
Wayne Andrews, a close friend of
Hills and a computer scientist, was
instrumental in helping Hill acquire the
CROMEMCO, as well as providing his
own personal tick level price data for Hill
to use. (The data eventually grew into a
business of its own, sold by Tick-Data out
of Colorado and Commodity Services
Incorporated out of Florida.)
During this same time, the Apple
Macintosh was rising in popularity and
power. John Fisher, who Hill met while
looking at computer books at a local
Computerland store in 1985, liked the
unique graphic user interface, or GUI,
and ported Excalibur to a Macintosh
68020. This helped solve a major prob-
lem for Hill. As he explained to Fisher at
the time, he wanted a piece of software
simple enough where he could code his
trading ideas and have the software pro-
duce performance metrics on those ideas.
Hill had been doing this by hand, but his
many ideas quickly outgrew this labori-
ous approach.
At the time Excalibur was invented, it
was the only retail-oriented commercial
software to support completely custom,
built-from-scratch trading systems. The
synergy between a veteran trader and vet-
eran programmer was tremendous. Their
efforts gave birth to software that was a
substantial achievement in the world of
algorithmic trading and testing.
There were three key components
Trading system technology advanced quickly in the late 1980s and early 1990s,
establishing paradigms that persist today. Heres a look at where we stand and
where we might go.
Trading system analysis:
Then and now
BY MURRAY A. RUGGI ERO JR.
TECHNOLOGY & TRADING
T R A D I N G S Y S T E M E V O L U T I O N
System trading comes of age
How technology shaped market analysis
Software evolution and development
For more from Murray, go to
futuresmag.com/Ruggiero
that made Excalibur ahead of its time:
Portfolio analysis, daily and intraday
testing and testing on contract data
that incorporated rollovers. This last
component meant that the software
didnt have to rely on back-adjusted
time series. Because futures contracts
have finite lives, traders often stitch
multiple contracts together for con-
tinuous long-term testing. This cre-
ates either unnatural gaps in the series
when liquidity shifts from one contract
to the next or the individual contracts
have to be adjusted higher or lower to
eliminate the gap. For Hill, personally,
this last feature was critical. Many of his
strategies depended on individual con-
tract behavior that he believed was lost
in back-adjusted data.
However, it wasnt all perfect. While
the Apple operating system and its
user-friendly GUI made development
easier, the language was a derivative of
FORTRAN and did require program-
ming knowledge (see Speaking in code,
right). Also, early versions of the software
did not incorporate graphics or take full
advantage of the visual power of Apples
system. A sample performance report can
be seen in Raw results (page 36).
George Pruitt joined the Excalibur
team in 1989 to help develop a GUI inter-
face for the software and also a graphing
package. Without the ability to graph the
data, including indicators and trades,
most found it difficult to validate their
trading algorithms. With his experi-
ence in Pascal and the C programming
language, Pruitt was able to work with
the Macintosh platform easily. Within
a year, the complete Excalibur software
was available for public consumption.
Futures Truth still uses the software
today to help develop and test trading
ideas and systems for their commod-
ity trading advisor and the publication,
Futures Truth.
Trading recipes
In 1992, Robert Spear released a back-
testing platform with trade management
and portfolio capabilities called Trading
Recipes. This was a language-driven soft-
ware tool written for MS-DOS. It was
designed to develop, test and execute
rule-based mechanical systems.
Trading Recipes featured a modular
design that encouraged users to break
down a trading system into small, man-
ageable programming tasks. For exam-
ple, one area was for defining indicators
and values, another was for how to enter
a trade and yet another was for defining
how to manage and exit a trade. Values
were arranged in columns. To capture
a simple moving average of the past 20
futuresmag.com 33
This is an example of a system programmed using Fortran for Excalibur.
SPEAKING IN CODE
Source: Excalibur
closing prices in Column 1, you would
write:
COL1 = SMA[CLOSE, 20]
To go long if the previous days close
was greater than the value in that days
Column 3, you would write:
IF CLOSE[1] > COL3[1] THEN
BUYOPEN
Other features included performance
reports, a spreadsheet-like display of val-
ues used in your trading systems, numer-
ous pre-packaged indicators and the abil-
ity to handle many different trading data
formats.
One strength of the program was its
what-if testing abilities. Say that a par-
ticular sector (stocks or futures) gets
hot and that your system starts adding
positions across that sector. As the sys-
tem adds those positions, the portfolio
accumulates sector risk. You conceivably
could end up with a highly correlated
portfolio consisting of, for instance,
too many grain commodities. Trade
Recipes included purpose-built tools
that measured that portfolio risk via a
GROUPRISK variable. Other risk man-
agement tools were:
Equity available at the time each new
trade
Amount of risk and number of posi-
tions across the portfolio
tions across a system
tions within a sector
tions for a particular stock or future
tions for long trades
tions for short trades
Amount of risk and other metrics for
a trade under consideration
Margin requirements
Start-up capital and starting date
Current market volatility
User-defined metrics
Trading Recipes was a powerful pro-
gram. Its risk-management metrics
remain some of the most impressive in
retail market software and it is one of the
biggest leaps in the technology for indi-
vidual traders. Unfortunately, Trading
Recipes fell into a trap. Remember the
powerful spreadsheet software Lotus 1-2-
3? Maybe not. Thats because Lotus, like
Trading Recipes, didnt create a Windows
version until it was too late. Trading
Recipes wasnt available in a Windows-
platform until 2004-05. By then, many
users and potential users had found
another trading tool.
Systems for the masses
Brothers William and Rafael Cruz came
to the United States together from Cuba.
They trained to become classical violin-
ists together. Although they became quite
accomplished, professionally performing
classical music was not in their future.
Fate had other ideas.
When Bill was 16, a futures broker
called Bills father, but Bill took the call.
He listened. He learned about futures
trading and it took hold. For two years,
he studied everything he could and when
he turned 18, both he and his brother
Ralph pooled $2,400 and started trad-
ing pork bellies.
They started well but ultimately lost
all the money in a month or so. They
still believed in trading and knew there
must be a better way. They went to the
library, got pork bellies data and made
hand charts. They then used these charts
to test ideas. They added arrows up for
buy and down for sell to record and
test ideas. This cluttered up their charts,
so they started writing on clear plas-
tic sheets that they positioned over the
charts. This was around 1979.
In college, Bill met Kip Irvine, a music
major with a minor in computers. In
those days, it was difficult to get your
compositions played. Bill, being a skilled
violinist, agreed to play Irvines compo-
sitions if Irvine helped him automate
his trading strategy analysis. However,
programming the strategies took a lot
of time, and Bill had more ideas than
TECHNOLOGY & TRADING continued
Excaliburs performance reports were straight to the point, providing the raw hypotheti-
cal performance metrics and not much else. As you can see, the software could handle
portfolio-based analysis.
RAW RESULTS
Source: Excalibur
Irvine had time.
Bill decided that working with a pro-
grammer was too time consuming. He
needed a way to test his strategies him-
self without having to learn how to code.
This was the seed of the development of
EasyLanguage a collection of intuitive
commands and standardized syntax that
closely mimicked natural speech.
Bill and Ralph started a company and
began hiring talented people to program
the software. The original development
team included Irvine, Sam Tennis, Peter
Parandjuk and Liren Ji in engineering.
Ruben Triana and Darla Tuttle were in
product management.
For a brief time, they tried to market
and sell trading systems, but they soon
discovered that the real opportunity
was in selling non-technical clientele
the tools to program and test their own
strategies. They released System Writer
one week before Black Monday in 1987.
Two features characterized System
Writer. The first was that all strategies
processed one bar at a time, with offset
Bar 0 being the current one. In addition,
System Writer didnt just let traders write
their own rules. It allowed them to write
their own functions that they could call
as often as they liked across all their
strategies. This simple feature added an
enormous amount of flexibility and scal-
ability to the software.
Early going was tough for this start-up
company, then called Omega Research.
Despite the existence of other trading sys-
tem software, backtesting was still new to
many. However, over time the popularity
of personal trading system development
grew, and for many System Writer was
the only viable alternative.
System Writer Plus was released in
1989, and it was well received. It was
much faster than System Writer and
incorporated optimization and new
charting features in innovative ways.
Bruce Babcock of Commodity Trader
Consumer Reports (CTCR) was an early
fan. Babcock, writing as a contributor
to Futures, said this in his 1989 review
of System Writer Plus: System Writer is
the system trading software equivalent of
putting a man on the moon.
In 1991, System Writer Plus was reborn
as TradeStation. TradeStation added
intraday analysis and a real-time element.
Now, small traders had a user-friendly
way to analyze the markets in real time.
The next major breakthrough was
in 1993. Reuters approached the Cruz
brothers to buy them out. Bill and Ralph
were enjoying the excitement and growth
of their business and said they werent
interested in selling but that they would
license it. Reuters said no. A few years
later, Dow Jones Telerate came knock-
ing. Again, Bill and Ralph said no sale
but that a license would be available.
Dow Jones Telerate first balked but then
returned to make a deal a year later. They
launched TradeStation as a premium
service to institutional clients in 1996.
Perhaps the first time in the history of
trading system software, a major product
that was designed with retail clients in
mind had trickled up to professional
traders.
In 1996 Sal Sredni joined the com-
pany as vice president of operations. In
1997, Omega Research went public and
renamed the company TradeStation. In
1999, TradeStation launched an online
version to deliver data over the Internet
and, in 2001, TradeStation 6.0 added
real-time execution and brought short-
term intraday trading off the floor.
With retail traders now able to day-trade
from their desktops, the fate of pit trad-
ing was essentially sealed. Also in 2001,
the company launched TradeStation
Securities, a stock brokerage firm. The
testing, order generation and native exe-
cution were fully integrated in 2003 with
TradeStation 7.0. Forex analytics fol-
lowed, and then TradeStation 8.0 added
options execution. In 2005, TradeStation
became a self-clearing options firm.
Another aspect that helped grow
TradeStation was a third-party solution
provider network. Managed by Tuttle,
the network featured dozens of profes-
sional programmers who expanded the
capability of TradeStation and its sister
applications. An entire industry grew up
around the software, including seminars,
publications and user networks. It all
contributed to the penetration and suc-
cess of TradeStation.
The Cruz brothers retired from
the company in 2007, and Sredni has
taken over as CEO.
Artificial intelligence
While TradeStation brought system
trading design and execution to the
masses, the native version of the soft-
ware was built around mathematical-
based indicators that had been in use
for decades moving averages, oscilla-
tors, price patterns, statistics, etc. For
many, the real future was in advanced
analysis strategies, often lumped under
the broad and hard-to-define heading of
artificial intelligence.
In 1988, this author co-founded a com-
pany called Promised Land Technology.
A neural network add-in was developed
for Microsoft Excel called Braincel. Many
clients wanted to use Braincel to pre-
dict stock and commodity markets. We
obliged and, as such, got involved in the
trading business. We built a backtesting
add-in for Excel called Futures Builder.
Users programed their ideas in Visual
Basic for Applications. The add-in pro-
vided performance reports and generated
next-day orders.
More important, though, neural net-
work tools were integrated with trading
system strategies. One system that was
packaged with Futures Builder was a
30-year Treasury bond system that used
futuresmag.com 37
System Writer Plus was one of the most
important advancements in bringing sys-
tem trading to the retail trading masses.
ADVANCING THE BREED
Source: Omega Research, Inc.
Technology & Trading: Ruggiero continued on page 41
T
rading is an easy business to get
into: No degrees or specialized
training are required, start-up
costs are relatively low and it can be done
from the comfort of home. The logistical
ease of getting started, however, should
in no way imply that becoming a profit-
able trader is simple.
Most experienced traders would attest
that success depends on many factors
including hard work, research, planning,
discipline and being a lifelong student of
the markets. As with many businesses,
there are certain principles that, when
followed, can greatly increase the chances
that a trader will be successful.
Here, we explore 10 timeless rules that
are an important part of successful trad-
ing, no matter the techniques, markets or
time frames you trade.
1:
Treat trading like
a business
As a hobby, trading quickly
gets expensive: Just dab-
bling can prevent traders
from gaining the proficien-
cy and experience they need to become
consistently profitable. As a job, trading
can be discouraging because there is no
such thing as a regular paycheck: Traders
can work 10-hour days all week and end
up empty handed on Friday. Rather than
thinking in terms of a hobby or job, it
is important to approach trading as a
business.
Like any business, trading incurs
expenses, losses, taxes, uncertainty and
risk, and these factors must be taken into
account. The key to developing a success-
ful trading business is good planning,
both for the overall business and for
the actual trading. Traders who want to
weather the learning curve and stay in the
industry for the long haul will put in the
time and effort to research and develop
strategic plans that encompass short-
and long-term goals and the details of
trading: What will be traded and how it
will be traded.
2:
Always use a trading plan
A new trader would
not have to look far to
come across the well-
known saying, Plan your
trade and trade your plan.
The first part plan your trade is
accomplished through a trading plan: A
written set of rules that defines entry, exit
and money management criteria. Good
trading plans often are based on experi-
ence or market observations and developed
through research and exhaustive testing.
While it is time-consuming and challeng-
ing to develop a profitable plan, a major
advantage is the consistency it delivers.
The second part of the adage trade
your plan is, for many traders, as dif-
ficult as developing a trading plan. Trade
your plan means following your trading
plan exactly, without making excuses,
second-guessing or otherwise deviating
from the rules that were so painstakingly
created. Taking trades that fall outside
the plan is considered bad trading, even
if they turn out to be profitable.
Often, invalid trades are the result of
our emotions: Fear, greed, impatience,
overconfidence, etc. Other times, they
stem from our mistakes, or pilot error
as it is often called. Trading your plan
is not as easy as it sounds, and most
traders must work hard to develop the
necessary skills over time. Consistently
following the rules of an effective trad-
There are many ways to trade. Regardless of your approach, following these
guidelines will put you ahead of the game.
10 rules successful traders
follow
BY JEAN FOLGER
TRADING 101
B E S T P R A C T I C E S
Roadmap for trading success
Rules are strategy agnostic
Trading for the long-term
For more from Jean Folger,
go to futuresmag.com/Folger
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ing plan is part of what allows a trading
business to make money over time.
3:
Risk only what you can
afford to lose
While traders plan on
making money (that s
why people trade, after
all), it is important to
acknowledge that it does
not always work out that way. It is essen-
tial that the money used to fund a trad-
ing account be what can be lost with-
out impeding the ability to meet other
financial obligations. Losing money is
difficult enough, but it is even more so if
it is capital that never should have been
risked in the beginning.
It should go without saying that a trad-
ing account should not be funded with
money earmarked for the kids college
funds, the mortgage or day-to-day living
expenses. Aside from being a terrible idea
that can lead to disastrous financial loss-
es and unfortunate circumstances, trad-
ing with money that is not expendable
can put a trader under an extraordinary
amount of pressure to succeed.
Often, this type of pressure leads to bad
decisions and, ultimately, losses. Prior to
trading, it is important to make an honest
assessment that the money in the trading
account is truly expendable. If it isnt, trad-
ers should keep saving until it is.
4:
Use technology to your
advantage
Electronic trading has
been around for a while,
but the tools that are avail-
able to modern traders are
constantly improving and
evolving. Faster computers, high-speed
Internet, all-electronic markets and
direct-access trading all have helped the
independent retail trader. Additional
technologies, such as trade automa-
tion, innovative market research tools
and the ability to test trading systems
accurately on historical data have given
traders even more powerful tools. Mobile
trading apps make it possible to scan for
trading setups, enter orders and manage
positions from a smart phone or tablet,
giving traders a tremendous amount of
previously unseen flexibility.
Using outdated technology can put a
trader at a severe disadvantage. Trading
is a competitive business, and it is best
to assume that other market partici-
pants are taking full advantage of avail-
able trading technology. As with many
other businesses, being (and remaining)
competitive in trading means keeping
up with technology.
5:
Develop a trading plan based
on your own research
A traders own research,
not emotions or specula-
tion, should be the driv-
ing force behind develop-
ing a trading plan. With
so much information readily available
in the public domain these days, it may
be tempting to rely on someone elses
work or research. This can backfire for
a few reasons.
First, whatever methodology is being
promoted actually may not be profitable.
Second, even if it is profitable to someone
else, it does not guarantee that it will be
to other traders. Different trading styles
and risk tolerances mean that trading
plans are not one-size-fits-all.
Finally, traders should fully under-
stand the logic behind a trading plan;
otherwise, it is possible to lose trust in
a plan, making it easier to deviate from
the rules.
6:
Know your exit strategy
Before entering any
position, traders should
have an exit strategy in
place. This should be
included in the trading
plan and define how the trader will get
out of both winning and losing positions.
Many traders agree that money is made
in the exit. This means that regardless of
where a position is entered, its the exits
that determine if it will be a winning or
losing trade.
While we often think of trade exits in
terms of dollar-based profit targets and
stop losses, there are other methods for
determining exits. A trading plan could
utilize a time- or activity-based exit, such
as closing the trade after a certain num-
ber of bars have printed, after a speci-
fied amount of time has elapsed, or at
the end of the trading session (EOD
or end-of-day close). Exits also can be
based on some type of market activity or
technical analysis. For example, a trade
could stop-and-reverse if a technical
indicator gives an opposing signal.
Regardless of approach, it is important
to have an exit strategy in place before
entering any trade. It can mean the dif-
ference between not only a winning and
losing trade, but a winning and losing
business.
7:
Manage risk and
protect capital
Properly managing risk
and protecting trading
capital is what keeps
traders i n the game.
They also should avoid
risking too much on any single trade.
The generally accepted industry stan-
dard is to risk no more than 2% on any
single trade. Many traders with smaller
accounts find this limits their ability to
make substantial profits and may, as a
result, risk far more. All it would take
is a series of losing trades to destroy
the account.
Trading with a stop loss is another
way to manage risk and protect capital.
A stop loss limits the risk that a trader is
exposed to for each trade. We all would
like to always exit with a profit, but that
is not realistic. Because losing trades are
inevitable, it makes sense to know how
big those trades are going to be. If the
trade moves in the wrong direction, it
is closed and the trader moves on to the
next opportunity.
Being undercapitalized not having
enough money is perhaps the prima-
ry reason why many traders fail. This
is for a couple of reasons. One is that
traders need money to make money.
Imagine a trader makes a 30% gain in
one year. That might be enough to live
off if its based on a $200,000 account.
However, 30% of a $5,000 account is
not enough to pay the bills. Being
undercapitalized also is detrimen-
tal because it becomes impossible to
withstand the inevitable drawdowns.
Again, it wouldnt take many losing
trades in a row to wipe out a small
account.
8:
Know when to stop trading
There are two pri-
mary reasons to stop trad-
ing.
The first is that the
trading plan is ineffec-
tive and losing more than anticipated
in historical testing. Markets change,
interest and volume in particular trad-
ing instruments vary and trading plans
simply may not perform up to expecta-
tions. It may be time to take a step back
and reevaluate the trading plan, remain-
ing businesslike and unemotional
throughout the process. An ineffective
trading plan is a problem that needs to
be solved; it does not necessarily mean
the end of the business.
The second reason to stop trading is
that the trader is ineffective. Factors such
as emotions, external stress factors and bad
health can have a negative impact on trad-
ing performance. A trader could develop a
winning trading plan, but it still could fail if
he is unable to execute the plan properly. It
is beneficial to both the trader and the busi-
ness to recognize any personal challenges
and take measures to improve the situation.
If a trader has trouble with emotions, for
example, he may benefit from using some
type of strategy automation.
9:
Accept your losses
but learn from them
Although most traders
inherently focus on win-
ning, trading is mostly
about losing. In fact,
successful traders think
of trading not in terms of how much
they can win, but how much they can
afford to lose.
Losses are a certainty in trading, and
despite claims that some trading plans
or systems are 100% profitable, the real-
ity is that many successful plans win only
about 40% of the time. The key is to make
more on each winning trade than is lost
on each losing trade. This is what allows
traders to make money over time.
Although traders must be willing to
accept losses, it is important to learn
from them as well. One method for this
is to maintain a trading journal or diary.
A journal can help traders gain impor-
tant feedback and detailed information
about individual trades that performance
reports cannot show. Typically, a journal
includes the date, time, price, direction,
reasons for the trade and individual trade
notes. This provides a record of activity
that can be used to evaluate the overall
performance of the trading plan.
10:
Keep trading
in perspective
While it is important
to remain focused each
and every trading day, it
is equally important to
remain focused on the big
picture. One losing trade (or day) should
not be a surprise. It is a part of trading.
Nor should one winning trade (or day)
be cause for a celebration. Its just one
step along the path to long-term profit-
ability. Because trading is a business, it is
the cumulative profits that matter.
Win or lose, trading is just another day
at the office. Once a trader accepts that
wins and losses are part of the business, it
is easier to keep emotions in check.
Setting realistic goals is an essential
part of keeping trading in perspective. If
a trader has a small trading account, for
example, it would not be reasonable to
expect huge returns: a 30% return on a
$5,000 account is much different than a
30% return on a $1 million account. It is
helpful to remember that the multimil-
lion-dollar traders are the exception, not
the norm. Most traders who survive the
tough part of the learning curve are able
to make a comfortable living.
Some of these rules are directly related.
For example, part of Rule No. 1: Treat trad-
ing as a business depends on Rule No. 2:
Always use a trading plan. And Rule No. 9:
Accept your losses can help traders fulfill
Rule No. 10: Keep trading in perspective.
Together, these rules make up general
guidelines that can be used by discretion-
ary and system traders alike. Traders who
have the patience and discipline to follow
these rules can increase their odds of suc-
cess in the challenging and competitive
business of trading.
Jean Folger is the co-founder of, and system
researcher with, PowerZone Trading, LLC. Jean
can be reached at www.powerzonetrading.com.
futuresmag.com 41
a neural network to predict a moving
average crossover.
Other companies were using neu-
ral networks, of course. In early 1994,
NeuralWare released a trading system
development product called Predict.
Several years later, the company came out
with NeuralShell Trader as a standalone
product. Both of these products embed-
ded neural networks, genetic algorithms
and backtesting into one platform.
NeuralShell Trader is still being devel-
oped and sold today.
Many of the products that were state-
of-the-art during this Golden Age of
development are gone: ProfitTaker,
Advance Chartist and Excaliber all were
once considered cutting edge at one
point but failed to continue and improve.
Products such as TradeStation with its
programming language and add-in API
eliminated the need for traders/software
developers to continue developing cus-
tom tools.
Now, we find ourselves at another
frontier. Needs have shifted to portfolio
capabilities and advanced programmable
money management. Increasingly, more
traders are seeking advanced analysis for
both equities and futures. There also is
interest for integrated trading strategies
that incorporate neural networks, cycle
analysis and genetic algorithms. This is
good because the best trading tools are
born from the need to get an edge in the
markets and make a living from trading.
Software is only half the battle.
Hardware is advancing at an impres-
si ve rate. Both Mul ti charts and
TradersStudio Multicore take advan-
tage of todays multi-core machines.
TradeStations charts currently have
multi-core support, and expansion to
the softwares backtesting engine cant
be far behind. However, for this new
generation of software, systems and
developers to evolve the status quo, the
technology and the exploitation of that
technology have to advance hand in
hand. As that happens, expect powerful
new tools to uncover exciting new ways
to exploit market inefficiencies.
Murray A. Ruggiero Jr. is the author of
Cybernetic Trading Strategies (Wiley).
E-mail him at ruggieroassoc@aol.com.
TECHNOLOGY & TRADING continued
Ruggiero continued from page 37
B A D A C T O R S
I
nc. 500, 2010. Crains Fast Fifty,
2011. Crains Fast Fifty, 2012.
AlphaMetrix Group LLC, Chicago,
appeared to be a company going plac-
es fast. That is, until 2013, when the
self-described Marketplace for Private
Investments found itself on the very top
of lists belonging to the National Futures
Association (NFA) and the Commodity
Futures Trading Commission (CFTC).
AlphaMetrix, which boasted a five-
year growth rate of 8,030.4% in Crains
Chicago Business 2011 Fast Fifty issue,
now faces CFTC charges alleging that the
firm committed fraud and misappropri-
ated at least $2.8 million that belonged
to pool participants.
Just the facts
In the beginnings section of its web-
site, AlphaMetrix positions itself as
building a foundation of certainty and
trust. On Oct. 10, 2013, AlphaMetrix
founder and CEO Aleks Kins issued a
letter to pool participants that would
seem to indicate that there are a few
cracks in that foundation, perhaps even
enough to bring down the house that
Kins built. Kins letter, in part, reads:
We write to update you on certain
developments at AlphaMetrix Group LLC
(AlphaMetrix), the ultimate parent of the
AlphaMetrix family of companies. In the
operation of our business, we regularly
run intercompany balances between and
amongst our affiliates. Our regulated com-
modity pool operator, AlphaMetrix LLC
(the CPO) is one such affiliate with whom
there are intercompany balances. The CPOs
assets consist largely of a receivable owed
to it by Parent. Parent has recently encoun-
tered significant cash flow issues and is
working to strengthen its current financial
position and its continued operations. As
a result of this, the CPO has delayed fee
rebates owed to certain of its third-party
money managers and participants, which
should have been reinvested into various
pools, but were not. The fact that these fee
rebates were not reinvested may have an
impact on the pools net asset values.
Additionally, the CPO has not paid
management and incentive fees that were
earned and owed to third-party money
managers, yet it has withdrawn those fees
for payment from various pools.
In addition, the letter stated that CFO
George Brown had been dismissed and
the services of Arthur Bell, CPA, had
been retained to review and assist us
in improving our internal controls and
recordkeeping procedures.
The departures of two other senior
staffers, Mikus Kins, chief product and
business development officer, and Geoff
Marcus, chief strategic officer, followed
shortly thereafter. At its peak, AlphaMetrix
claimed more than 120 employees, with
headquarters in Chicago, and offices in
New York, Columbus, OH, London and
the Cayman Islands. How many of those
employees remain is unclear.
On Oct. 21 the NFA issued a Member
Responsibility Action (MRA) against
the firm. The MRA was issued to curtail
AlphaMetrix problems and keep them
from expanding. The order required
AlphaMetrix LLC to satisfy its obliga-
tions to certain pool participants by Nov.
1, which means that the NFA can sus-
pend the member, restrict its operations
or direct it to take other remedial action.
The NFA issued a statement that said,
The firm had deducted advisory fees for
certain participants in commodity pools
operated by the firm. Those fees were to
es fast. That is, until 2013, when the
self-described Marketplace for Private
Investments found itself on the very top
of lists belonging to the National Futures
Association (NFA) and the Commodity
Futures Trading Commission (CFTC).
AlphaMetrix, which boasted a five-
year growth rate of 8,030.4% in Crains
Chicago Business 2011 Fast Fifty issue,
now faces CFTC charges alleging that the
firm committed fraud and misappropri-
ated at least $2 8 million that belonged
( AlphaMetrix
AlphaMetrix f
operation of
run intercom
amongst our a
modity pool o
(the CPO) is o
there are interc
assets consist
to it by Parent
tered signific
working to str
position and i
a result of thi
rebates owed
money manag
NFA issues MRA
CFTC says $2.8 million missing
Lavish events
Live fast, die young and leave a good looking corpse was the mantra of the old rock
and roll crowd. AlphaMetrix, a pool operator that seemed to follow that rule, was
brought down by regulators after not paying traders or investors.
MANAGED MONEY
House of AlphaMetrix
falls hard and fast
BY KRI STI N FOX, MI CHAEL MCFARLI N & GI NGER SZALA
For more on managed funds, go to
futuresmag.com/managed funds
futuresmag.com 43
be reinvested in the pools but were not.
The total amount owed to participants
is approximately $600,000. AlphaMetrix
has approximately $700 million under
management. According to NFAs action,
if AlphaMetrix fails to satisfy its obliga-
tions by Nov. 1, the firm would be pro-
hibited from placing trades for any of its
pools except for trades liquidating open
positions. Further, any disbursement
of pool funds could only be made with
NFAs approval.
On Oct. 31, AlphaMetrix announced in a
statement that it would cease trading oper-
ations as of that date and enter that portion
of its business into an orderly liquidation.
The statement read: In light of recent
redemption requests, AlphaMetrix has
determined that its sponsored funds will
no longer be able to effectively trade the
investment strategy employed by each
trading advisor. As a result, AlphaMetrix
has decided that it is in the best interest
of all investors for the funds to cease trad-
ing as of Oct. 31, 2013, and enter into an
orderly liquidation. For all investors who
have not already redeemed, it is anticipat-
ed that AlphaMetrix will distribute 90% of
the proceeds to investors on or about Nov.
21, 2013. The balance will be completed
upon the completion of a final audit.
The CFTC was the next regulator to
charge AlphaMetrix. On Nov. 4, the CFTC
filed charges in the U.S. District Court for
the Northern District of Illinois Eastern
Division, alleging that AlphaMetrix violat-
ed the Commodity Exchange Act.
The CFTCs complaint alleges:
1. Between at least Jan. 1 and Oct. 31,
2013, defendant AlphaMetrix LLC
(AlphaMetrix), a registered commodity
pool operator (CPO) and commodity
trading advisor (CTA), misappropriated
at least $2.8 million in funds belonging
to participants of numerous pools oper-
ated by AlphaMetrix and issued false or
misleading account statements to these
pool participants that concealed its fraud.
2. Specifically, AlphaMetrix agreed to pay
rebates of fees to certain participants in
commodity pools it operated by rein-
vesting the rebates in the commodity
pools in the name, and on behalf, of the
participants. Between approximately
Jan. 1 and Oct. 31, 2013, AlphaMetrix
was obligated to reinvest at least
$2.8 million worth of rebates back
into commodity pools in this manner.
However, AlphaMetrix failed to reinvest
these funds and instead transferred
them to bank accounts of its parent
company, AlphaMetrix Group LLC
(AMG). As a result of this unlawful
conduct, AMG received AlphaMetrix
pool participants funds to which it had
no legitimate interest or entitlement.
3. Account statements that AlphaMetrix
emailed to these pool participants
during this time period reflected increas-
es in the participants net asset values,
as if the rebates had been reinvested in
these pools, even though they were not.
4. In October 2013, AMG and Aleks
A. Kins (Kins), the President and
Chief Executive Officer of AMG and
AlphaMetrix, admitted in a letter
to participants describing signifi-
cant cash flow issues that AMG was
encountering that AlphaMetrix did
not actually reinvest funds owed pur-
suant to rebate agreements, which
may have an impact on the pools net
asset values.
The complaint further alleges that
the conduct described violates the core
anti-fraud provisions of the Commodity
Exchange Act (CEA). On Nov. 5, the
Federal Court in Chicago entered a
Consent Statutory Restraining Order that
was requested by the CFTC.
In a statement, AlphaMetrix agreed to the
entry of the Order as it is consistent with the
firms efforts to liquidate and return funds.
According to the statement, AlphaMetrix
denies the CFTCs allegations that it violat-
ed the CEA.
The Order appointed a Corporate
As a privately held company founded in 2005, little is available about the financials
of the firm, but the June 6, 2011 edition of Crains Fast Fifty shows 2010 revenues of
$41.7 million, 87 employees, profitability and a five-year growth rate of 8,030.4%. The 2011
edition of Crains Fast Fifty, released June 4, 2012, shows 2011 revenues of $51.2 million,
102 employees, no profitability and a five-year growth rate of 2,831%.
Source: Crains Chicago Business
MANAGED FUNDS continued
Monitor for all commodity pools
operated by AlphaMetrix, accord-
ing to the firms Nov. 6 statement.
The corporate monitor is directed
and authorized to ensure that at
least 95% of pool participant funds
are returned to participants no later
than fifteen (15) days from the entry
of the Order. AlphaMetrix will coop-
erate with the Corporate Monitor.
It is anticipated that additional
pool participant funds will be released
once tax, audit and other such service fees
are estimated and accrued for as direct-
ed by the funds offering memorandum.
AlphaMetrix is currently communicating
with Deloitte to engage them to complete
final audits. Deloitte has audited funds for
AlphaMetrix since 2008.
As a privately held company founded
in 2005, little is available about the finan-
cials of the firm, but the June 6, 2011
edition of Crains Fast Fifty shows 2010
revenues of $41.7 million, 87 employees,
profitability and a five-year growth rate
of 8,030.4%. The 2011 edition of Crains
Fast Fifty, released June 4, 2012, shows
2011 revenues of $51.2 million, 102
employees, no profitability and a five-
year growth rate of 2,831%.
The firms offerings are AlphaMetrix
technology (the managed account plat-
form), investment research, investment
products, financial investigations and
its [known to be extremely lavish] events.
The firms platform was supposed to
give investors access to fully vetted funds
and, according to the website, achieve a
higher level of verified trust. Touting its
high levels of due diligence the firm hired
former Secret Service members and formed
AlphaMetrix Financial Investigations,
which performed comprehensive back-
ground investigations on traders and advis-
ers wishing to join the platform.
While the firms initial roots were in
technology and secure investing, it was
the events that captured peoples attention
and drew the crowds.
Talk of the town
Alphametrixs first event was education,
speed-dating and golf for charity at the
Beverly Hills Country Club on the
south side of Chicago. This was fol-
lowed by the firms first summit in
2010 at the Doral in Miami, with
educational speakers and speed-dat-
ing for managers and investors.
Harry Markopolos, best noted for
his attempts to get the U.S. Securities
and Exchange Commission to inves-
tigate Bernie Madoff, was the key-
note speaker, discussing the red flags
surrounding the Madoff fraud.
Subsequent conferences dropped the
educational seminars and focused on
speed-dating and high-profile speakers
such as Tony Blair. Weekend networking
events were sponsored by AlphaMetrix
including water sports at the Monte
Carlo Beach Club; Crepes and Croquet
at the former home of Karl Lagerfeld; and
spouse packages that included South
Beach (Miami) walking tours, spa treat-
ments and champagne cabanas.
A manager who preferred anonymity
noted that while he had attended their
conferences because there were real
investors there, he didnt understand
the math. It wasnt clear to me how
they made money with the platform. The
numbers didnt seem to work.
At least according to the regulators, his
arithmetic is right.
beginning of November was at $3.90, the
May 2020 contract was at $4.50. Natural
gas has always been a domestic market but
with the huge price discrepancies overseas
that demand should push prices higher
out on the curve when transportation is
worked out. (see Dan Dicker: Mad about
oil, October 2013) If I were a natural gas
dependent corporation, I would be locking
in these prices for a long time, Flynn says.
He adds that the increased domestic ener-
gy production should be positive for the
dollar. It changes the dollar flows. Instead
of dollars running out to other countries
for importing oil, more of those dollars are
going to stay home. The more dollars you
have at home, the faster you probably are to
remove stimulus; it should eventually make
the dollar stronger, Flynn says.
Keeping an eye on beans
While commodities may be set to benefit
from a general increase in demand, soy-
beans may be the most interesting grain
market to watch. Chad Burlet, principal
of commodity trading advisor Third
Street Ag, says, We can expect quite a bit
of volatility in the soybean market in the
next six months. The current soybean sit-
uation is very tight and prices are high,
Burlet says. This has led to record plant-
ing in South America, which could lead
to a 15-million ton premium to last years
record South American crop, according
to Burlet. With good weather the market
could break $2-$3 per bushel. However, if
the crop gets hurt we could easily rally by
that much, he adds.
However, this also means we probably
will be paying more for a steak in 2014.
Alvin Hults principal of introducing
broker Tejas Trading Company expects
live cattle to hit all-time highs in the first
half of 2014.
Supply is tight due to the massive kills,
Hults says.
Two years of droughts and elevated
feed prices has caused feedlot operators
to prematurely kill livestock leading to
a short supply of beef. While the worst
drought was in the 2011 growing season,
2012 had drought condition as well and
supplies of grain had already been tight.
We didnt have any recovery in 2012.
We slaughtered cattle that [werent at full
weight] due to high grain prices, Hults
says, adding, live cattle could get as high as
$1.50.
MARKETS continued
Markets continued from page 22
stop is advanced by 10 ticks. This way
your paper profits are protected after
a certain point. However, keep in mind
that if you rely on the trailing stop to exit
your trade that it, by definition, will get
you out after a 10-tick retracement.
Market patterns dont have to be pow-
erful, and they dont have to be substan-
tial to make traders money. However,
they do have to be reliable and identifi-
able. This simple movement in the Swiss
franc and the dollar index can provide
an ongoing profit opportunity for disci-
plined and attentive traders.
Nick Mastrandrea is the author of Market
Tea Leaves. You can reach him at his web
site www.markettealeaves.com.
futuresmag.com 45
The next day, on Sept. 19, we see a move in the December Swiss franc futures just after
10 a.m. (top). Meanwhile, the December Dollar index futures saw a brief interruption
in a strong uptrend, presenting bulls a good opportunity to buy into the trend (bottom).
ORDER UP
Source: NinjaTrader LLC
1.1010
1.1005
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80.580
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20:24 9/19
80.530
05:30 06:00 06:30 07:00 07:30 08:00 08:30 09:00 09:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00
03:04 03:39 04:32 05:37 08:30 09:11 10:00 10:15 11:03 12:51 14:22 9/20
Mastrandrea continued from page 25
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HOW THE
JOHN BRYNJOLFSSON:
W
illiam Ziemba is a researcher, academic, author and
trader; not necessarily in that order.
Ever since launching his academic career as a
professor at the University of British Columbia after earning a
doctorate from University of California Berkeley, Ziemba has
studied market anomalies and put what he found to practical
use through his personal trading.
No matter where I am in the world I am always trading and
watching what is going on, Ziemba says.
It always started with academic work
and I have also traded, Ziemba says. In
my teaching I tend to have theoretical
courses but also practical courses that
deal with the markets. I tend to be watch-
ing [markets to see] what is going on. I
think of it as a script. The market is telling
you a story, it is supposed to be doing the
following and you watch and [ask] is it
really doing what you think it is supposed
to be doing? If not there is trouble.
Ziemba was a professor from 1968
through 2006 but the academic life
allowed time for research and consult-
ing work where he tested his theories.
He worked as a consultant with Frank
Russell for nine years and also with Morgan Stanley. He has
written dozens of academic papers and several books, as well
as being a visiting professor at numerous prestigious aca-
demic institutions including Cambridge, Oxford, University
of Chicago, Stanford and the London School of Economics.
First I was doing academic research on the small firm effect
and then I got the itch to trade and wrote the first paper on
that in 1987, Ziemba says. He concentrated his research, which
would lead to his current trading program, Alpha Z Futures
Fund LLC, in three areas: Calendar anomalies, presidential elec-
tion strategies and option biases.
Calendar anomalies involve studying the turn of the month
effect, turn of the year effect and options expiries. His most
recent book, Calendar Anomalies and Arbitrage, is based on
many of the papers he has written over the years, which he has
updated with current data through 2012.
Presidential election strategies study the divergence in perfor-
mance between small-cap stock and large-cap stocks depending
on who is in the White House, and option biases look at the
behavioral biases of the way people trade and attempts to create
strategies to exploit that.
His most powerful strategy is the calendar anomaly that
shows that small-cap stocks outperform large-cap stocks in the
last few weeks of the year. Ziembas research shows that this
edge gets supercharged when there is a Democratic president.
It turns out that it is more powerful with a Democrat in the
White House. For example, even though the regular period is
middle of December to the end of December, it actual went to
February [in 2013]. Normally it is a two-week period at the end
of December, Ziemba says.
He says the strategy has worked without fail for 18 years. I did
it for 14 years and consulted with Morgan Stanley and taught it
to them, he says. At the time, 1996, he
would buy Value Line Stock Index futures
and sell S&P 500 futures, but volume was
drying up in the Value Line contract so
he decided to retire from consulting and
concentrate on his day job and research.
His research led to a series of well
received books about horse raising odds,
which is very applicable to options pricing.
Perhaps that is what drew legendary
options trader Blair Hull to reach out to
Ziemba. Hull started his impressive trad-
ing career counting cards and studying
the odds in blackjack and eventually
applying those principles to options.
Hull signed a contract with Ziemba
to study anomalies in 2009. He asked
me to study all the anomalies, so we studied a whole bunch.
All sorts of things: Options expiry, presidential effect, holiday
effect, we studied everything carefully, Ziemba says.
The Alpha Z Fund, which began trading client money in July, incu-
des all three of Ziembas major areas of study. His proprietary track
record earned 23.46% in 2010, 9.6% in 2011 and 11.77% in 2012. Since
officially launching in July, Alpha Z is up 4.1%. A separate institutional
account trading the entire year is up 53.62% through October.
Once again the standout strategy is the end of the year effect,
which he has traded over the last four years using the Russell
2000 as the small-cap leg.
By having a larger base, I can do more things. I have had strat-
egies I have worked on for years that I never implemented. With
a wider base I hope to implement more of them, Ziemba says.
The options element involves option writing but from a value per-
spective. He buys options as well, and often is hedged with futures.
All of this hinges on the way people decide to do things, Ziemba
says. Why is it that the first of the month plus one day [markets]
usually go up? The reason is people receive their salary the day
before and pension funds have to buy new shares, so there [are]
institutional practices and behavioral biases that all fit together.
What I try to do is study these things and use them in my trading.
Ziemba has spent a lifetime studying markets and is now
ready to put what he has learned to use for clients.
Ziemba: Leveraging a lifetime of research
BY DANI EL P. COLLI NS
TRADER PROFILE
I
L
L
U
S
T
R
A
T
I
O
N

B
Y

M
I
C
H
A
E
L

B
E
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K
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T
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WILLIAM ZIEMBA
CME Group is a trademark of CME Group Inc. The Globe logo is a trademark of Chicago Mercantile Exchange Inc. All other trademarks are the property of their respective owners. Copyright 2013 CME Group. All rights reserved.
How the world advances
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The Foreign Exchange Matrix,
a New Framework for
Understanding Currency
Movements
By Barbara Rockefeller
and Vicki Schmelzer
Harriman House
$35.00, 276 Pages
BY PATRICK KELLY
This book attempts to unveil the
mystery of the worlds foreign exchange
markets whose participants essentially
take a huge yet informed bet on whether
a currency will rise or fall and net them
a profit or a loss. The authors, Barbara
Rockefeller and Vicki Schmelzer, pull
back the curtain on the often opaque,
yet fascinating, world of
forex trading; and in 12
chapters capture the com-
plexities of a $4 trillion a
day market.
The book describes the
forex matrix as a grid for-
mat of the many factors
and players in the mar-
ket and why they inter-
act. The term matrix is
borrowed from random
matrix theory where the
math is truly advanced.
The authors explain
why the forex market exists and why
this form of free-booting capitalism can
operate independently from the politi-
cal, economic and social zeitgeist of the
day. Their insights show how forex trad-
ers dislike central bank intervention, an
ubiquitous and regular fact of life in the
current financial milieu, and why central
banks apart, forex works independently
of equities, commodities, bonds and
other financial trading instruments.
However, the book is peppered with
references to the pivotal role the worlds
central banks have in the market, espe-
cially since the subprime and euro zone
crisis of 2008-2009. Their practice of
quantitative easing (QE) to keep interests
very low and their use of unconventional
measures have spooked a Forex market
that traditionally dislikes intervention
and capital controls.
Rockefeller, an international econo-
mist, and Schmelzer, a former forex pro-
fessional turned financial journalist, har-
ness their combined 50-year experience
in Forex markets to track, for example,
commodity futures, hedging, the dollar
as a reserve currency, the relationship
between the dollar and oil, and the dol-
lar and gold. The authors also highlight
why chart reading and technical analysis
heavily influence Forex.
Anyone with bias against technical
analysis will not fare well in forex, they say.
In their introduction the authors cau-
tion they are writing for a reader with a
high level of knowledge of financial mar-
kets generally and a particular curiosity
about the forex market.
The authors delve into what traders
pay attention to, including risk aversion,
relative interest rates and
relative inflation expec-
tations, forex forecast-
ing and the efforts of
the U.S. Federal Reserve
system to regulate the
market. While traders
may pay lip service to
some outside influences,
they do pay attention to
the weekly Commitment
of Traders report from
the Commodity Futures
Trading Commission.
In a market swamped
with computer data Rockefeller and
Schmelzer seek to untangle the web of
algorithmic driven data and expose ques-
tionable or unknown ways this informa-
tion is transmitted.
Each of the 12 chapters begin with
an aphorism such as one by Winston
Churchill who once told the House of
Commons, There is no sphere of human
thought in which it is easier to show
superficial cleverness and the appearance
of superior wisdom than in discussing
questions of currency and exchange.
Agree or disagree with Churchill, forex
traders must carry in their heads a mix
of economic data if they want to truly
follow forex and discover why prices are
moving. Each country has 10 variables
a trader will need to follow. Foreign
exchange exposure to hedging is 80%
whereas global equities markets hedge
less than 20%. Forex is a very big deal.
(An e-book edition is available free
to print edition buyers. Go to http://
ebooks.harriman-house.com/foreignex-
changematrix)
Patrick Kelly is a freelance writer with a
background in commodity market reporting.
The Trend Following Bible:
How Professional Traders
Compound Wealth
& Manage Risk
By Andrew Abraham
Wiley, 2013
$75.00; 224 pages;
E-book $48.99; 224 pages
BY DESMOND MACRAE
Normally its best to start any book
review with a description of what value
a book can offer readers, and postpone
complaints. Here, a criticism must come
first else readers might quit at the first
paragraph, never to see the value Andrew
Abrahams new book offers. He writes in
his Introduction that in 1994 very few
people had ever heard of trend follower
or trend following. Dont discard this
book because of this egregious historical
error or you will miss the good stuff.
For the record, the English political
economist and investor David Ricardo
(1772-1823), wrote; Cut your losses, and
let your profits run on. Charles Dow
(between 1899 and 1902); Edwin Lefvre
(1923); Richard Schabacker (1932), and
Edwards & McGee (1947) all described
trend-following fully, as have many oth-
ers since.
This book is really an autobiography
of Abrahams professional trading and
investing life, not the bible. It should
have been titled My Journey as a Trend
Follower, but authors rarely get to name
their books.
That said, trend followers, and investors
who are considering adding trend-follow-
ing funds to their investment portfolios,
can profit from this authors journey.
The first three chapters offer little
that is not already well known about
trend following and risk management,
but Abrahams summary of his experi-
ence with MF Global is must reading.
BOOK REVIEWS
48 FUTURES December 2013 DIGITAL EXCLUSIVE
His advice about using U.S. Treasury
Direct and independent money market
funds away from brokers should be read,
marked, learned and inwardly digested.
Ignore his occasional
claims of proprietary
ideas in his review of what
it takes to be a successful
trend follower. Pay close
attention to Abrahams
powerful plea that trend
followers MUST learn to
write testing programs of
their own (which he did
when he started), or learn
to use existing testing pro-
grams. He writes that any
good testing program will
do, adding that he now
uses Metastock.
Later Abraham addresses trading psy-
chology, the most important of the three
components of trading success; the oth-
ers being money management and a trad-
ing method or system.
We dont often get to see exactly how a
trend follower, or any other kind of trader,
operates, but near the end of Abrahams
book, we do. Assuming comparison yields
insight, we have a real per-
son with whom we can
compare ourselves, which
may make this the most
important of the 10 chap-
ters.
Alas, this book is set in
9-point type, making it
hard to read. The many
excellent charts are even
harder to see, so use a
good magnifying glass.
Type in some E-book for-
mats can be enlarged, but
alas, the charts seem to
remain the same size.
Desmond MacRae is a New York-based busi-
ness writer specializing in banking, finance
and investments. E-mail him at desmond-
macrae@nyc.rr.com.
DIGITAL EXCLUSIVE futuresmag.com 49
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BEN DAVIES
TALKS GOLD, CURRENCIES AND
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DIGITAL EXCLUSIVE
A
n option pricing model can be
the first step in finding prof-
itable equity options trading
opportunities. Using pricing models
effectively, we can uncover discrepan-
cies that we may be able to exploit with
speculative positions. Pricing models
may be applied to call options, as shown
in Wells Fargo calls (right), or to put
options, which will be described later.
On Aug. 9, 2013, Wells Fargo shares
were priced at $43.23. For strike prices
ranging from $50 to $43, market prices
for calls extended from 0.250 to 2.240
with premiums from $25 to $224. The
model shows call prices predicted by
regression analysis based on the market
prices for nine strike prices.
Price variations between predicted
and market values are small, with the
largest difference at $3.51 at $135 mar-
ket premium. The column for price
variations is the first place to look for
potential trades: Buying undervalued
options and hedging over short time
periods with concurrent sales of over-
priced options on the same equity.
Buying the $46 strike at $95 and selling
the $45 strike at $135 is an example that
ended on Aug. 16 with the $46 strike at
$83 and the $45 strike at $130, for a net
gain of $100.
Because this trade is hedged against
movements in the underlying stock,
it is possible to hold out for a profit,
although the chance for larger gain is
stronger close to the original buy and
sell date.
A long straddle also is possible when
there are underpriced options on both
the puts and calls. Buy an undervalued
call and put with the intention of prof-
iting when the prices return to normal
no matter the direction of movement in
Using option pricing models, we can uncover pricing discrepancies in the equity
markets and exploit them for profit.
Opportunities in equity options
BY PAUL D. CRETI EN
TRADING TECHNIQUES
P R I C I N G MO D E L S
This chart compares market and regression call option prices for Wells Fargo.
WELLS FARGO CALLS
Using pricing models for profit
Calculating fair market prices
How to forecast option prices
For more from Paul, go to
futuresmag.com/Cretien
January 2014 calls on August 9, 2013 Stock = $43.23
Breakeven prices
Strike
price
Call
option
price
Predicted
option
price
Intrinsic
value
Price
variation
Delta
slope
Upper Lower Market
premium
50.00 0.250 0.253 -6.770 -0.341 0.114 51.150 41.030 25.00
49.00 0.370 0.363 -5.770 0.652 0.154 50.488 40.829 37.00
48.00 0.520 0.514 -4.770 0.619 0.205 49.884 40.693 52.00
47.00 0.710 0.715 -3.770 -0.503 0.267 49.342 40.571 71.00
46.00 0.950 0.978 -2.770 -2.845 0.340 48.866 40.436 95.00
45.00 1.350 1.315 -1.770 3.510 0.422 48.627 40.030 135.00
44.00 1.720 1.733 -0.770 -1.294 0.509 48.301 39.851 172.00
43.23 2.113 2.113 0.000 -0.012 0.575 48.207 39.558 211.30
43.00 2.240 2.236 0.230 0.355 0.595 48.188 39.463 224.00
DIGITAL EXCLUSIVE
the underlying stock. Regression analy-
sis may be used to value puts as well as
calls; however, arbitrage pricing usually
keeps puts and calls close to parity, as we
explain later.
A straddle trade in Starbucks options
was possible on Sept. 6, 2013, with the
stock at $71.57. The January 2015 $75
call and $70 put were underpriced by
$9.28 and $13.08 according to regres-
sion analysis. By Sept. 12, Starbucks
stock had increased to $75.67. Changes
in the call and put prices were plus $212
and minus $134 respectively, for a $78
net profit before trading cost.
Volatilitys role
Expected, or implied, volatility is the
primary factor underlying the price of
options for equities, futures and any con-
tract in which the holder has the right to
buy or sell at a fixed price over a specified
time period an underlying asset or liabil-
ity whose price is free to vary. Traders in
the options market determine implied
volatility based on the fluctuation of the
underlying price including historical
price movements and expected future
variations.
Based on the assessment of volatility,
the options market sets an upper and
lower price range for the underlying
through the expiration date. On Wells
Fargo calls, an option price is computed
for each of nine strike prices, with the
underlying stock at $43.23. Upper and
lower prices are breakeven stock prices
at the January 2014 expiation date that
result in zero gain or loss from a delta-
neutral trade on Aug. 9 (hedging the
number of options sold short deter-
mined by the inverse of the slope at a
specific strike against a long position in
the underlying stock).
Wells Fargo price curve (above)
shows the dynamics of pricing a call
for which the strike price is equal to
the stock price. A line tangent to the
options price curve has a slope equal to
0.575. The upper breakeven price occurs
where the sloped line intersects the hor-
izontal axis at $48.207. The lower break-
even price is $39.558, directly beneath
the intersection of the sloped line and
the intrinsic value line, on which each
point equals the stock price less the
$43.23 strike price. The sloped line on
the chart is lowered slightly to make it
easier to see the details.
The height of the option price curve
where the stock equals the strike price
can be used as a measure of relative vola-
tility. Four equities (above) shows vola-
tilities compared for Facebook, Google,
Starbucks and Deere.
The heights along the curves equal the
ratio of call price-to-strike price, with the
primary comparison made where the
ratio of stock price-to-strike price equals
1.0. It is easy to see that Facebook is far
above the other three equities in terms
of implied volatility, roughly twice the
height of either Google or Deere. The
volatility measure for Facebook January
2014 calls is approximately the same as
that for Deeres January 2015 options,
equalizing the time value of 16 months
for Deere with four months for Facebook.
Delta neutral
The column of delta values, or slopes,
in the option price curve at each strike
price may be used in the design of delta-
neutral trades the sale of calls hedged
by a long position in the stock.
The number of calls in the trade is
determined by the slope, equal to 1/delta.
For Wells Fargo, using the $44 strike
relates to a slope of 0.509 so that 1.96
calls are sold for each share held long.
As indicated by Wells Fargo calls and
Wells Fargo delta neutral (page 32), we
know that the breakeven stock prices are
$48.30 and $39.85 with the peak profit
$338 at the strike, $44.
The regression analysis used on
Wells Fargo calls can be used to com-
pute the heights of put and call option
futuresmag.com 51
This chart should help you visualize how we price a call with an at-the-money strike.
WELLS FARGO PRICE CURVE
Source: Barchart.com
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
C
a
l
l

o
p
t
i
o
n

p
r
i
c
e
January 2014 calls on August 9, 2013
Predicted call prices Intrinsic value Breakeven prices Slope of price curve
We can measure relative volatilities by comparing the option price curves where the
stock equals the strike price. By this measure, Facebook is the most volatile stock.
FOUR EQUITIES
0.10
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0.00
0.70 0.75 0.80 0.85 0.90 0.95 1.00
Stock price/Strike price
O
p
t
i
o
n

p
r
i
c
e
/
S
t
r
i
k
e

p
r
i
c
e
Facebook Google Starbucks Deere
50.0 48.0 46.0 44.0 42.0 40.0 38.0
DIGITAL EXCLUSIVE
price curves. Applied to equities in an
industry such as banking, the results
help us understand how the stocks
are related. The chart on Four banks
(above) shows movements in the cumu-
lative percentage price changes over a
five-month period beginning April 2,
2013. Similar short-term price chang-
es occur each day at the same time the
spread between prices becomes larger
or smaller. Because all large banks are
controlled by the same economic, regu-
latory and competitive factors, it isnt
surprising that they move more or less
as a unit.
On Four banks puts and calls
(right) differences in volatility are seen
as calls increase in price when the stock
price increases relative to strike price
while the put price curves fall with stock
prices that are larger than the strike.
Citicorp and Bank of America are the
strongest banks as measured by implied
volatility, while Wells Fargo is repre-
sented by the lowest price curve for put
and call options. Reflecting the similar-
ity in stock price movements on Four
banks, the price curves all are in the
same area of volatility no Facebook
level of volatility is shown by the banks
at the present time.
Parity pricing
Based on the market price of the call
option at a specific strike, a put option
can be created by the following process:
1) buy the call at its market price, 2) sell
the underlying stock at market price and
3) buy a bond at a discounted price that
will equal the value of the strike price at
the expiration date.
Arbitrage ensures that put prices will
be related to calls at or near parity. For
example, on Sept. 16, 2013, Citigroup
stock is $51.00. One strike price is $45
with the corresponding call priced by the
market at 7.05.
The current discount rate is one-half of
1% for one-third of a year to expiration,
so the formula used to compute the puts
value is (-7.05 + 51 45 / (1.005)^0.333)
x 1. The computed parity price, 0.9753,
is close to the puts market value of
0.9500.
The options market usually calcu-
lates the price of puts at or near the
parity price with call options. Citigroup
January 2014 (right) is an excellent
example of parity pricing. When calls
are mispriced, the corresponding puts
may be overvalued or undervalued at
the same time. This pricing relation-
ship supports the long straddle trades
described above, with the possibility of
originating a trade based on an under-
valued call.
Paul Creti en i s an investment anal yst
and financial case writer. His e- mail is
PaulDCretien@aol.com.
Banks are closely related in terms of their price changes. This isnt surprising
considering they are driven by similar fundamental factors.
FOUR BANKS
25%
20%
15%
10%
5%
0%
-5%
A
p
r

2
A
p
r

8
A
p
r

1
2
A
p
r

1
8
A
p
r

2
4
A
p
r

3
0
M
a
y

6
M
a
y

1
0
M
a
y

1
6
M
a
y

2
2
M
a
y

2
9
J
u
n

4
J
u
n

1
0
J
u
n

1
4
J
u
n

2
0
J
u
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2
6
J
u
l
y

2
J
u
l
y

9
J
u
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y

1
5
J
u
l
y

1
9
J
u
l
y

2
5
J
u
l
y

3
1
A
u
g

6
A
u
g

1
2
A
u
g

1
6
A
u
g

2
2
A
u
g

2
8
S
e
p

4
S
e
p

1
0
Cumulative percentage change in stock price
Here we chart the profit and loss values for a $44 strike call at various prices for the
underlying.
WELLS FARGO DELTA NEUTRAL
August 9, 2013
Strike price $44.00 Call price 1.720
Delta 0.509 Premium $172.00
Stock price $43.23 Calls sold 1.96
Premium
received
$337.92
Stock price
at expiration
Gain (loss)
stock
Call value Call change Proft (loss) Stock price
at expiration
Proft (loss)
50.00 600 (1,179) (841) (241) 50.00 (241)
49.00 500 (982) (644) (144) 49.00 (144)
48.00 400 (786) (448) (48) 48.00 (48)
47.00 300 (589) (251) 49 47.00 49
46.00 200 (393) (55) 145 46.00 145
45.00 100 (196) 141 241 45.00 241
44.00 0 0 338 338 44.00 338
43.00 (100) 0 338 238 43.00 238
42.00 (200) 0 338 138 42.00 138
41.00 (300) 0 338 38 41.00 38
40.00 (400) 0 338 (62) 40.00 (62)
39.00 (500) 0 338 (162) 39.00 (162)
38.00 (600) 0 338 (262) 38.00 (262)
Citigroup Bank of America J P Morgan Chase Wells Fargo

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