Welcome to td commodities

Reprinted courtesy of The Wall Street Journal
with minor content editing by TD Commodities Editor

Just a few minutes before the days trading ended on New York's Commodity Exchange one sleepy autumn afternoon, all hell broke loose. Another of the many trader games commodity-traders routinely play was underway.

In the cooper futures trading pit, a surge of buy orders cascaded onto the trading floor and in to the trading pits. Normally such late trade activity barely budges prices.

But on this day, 10-8, so many top dealers and floor-traders left early for the London Metal Exchange's gala annual dinner that there weren't many sellers around to accommodate the copper buyers. Copper prices soared nearly 3-cents a pound, considered to be a substantial bullish price move.

The few junior floor traders still at their trading posts in the trading pits quickly concluded that someone was trying to exploit the market's poor attention (perhaps to even temporarily corner the market) to move cooper futures prices to the $1.07 a pound price level, a copper futures resistance price area deemed imporatnt by metal futures traders who use technical analysis.

A price move above $1.07, which both off-floor and on-the-floor traders considered an important price resistance level, was widely assumed to then trigger "buy" signals from trend-watching large commodity funds and other traders (including daytraders), prompting automatic execution of a heap of standing orders mostly based on stops.

Such ahead-of-time orders are known as to daytrading-futures traders as "stops," which is why this game is called "gunning for stops." The idea was to induce a flood of buy orders above $1.07, whereupon cooper would soar even higher, at which point the trader who started the game could sell out at a profit.

The gunning for stops traders game probably fails more often than it works, traders say. In this case, the price touched $1.07, but didn't rise any further; it fell back a penny at the close. That's the trading risk commodity traders run in gunning for stops, or resting price stop-loss areas, commoditytraders say. Yet the gunning-for-stops game can pay off handsomely, and it is much in evidence in many of today's commodity markets.

Gunning for Stops works because so much of futures trading nowadays is based on trading systems that use widely available technical indicators such as moving averages and momentum yardsticks with authoritative-sounding names such as relative strength and stochastics.

In some cases, a trader can accurately guess from traders market talk and by looking at price charts where the key price resistance and support levels are. And they know that traders usually place stops around those critical areas. Many futures and forex traders also tend to place stop-loss orders just below a swing-low bottom, or conversely, just above a swing-high top.

Swing trading technique (also known as pivot-points) can be quite profitable for some commodities futures traders. However, if their resting stop-loss orders are 'gunned' swing traders are likely to end-up as a losing trader, at least for the day the gunning for stops game happened to them!

Money managers and futures traders have complained privately for years about floor traders engineering price movements to trigger buy and sell stops and computer-generated signals to buy and sell. But in this and other cases recently, they suspect, very large players were trying their hand at the game. If so, they say it is a disturbing development. "This is a very controversial issue," says one commodity futures money manager. We're very, very unhappy about it."

Who gets hurt by traders playing the game? Anyone whose stop-loss order was triggered artificially. Those people may be forced to take profits too early, sustain losses they wouldn't otherwise incur or take positions based on false price signals, traders and analysts say. And when those traders are money managers, their investors get hurt. Technical traders are particularly vulnerable to getting whipsawed by these short-term price swings, says Fred Demler, metals economist at PaineWebber Group Inc.

Sumitomo Corp's Yasuo Hamanaka later confirmed he had placed buy orders at the end of the 10-8 session, but denied they were speculative. Mr. Hamanaka has a reputation as an aggressive commodity futures trader. He made similar denials - met with skepticism - when he was rumored to be behind earlier squeezes in the London Futures Market.

In recent years, Middle Eastern syndicates are thought to have used the stops-gunning strategy in precious metals markets. And some people think big U.S. commodity funds have figured out how to profit either from riding the coattails of other players using the strategy or by doing it themselves.

Traders won't admit they gun for stops. And commodity trading regulators say it's next to impossible to prove a price move was the result of market manipulation, which is illegal. But few people in the market deny it goes on, and some say they've noticed it occurring more frequently in recent years.