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Featured Commodity Futures Trading
Article of the Month.
'Gunning' Plays Can Claim Victims in the Futures
Trading Pit
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 important 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 day-traders),
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, commodity traders
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 commodity futures 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 and more frequently in recent years.
"It happens all the time," says a sugar trader.
Recently, he adds, he's seen more investors "getting
stopped out" by a sudden-moving market that triggers
their stop orders. That could simply be the un orchestrated
result of a choppy, thinly traded market, he says, but
people are blaming traders for gunning their stops.
