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

Continued from page 1

"When it's happened to me, I've been extremely angry," says George Milling-Stanley, precious metals analyst at Shearson Lehman Brothers. Trade recommendations he has made to individual investors have lost money, he says, because traders went gunning for stops. For example, suppose he thinks gold will rise and recommends clients buy it at $335 an ounce - adding that they should put in a stop-loss order at $333 in case he is wrong. Then suppose some traders gun the market down to the stop levels, which sells the investors out of their positions at losses, and the price subsequently rises above $335 as originally expected. "You feel like someone's stolen the march on you," he says.

Jeff Nichols, a Boca Raton, Fla., precious metals consultant, says a well-capitalized floor trader can occasionally pull off such a move in small, thinly traded markets, particularly if other traders sense what's going on and join in. But in larger markets, such as currencies, it takes a lot of money to gun for stops successfully because the player has to be able to buy or sell contracts in significant quantities, Mr. Nichols says.

Well-known commodities trader Richard J. Dennis says he tries to anticipate where technical traders have placed their stops and gauge the effect that activation of the stops will have on prices. "If you look at charts, you can make a reasonable guess about where the stops are," Mr Dennis says, adding that he uses this information to avoid those areas. "They're a little bit like land mines going off, and you don't want to walk into the mine field."

Some Wall Street "rocket scientists" have honed the quesswork more precisely. They are able to identify which technical system is prevailing at the moment and what signals the system will give out at different price levels, Mr. Nichols says. These sophisticated traders then use that insight to devise trading strategies accordingly, he says.

One futures money manager thinks stop-gunning traders neither guess nor use computers, but instead are learning through their brokers and other sources where the big orders are sitting. "I wonder if this were the securities industry, if (traders who gun for stops) wouldn't be in jail for this type of thing," he says.

Brokers who disclose such information would be violating federal regulations and exchange rules. But there are more subtle ways the information leaks out, traders say, such as through winks and nods and euphemisms. "They don't come out and say "I have an order at six," says a former New York trader. "They say, I think there's good resistance at six."

In the crowded trading pits, traders can also find out about stop orders when they catch a glimpse-accidentally or intentionally-of other brokers' order cards, says an analyst. Because they have little hope of a regulatory crackdown, gunning victims say they have learned to accept it as just another risk in trading commodities. "If you want to play with the big boys, that's the way it works," Mr. Nichols says.

To avoid being stung, many money managers no longer place stop orders, says Jane Martin, executive director of the Managed Futures Association. Other market players, says Mr. Milling-Stanley of Shearson, have learned to protect themselves by placing stops further away from current prices. Experienced traders recommend moving stops when activity looks suspicious. Market users must be especially alert during slow-trading periods, such as during banking, international or religious holidays, says Mr. Demier of PaineWebber.

Still others try to take advantage of the strategy without actually playing it. Malinda Pinson, partner of Fundamental Futures, an Ankeny, Iowa, money management firm, says her firm watches for such things as gunning stops for opportunities to execute trades that it would have made anyway. "We have learned to wait until the technical traders' stops are triggered," she says. As the "big machine traders" start selling, her firm starts buying, she explains.