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  1. Pending orders are used when appropriate conditions for a favourable trade do not exist at present market levels, but are likely to do so at a future time. In these conditions, a trader can decide to set a pending order which will be automatically executed if the market gets to that level. For instance, a trader may be looking to sell a currency at a resistance level, but the price of the asset is still some distance away from his preferred point, and presently heading upwards. If he uses a market order, the trade may keep advancing against his position and leave his account in jeopardy of a large draw-down or being stopped out entirely. But by using a pending order such as a Sell Limit order set to the resistance level, his trade is executed at a point where the trade is more likely to succeed.
  2. The Non-Farm Payrolls (NFP) report is a part of the employment data released by the US Bureau of Labour Statistics on the first Friday of every month. It is a highly-watched economic indicator as it provides very strong information about the state of a nation’s economy. If more people are employed in the private sector, it shows that the economy of the nation is strong. Bad employment figures are a direct consequence of a weak economy. When the global financial crisis hit as a result of the collapse of the US sub-prime mortgage market in the US, the multiplier effect hit home and caused many businesses to lay off workers and reduce wages, resulting in poor NFP figures for many months at a stretch. The NFP represents about 80% of workers whose output brings about the total GDP of the US, and it helps policy makers evaluate the state of the nation’s economy and decide on economic policy.
  3. Traders can only trade when the markets are open for business. These times are referred to as market hours. Market hours differ from market to market. The stock market is only open for about 6 hours a day, 5 days a week. The forex market is a 24 hour market, with the market hours divided into 3 main zones; Tokyo, London and New York time zones.
  4. Hedging is used if the outcome of a trade is not assured, or if a transaction becomes too costly as a result of exchange rate differentials. In such an instance, a trader may decide to take a contrary position in another market or employ another kind of trade in reverse of the original one in order to cover up any losses incurred on the first trade. Hedge trades are done in such a way that if the original trade is a winner, the payout is higher than the second trade used as the hedge, and if the first trade is a loser, the hedge trade will cover the losses.
  5. Fundamental analysis is the primary driver of the forex markets. This is because the figures released for the economic indicators will affect the investment climate and appetite of traders for the affected country’s currency. Millions of individual and institutional traders watch these economic indicators and when the figures are released, they produce an immediate market bias for the affected nation’s currency. This bias can be positive, (sending the currency value upwards) or negative, crashing the value of the currency. Traders usually develop a bias because fundamental analysis answers the following questions: is the economy of the country in question expanding or contracting? What parts will the country’s policy makers be looking at, and what actions will they possibly take? What parts of the economy is doing well or in bad shape? These questions help traders determine if that country’s currency is worth holding, and they respond accordingly after conducting the fundamental analysis.
  6. Certain economic parameters are used by economics and politicians alike to determine the state of a nation’s economy. Some of these parameters include employment reports, retail sales, consumer and producer inflation figures, the Gross Domestic Product (GDP), interest rate decisions and manufacturing data. Economists look at the economic indicators and make prediction of what the figures will be every month. The extent of conformity or deviation of the actual figures from the consensus reached by economists in their predictions, affects the sentiment that traders have for the currency of the affected country, leading to either an increased demand for the currency or reduced demand. The extent of demand will ultimately affect the value of the currency vis-à-vis other currencies. A calendar of these indicators is released every month for the benefit of everyone concerned, including forex traders. Economic indicators are known colloquially as forex news.
  7. In the financial markets, traders can buy or sell securities in two ways: directly from the liquidity providers (banks) through the dealing desk of brokers When buying directly from the liquidity providers, traders get access to pricing and deals directly. When buying through the dealing desks, traders buy indirectly, as the brokers operating dealing desks buy from the liquidity providers and resell to the traders. In this instance, the dealing desk broker is not operating as a broker but as a dealer. Dealing desks have implications for traders as traders are offered pricing at slightly marked up rates. Dealing desks have also been implicated in some pricing abnormalities such as stop hunting, slippages and re-quotes.
  8. Day trading is often seen in the light of normal employment hours, where workers clock-in in the morning and clock-out at the end of the trading day. Day trading is the hallmark of speculators, who use leverage in order to maximize the relatively small market price fluctuations that occur during the trading day. The volatility of markets such as the forex markets allows traders to open and close positions in a matter of hours. Day trading is done by the majority of individual traders in the market, hence contributing to the great market liquidity that the forex market boasts of.
  9. The secret to day trading is that there is no secret. Smart-ass, huh? Bear with me, I'll explain. A secret means that not a lot of people know about it. When trading, do you want to look at something that only a few people are looking at? So that when you make the decision to enter, it's you against everyone else? Hell no! That makes no sense. Even Paul Rotter, probably the largest individual futures trader, said he wouldn't be able to go against everyone else if the market was going one way. So you want to be on the side of with the most volume. And where does the majority of futures volume goes through? Trading Technologies' (TT) gateways (I remember a quote on their site that said about 70% of all futures volume goes through them). And what do you see on the screen of every professional trader? Columns of red, blue and prices. What is it? MD Trader that is part of TT's X_Trader (or a competing product that looks pretty much the same)! Don't you think professional traders would tell TT if there was something essential missing on MD Trader if this is what they use all the time? What about X_STUDY (TT's charts that are also part of X_Trader). How many chart types does it support? Not many. How many indicators does that have? Not many, and most of them are based on volume. And why don't traders complain about X_STUDY? Maybe they don't look at charts for decision making? So might it be possible that all the information you need can be seen on this small MD Trader window? Is this even possible? Paul Rotter (same guy I mentioned above) says he looks at charts for orientation, but doesn't make decisions based on that. What does he use to make decisions? The MD Trader! (Btw, this is not a commercial for MD Trader, you can use any competing product that shows you the same information). And what does MD Trader show you with just 5 columns? • All Bids • All Offers • Last Trade (Price and Size) • Volume by Price (a.k.a. Volume at Price, Market Profile, etc) • Your Orders inkl. your estimated position in queue (shown as EPIQ) Why is this relevant? Because this is a market, not some magic world. Bids and Offers make a market and the last trade shows transactions that took place in that market. See, this is simple. This is just a market, no magic. Think of it as a bazar. No one uses charts or indicators on a bazar to make the decision to buy or sell something. Same with the trading pit. And traders in the trading pit also use something else: noise. Noise meant momentum. How can you see momentum in the MD Trader? It's how quickly bids and offers change and how much is how quickly traded. So momentum is another important information that you can't put in numbers, but you can feel looking at the order book. What about Volume by Price? It allows you to find out how much has traded at a price when the last trade information is changing too quickly. It also summarizes the entire day's trading. You don't know whether the volume that you see there are still open positions or whether they have been already closed. But some of them are likely to be open. And those traders care where price is right now. You don't know when the traders that are on the losing side are going to puke, but you know that they are going to puke at some point. And that point comes closer the more the market moves against them. And they don't care whether there was an S/R on the chart or there is some indicator telling you to buy or sell, when they want out, they get out and this will affect the market. What about EPIQ? It shows you how likely it is that your limit order is going to get filled. Do you really need this? No, but it's good to know. No reason to enter at market, if your EPIQ is 10 and you expect a few more trades at that price. I hope I've given you something to think about. And please don't flame me in this thread, it won't change anything. That's like saying Newton's law of gravity does not apply to the part of the world that you live in. It is what it is. I'll post a few snippets of my favorite posts made by other traders from this forum to illustrate what I mean by all this.
  10. When do you think the most points are accumulated in the S&P E-mini market? During the day session or during the overnight session? To answer this question I developed two simple strategies. Both strategies only go long. They both use a daily chart and a 200-period simple moving average (SMA) as a market environment filter so trades are only taken when price closes above the SMA. Both systems were executed from 1997 to September 2011 with no slippage or commission cost deducted. The Day's Session The first strategy simply buys at the day's open and closes the position at the end of the day. Thus we are capturing the points gained or lost during the day session. The equity curve is a sum of the points gained or lost during the day session since 1997. Below is the equity curve of this trading system. The Night Session The night session strategy is just as simple but it opens a new position at the close of the daily bar. It then closes that position at the open of the next bar. Thus we are capturing the points gained or lost during the night session. The equity curve is a sum of the points gained or lost during the night session since 1997. Below is the equity curve of this trading system. As you can see there is a clear difference between the night session and the day session. What does this mean to you? There does seem to be an edge in exploiting long positions by riding the overnight session. My hypothesis is because so many active traders do not trade the overnight session, the market will often move in such a way as to lock them out from gains. Most people are familiar with the market shakeouts that rattle the faith of bullish participants, thus forcing them to lose their position. You've seen it where the market moves down to takeout your stop only to reverse in your favor. A painful experience. However, the market does have another subtle trick that messes with your psychology. That trick is making you miss the bull move all together. Yes, the markets are good at trapping you out of a move too! Anyway, keep this night vs. day session study in mind and perhaps you can use it to help gain an edge with your trading.
  11. I came across this guide, 25 Free Options Strategies from the CME Group, http://bit.ly/nnqDEC Has anyone used it?
  12. If you have $10,000 to put towards your trading account, don’t waste your time. As a matter of fact if you have $15,000 or even $25,000 in your trading account, don’t waste your time. That is, don’t waste your time with careless mistakes because every trade counts. The Learning Curve is Flat The learning curve for learning how to trade futures for a living can be extremely flat, that is you may spend countless hours learning all there is to know about the trading the markets, but you aren’t seeing a return in profits. Your time spent learning increases, but your account stays the same, or in many cases shrinks. If you want to win at this game and become consistently profitable over time then you absolutely, positively, must be disciplined 100% of the time, all of the time. Don't Waste Your Money on Tuition Many people like to credit their trading losses in the early years towards “tuition” or “paying their dues” and while there is something to be said for learning by doing, there is no reason for justifying a trading mistake. Every error you make in trading is costing you money. That First Step When starting out as a trader, you probably traded a practice account for a couple of months and began to learn the ropes, testing your strategy (my broker of choice is Infinity Futures for both practice accounts and live trading). After becoming anxious you make the switch to live trading and realize that most of what you learned goes out the window when you’re in a live trade. Your emotions come into play and your methodology becomes foggy. And the Light Bulb Goes Off There are many “light bulb moments” along the way, but limiting the mistakes when you’re trading a small account is crucial if you want to prevent blowing up your account. Along with reading the material on the EminiMind Blog I recommend reading and learning from the mistakes of other top traders in the Market Wizards series. 3 trading mistakes that will lead to disaster: Impulse trades – If you find yourself clicking sporadically on the trading ladder you need to stop immediately and reevaluate your trading plan. Revenge trading – Just because you had a loss doesn’t mean your next trade needs to be a home run, try for consistent singles and doubles with a few strikeouts in the mix. Trading too big for your account size – If you’re trading an account size of $10,000 then the max number of contracts you should be trading on the ES or 6E is 2, enough said. The Only Guarantee While no one can guarantee your success trading the markets (if you come across such claims be leery) I can guarantee you that if you make any of these 3 trading mistakes you will lose money. Treat your trading capital like you would your children, or if you don’t have children, like a one of a kind Porsche, you wouldn’t throw your kids in front of a bus so don’t piss away your trading account with avoidable mistakes. Patience pays in trading the markets so don’t waste your time trading a small account. Every trade is a valuable step towards generating consistent income trading futures for a living.
  13. On 5-3-11 we recommended buying June RBOB at 3.3616 on a stop. Overnight the market traded lower and took out the low of 5-3-11. Since the low was taken out the pattern is no longer valid. We are no longer recommending buying June RBOB at 3.3616 on a stop. We will sit on the sidelines and wait for further price action before we look to get back in.
  14. I have been shown that the date is recurring throughout price action all day everyday and in all markets. For example there is a 4 digit date and a two digit date. It is painfully obvious in markets such as the es but harder to see in the YM. The YM has to be treated like an odometer in a car. The actual price will exclude the last digit on the right. This is also true in the currencies and the dax. For example if the date is the 27th which it will be on Monday then the following #'s would act as support and/or resistance depending upon price movement.: ES: 1242, 1251,1260 and 1269 Price 1251 is 27 added up as 15+12; 1242 is 24+2+1=27; 1269=12+6+9=27 YM for monday will be 11520 and 11430; The sum of these #'s equal 27 but remember it is without the last digit to the right. These numbers change everyday with the date. I hope this helps someone in their trading. If you want to know the two digit date it is less complicated. Of course for Monday is 27. Then it will be all #'s that equal 9; 27 (2+7=9) 36, 45, 54, 63 and so on. There is a ton more but hopefully this will help someone.
  15. Scott Slutsky career spans nearly 30 years in the futures arena. He spent 20 plus years in the various currency pits filling institutional and retail orders for customers such as Morgan Stanley, Goldman Sachs, Lehman, and others. He is a former Board of Director of the Chicago Mercantile Exchange, and a current director of the CME/CBOT/NYMEX PAC Committee. Mr. Slutsky moved off the trading floor and used his expertise to become Managing Director of Alaron Trading Corp, which was an FCM. Traveling the world promoting Alaron and the futures industry Mr. Slutsky and his team have become experts in international relations in India, Russia, China, South America and the Middle East. His Mock Trading Seminars have captivated audiences for years. His interaction with the participants promotes education with laughter. Currently launched BRICs Worldwide Consulting LLC http://www.bricsworldwide.com Managing director PFGBEST http://www.pfgbest.com/global
  16. Trading without charts... My setup... Some data were erased intentionally.
  17. Hi So basically I'm fairly new to futures trading, I've been trading options for about two years now. Mostly I stick to trading equities. But I've noticed that if the DOW has a significant down or up day the Nikkei follows suit on the next day (that night in America). Now of course this can only happen in Japan on a Tuesday, Wednesday, Thursday, and Friday. So basically what I want to do is trade options or futures on the days that I identify this trend. I'm looking for the best way to capitalize off this and I'm having a bit of trouble figuring it out. I would need to purchase these options/futures at the tail end of the American trading day and before the markets open in Japan, does anyone know how I could achieve this? Any and all help greatly appreciated.
  18. Hi there, I am currently developing a trading plan based mostly on work done by Martin Pring on price patterns, price action. I am looking for the market to signal to me turning points, reversals using price action in confluence with other longer term price patterns and support/resistance levels. Can you recommend any resources on exiting trades? I preferred style of trading is to scale in on longer term charts and then look for an all-out exit. I much prefer this over all-in and scale out as it is less risky. I have written about a potential setup on Platinum Futures here on my blog and I find it easy to get into a trade but not sure where to get out. Thanks for any pointers. keymoo
  19. I decided to post up the Euro's cousin, the British Pound/USD Futures. Mainly, because I am trading it live every day and I've been able to put together a reliable and robust tradeplan using UTA. I trade a 144 tick chart and like the Euro, I begin my trading at the start of the US Equity Session, 9:30 est. Also like the Euro, the BP trades on the CME so we'll use exchange times as our time reference. Like the EC, I backtested about 6 weeks of trading, Feb 1 thru Mar 12th. I researched a tight plan with the intention of getting my trading done early each session. Two wins and a positive result meant I was done for the session, or, by 11 am cst if I hadn't yet hit my goal, I'd be done. Over the first 6 weeks I tested 83 trades, 60 winners and 23 losses! Not bad. 72.3% winners and a nifty +505 points. Since then, as of today's date, I've been posting my real trades (the trades I take and call live in the traderoom that I host every day). I now have 191 total trades, including the backtested trades; 132 winners and 59 losses for a respectable 69.1% win rate. April was a tough sideways month, with wins and losses evenly distributed, yet we were able to hang out just below our equity highs and remained poised to break out to new profit levels, which happened last week. Today we hit new equity highs again, and have amassed +819 total points. The stair stepping is forming nicely as you can see from the attached screen shot of our equity curve. I am using HVMM 2010 for this market as well. It's a great compliment to the EC. The different timeframes 144 vs 233, and the different rhythm that each trade in, make them not correlated enough to worry about. Their results do not track too closely day to day, other than the fact that they both seem to be consistent performers. Too much correlation is something to be concerned with but I just don't see it being a real factor in this case. Check out the Trade Distribution Frequency Histogram too. What a beautiful distribution of trades. Notice the strong bias on the positive side with the majority of our winners hitting around 16 to 18 points. Notice also how our tight trade mgt plan has ended up with about 10% of our trades stopping out with just 1 point. Many of those trades would have wound up losing, but we were aggressively eliminating our risk while also covering the cost of our commission. No pip spreads to worry about with futures! Notice also how our longs and shorts were very simimlar in personality. This is the type of thing we like to see. It shows a stable trade system that does equally well going long or short. Feel free to post comments, questions or whatever is on your mind. Start a new thread and share the results that you are discovering on your favorite markets. It's amazing what the UTA reveals to us. Get in the habit of posting your trades to UTA every day and soon you'll build up a valuable history of trade data that will help you improve your trading.
  20. I don't have enough historical data to check back very far but it seems to me that the Bund (FGBL on Eurex) is at its highest price (126.95) it has ever been. Is that true? Can anyone confirm or correct me?
  21. It is even possible anymore to day trade the Emini S&P futures successfully? I've been trying to learn pro strategies and systems for day trading the ES contract, but nothing seems to work consistently in this algo run market. There is no 2-sided action, just quick stop runs to bring the market down fast and bait shorts, then massive run ups on crazy TICKS (+1000). I know I should just be buying this market on every dip, but these market makers are so clever that they'll bring the index down farther than you'd expect so to show apparent weakness, and then spike it back up on no volume. I just can't go long when we are this extended.
  22. Many new traders begin their trading experience on the mini Indices, with a primary focus on the mini S&P 500, as either a scalping trader or an intra-day trader. Their daily profit target is normally between three to five points. For an experience scalping trader, this could possibly be done but not for a new trader. It is hard to take any points out of S&P 500 on current market conditions. If you plot a range indicator you will understand why it is hard to make any money in S&P. If you are trading for living, do a study on currency futures. You will understand what I'm talking about. The Euro currency future is traded under the symbols EC or 6E and has the same tick value as the E-mini S&P 500, twelve dollars and fifty cents per tick. A point in the Euro is equal to a movement of one tick. There is few studies you can review on this link http://www.tradershelpdesk.com/pdf/market-research.pdf Good trading guys!
  23. I find the best trading setups are where traps catch out one side of the market forcing covering of positions. One setup that I find very useful is best shown on a one minute chart with volume setting up conditions. I am looking for a low on an expansion bar and with high volume. I have marked it - Exhaustion 1. The second exhaustion has slightly less volume and forms after a retracement. This exhaustion bar is usually at new lows but can be at a slightly higher low. The theory is that these exhaustion bars get rid of the majority of sellers leaving the potential for a reversal to the upside. The entry is based on a failed move to the downside which traps sellers forcing them to cover. I expect a fast move to the upside, so if price doesn't move quickly I will close out. There is a few potential entry areas that I have marked. The reverse is applicable for downside trades. (The entry area for the short should read Lower High)
  24. The lack of a manned physical trading floor for pit trading of futures contracts is a major reason why traders should avoid the all-electronic ICE futures when the Russell 2000 contract moves from the CME in September 2008. This article from the Wall Street Journal should help illustrate why: In Mystery Cotton-Price Spike, Traders Hit by Swirling Forces Alarm over the price of oil has sparked controversy over the role of "speculators." But it's an unusual and damaging price spike this year in a different commodity, cotton, that has market watchers scratching their heads. Waking up on March 3, cotton merchant Alan Underwood in Lubbock, Texas, flipped on his computer and got a shock: In the middle of the night, cotton had soared, to far above the price at which he had agreed to sell some. He frantically called his contacts in the markets. "I couldn't find anything, no news at all, to change the fundamentals of the cotton business," he says. Yet by day's end, prices on the usually staid market had leapt 15%, and the next day 16% more, before falling back. Investors faced two bleak choices: Come up with far more cash to keep the losing bets on, hoping for a turnaround, or unwind them for steep losses. The sudden price jump has had lasting effects. By hurting traditional users of cotton futures and forcing them to curtail trading, it continues to hamstring a market on which farmers, merchants and processors rely to hedge risk. The dislocation is fueling arguments both about what caused the spike and about oversight of the market for futures, which are contracts to buy or sell something at a set price on a set date. Many in the old guard blame billions of dollars in new bets by big institutional investors for distorting prices; some cry market manipulation. The Commodity Futures Trading Commission is conducting an investigation of whether cotton prices were "artificially inflated." The probe isn't complete. But a Wall Street Journal examination of the March events reveals how several unusual factors merged to cause a damaging upheaval: First, after new financial investors poured into their market, some cotton merchants themselves traded more aggressively. Adding to their vulnerability was the abolition, that very day, of their usual source of market insight: floor traders. Another blind spot was the growing off-exchange trading by hedge and pension funds, a force the CFTC can't fully track. In the midst of this brewing storm, a little-used exchange rule suddenly kicked in, blindsiding merchants and then forcing them to unwind sell orders with a torrent of buying totally unrelated to supply and demand for cotton. The price spike was extraordinary because U.S. cotton inventories were at their highest in four decades, and the housing slump weakened sales of towels and other fabrics. Global supplies were also high, buoyed by better farming techniques in India. Cotton is one of the smaller commodity markets, its $16 billion in futures and options contracts dwarfed by oil's $440 billion, according to a June Barclays Capital estimate. But some big investors saw cotton as due for a rally. Art Samberg of hedge fund Pequot Capital Management, for one, recommended cotton in Barron's in January 2007. Some investors reasoned that farmers would divert cotton acres to food crops like corn at a time of rising food prices. Others figured costly oil would push up the price of a petroleum-based competitor of cotton, polyester. Shippers and brokers say a trader at Pequot, Lewis Johnson, began attending industry conferences around the world, displaying a deep command of data on inventories, farm output and textile trade. They began calling him "Jet Boy" after, they say, he boasted over drinks he would make enough from cotton bets to travel by private plane. Mr. Johnson, who left Pequot in November, didn't return calls seeking comment. Pequot's cotton bet "worked out very well," says the fund's chief investment strategist, Byron Wien. The market had long been dominated by industry players such as cotton merchants, who buy farmers' growing crops and sell futures to lock in a profit. But this year, merchants stepped up their own trading, partly because there was a record crop to hedge. By late February, merchants held more than twice as many contracts to sell cotton as at that time in 2007 and 2006, says Jeffrey Korzenik, a money manager who has analyzed CFTC data on the cotton market. Jump in Buying While they were selling, institutional investors were buying. Their bullishness rose after a crop report in February said U.S. farmers would plant the fewest cotton acres in 25 years. The investors poured new money into bets on indexes representing baskets of commodities. A Schroders PLC agricultural fund raised $2 billion more in January and February. CFTC data show an eightfold jump in net buying from Feb. 19 to Feb. 26 by classes of investors that include pension funds and hedge funds. They also made many bets that would work only if cotton prices climbed sharply, according to options brokers and data from the operator of the cotton exchange, IntercontinentalExchange Inc., or ICE. In February, cotton futures rose 18%. The contract for May delivery stood at 81.86 cents a pound at month's end. At that point, the ICE, which had bought the old New York Board of Trade, ended a 138-year-old tradition of floor trading in the cotton pit. The next Monday, March 3, it switched to all-electronic trading, which then began at 1:30 a.m. Eastern time. Between 1:30 and 4:33 a.m., May cotton shot up three cents a pound -- the limit the futures contract could rise that day under ICE rules. When U.S. traders awoke, phone lines were soon abuzz between New York and the cotton-trading hub of Memphis, Tenn. Frantic investors wondered where the price pressure was coming from. But with no more floor traders to consult for scuttlebutt, they were in the dark. The futures market was dormant because the cotton contract had moved by its daily limit, but the ICE's options pit would soon open. It offered a way to keep trading. Options offer their purchaser the right to buy or sell something at a certain price in the future. Traders can duplicate the purchase of a futures contract by acquiring an option to buy cotton at a given price and selling someone else the right to sell cotton at that same price. Such combo trades are known as "synthetic futures." On March 3 and 4, they tripped up unwary cotton merchants. Commodity investors trade on margin -- that is, put up only part of the cost of the trade, usually 5% to 10%. If the price moves against them, they face a margin call, or demand for more cash collateral. The more the price moves against them, the bigger the margin call. Exchange Rules What some merchants didn't focus on was a rule that allows the exchange to use the options market's synthetic futures to decide what cotton's price is at the end of a day, for purposes of determining margin. Merchants had been among those supporting adoption of this rule back in 2003. The problem: The options market doesn't limit how much prices can move. When the options market closed in midafternoon, the ICE jolted traders with an announcement: The day's price of the May contract was 93.90 cents -- 12 cents above the prior Friday. Traders faced huge margin calls from clearing brokers, the firms that execute their trades and stand behind their obligations. Traders had to put up four times as much new money as they typically would need to in one day. All afternoon, traders shuttled in and out of meetings with incredulous bankers, with only hours to obtain giant new loans or have their trading positions closed out. Margin calls ran to hundreds of millions of dollars collectively for large merchants, including Memphis giants Dunavant Enterprises and the Allenberg Cotton Co. unit of France's Louis Dreyfus Group, according to people familiar with the matter. Dunavant and Allenberg declined to discuss their trading. Events in other crop markets heightened the crisis. The week before, several wheat markets had seen huge spikes. Agricultural lenders had provided merchants with large amounts of credit. With cotton now spiking, they were leery -- so unsure of cotton's value that they wouldn't accept additional physical bales as collateral. 'All Insanity' By the next morning, March 4, merchants who had maxed out their credit prepared to exit their futures trades via offsetting options trades. Since the trades they had to unwind were sales of futures, to get out of them they were forced to buy futures, en masse. At 10:56 a.m., the barrage of forced futures buying drove May cotton to $1.09 a pound, even though cash cotton was in the mid-60-cent range. "I was thinking that it was all insanity," says Mr. Underwood, the Lubbock merchant, whose phone was ringing with calls from desperate friends and trading rivals. "There was simply too much cotton in the world" to justify the price, he says. He sent his clearing broker less collateral than it demanded and warned it to keep careful documentation if it liquidated his positions. "If I was going out, I was not going quietly," he says. The clearing firm refrained from forcing him out of the market. As the price began dropping the next few days, his finances recovered, although his business remains below what it was. Others were less lucky. A Lubbock competitor, family-owned Canale Cotton Co., unwound its positions and bore a loss of some $2 million, family members confirm. Paul Reinhart AG, a 220-year-old Swiss trading firm, also took a large loss exiting its trades, people familiar with the firm say. It declined to comment. Cotton-industry groups attacked the ICE for saddling them with such high margin requirements on March 3 and 4. The exchange says its move was "based upon a published, transparent set of rules" adopted with the input of industry groups. For investors in the publicly held ICE, volatility was a boon. The ICE says that "extreme volatility does not inherently indicate a problem with the function of the market itself." But it has changed the rule that led to the extraordinary margin requirements March 3 and 4. The ICE now will base margins on the daily-limit price move in the futures markets. Angry Merchants Later that March week, in Washington, angry merchants confronted the acting chairman of the CFTC, Walter Lukken. Some participants say the agency indicated it hadn't noticed any problems brewing before prices soared. In June, Mr. Lukken said there was concern at his agency "that the fundamentals of the cotton market didn't readily support the runup in prices." The CFTC can't track all commodities trading. A large part of it occurs off-exchange, as Wall Street firms execute private contracts called swaps with institutional investors, allowing those investors to bet on futures without directly trading them. The Wall Street firm then buys or sells futures or options itself, to offset the risk it has taken. This system means hedge funds and their ilk can avoid exchange limits on the size of their bets. Wall Street firms, by contrast, are allowed to trade in large quantities because the CFTC regards them as commodity dealers. The system also means that part of hedge and pension funds' buying gets lumped into the category of buying by "commercial traders." Thus, the presence of financial buyers and sellers, sometimes known as "speculators," is partly obscured. Writing to a House committee last month, the ICE said a review of nonpublic cotton-trading data found "no significant or unusual buying activity" by financial investors, and thus the data don't support assertions "that these traders acted individually or collectively to manipulate the price of cotton futures in the Feb. 29-March 4 period." The ICE looked only at those days. Its letter didn't concern late February, when CFTC data show higher-than-normal futures selling by merchants and far higher buying by financial investors. The ICE also sent the letter without consulting the CFTC. That regulator says its own investigation of the two-day March cotton spike is continuing. Fallout has been significant for farmers, traders and textile mills. Many cotton shippers are no longer bidding for crops months before harvest and thus are rendering futures markets less effective as risk-management tools, Undersecretary of Agriculture Mark Keenum told the CFTC in April. That situation continues. And the prices of cotton? After touching $1.09 a pound in the tumult of early March, it closed Tuesday at about 67 cents. After the spike, two crudely illustrated charts made the rounds among traders. In one, traders drew a shark with some of its teeth formed by the cotton price's jagged spikes. "The ICE Shark," they call it. The other features a ship hurtling toward an iceberg. It's labeled "COT-TANIC."
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