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'Gunning' Plays Can Claim Victims in the Futures Pit
by Elyse Tanouye 6/17/92 -

reprinted with permission of The Wall Street Journal

Just a few minutes before trading closed on New York's Commodity Exchange one sleepy autumn afternoon, all hell broke loose. Another of the many games traders play was afoot.

In the cooper futures pit, a surge of buy orders cascaded onto the floor. Normally such late activity barely budges prices. But on this day, 10-8, so many top dealers and left early for the London Metal Exchange's gala annual dinner that there weren't many sellers around to accommodate the buyers. Copper prices soared nearly three cents a pound.

The few junior traders still at their posts quickly concluded that someone was trying to exploit the market's inattention to push cooper futures prices about $1.07 a pound, a level deemed crucial by traders who use technical analysis. A price move above $1.07, it was widely assumed, would trigger "buy" signals amount trend-watching commodity funds, prompting the automatic execution of a heap of standing purchase orders. Such ahead-of-time orders are known as "stops," which is why this game is called "gunning for stops." The idea was to induce a flood of buying 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 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 risk people run in gunning for stops, traders say. Yet the game can pay off handsomely, and it is much in evidence in many of today's commodity markets.

Gunning can work because so much of futures trading nowadays is based on 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, traders can guess from market talk and by looking at price charts where the key levels are. And they know that traders usually place stops around those critical areas.

Money managers and other futures traders have complained privately for years about floor traders engineering price movements to trigger 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 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 trader. He made similar denials - met with skepticism - when he was rumored to be behind squeezes in the London market last year.

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 regulators say it's next to impossible to prove that a price move was the result of manipulation, which is illegal. But few people in the market deny that it goes on, and some say they've noticed it occurring more frequently in the past year.

"It happens all the time," says a sugar trader. In the past year, 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 unorchestrated result of a choppy, thinly traded market, he says, but people are blaming traders for gunning their stops.

"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.


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