FAQs to 12-31-97

Q. From Laura K.(Location: Maui): I haven't found a broker I really get along with here, and have spoken with a rep in California. I like the way the guy comes across and would do business with him, but am wondering about the size of his company, and if he should go out of business, what will happen to my account and cash?

A. Have no fear. When you write and send your check, it goes to the Futures Commission Merchant (FCM), not your brokers office. It doesn't matter if your representative works in a "one person" operation or with thousands of reps. If your rep goes out of business or gets hit by a bus, (I know... sounds bad), your money is safe as long as the FCM is in business. There are very few cases where the FCM goes out of business causing a loss of the customers' money. The regulatory agencies, the Commodity Futures Trading Commission and the National Futures Association keep a very close watch on the financial aspect of the FCMs, and they do a tremendous job of monitoring. Have fun doing business with the rep of your choice and good trading.

Q. From Gerry J.(Location: San Francisco): I believe I may have some trouble with the Introducing Broker I use. I have noticed some positions showing up in my account that I didn't request. When I call, or sometimes the owner of the company calls me and says not to worry, the position was a mistake and it will be removed from the account. This almost never happened for two years, but now seems to happen on a regular basis. What is going on?

A. Gerry: It may well be that an account with a number much like yours has been opened and the positions are being assigned to your account by accident by the FCM. It may also be that the representative of the new account calls in with the wrong number to the trading floor. These types of things can happen. On the other hand there is of course a possibility that unethical practices are taking place. If the problem persists or appears to get worse, request a full explanation from the owner of the IB. Generally that will do the trick and clear up any questions. If however you get a "brush off", then inform the IB owner that you intend to talk with the compliance manager of the FCM. This may prompt a more complete explanation from the owner. If you still receive no satisfaction, contact the FCM and request to speak with the compliance officer. The compliance officer will check into the situation and report back to you. Give the FCM and the IB every opportunity to explain and rectify the problem. Should all of this fail, and you have submitted your request in writing as well as verbally, then having fairly exhausted all opportunities for the FCM and IB to clear the problem, go to the next level. You should then contact the NFA and explain your situation and the course of action you have taken to this point. They will most certainly investigate the matter fully.

REMEMBER...give all involved the full benefit of the doubt and a reasonable opportunity to solve the problem to your satisfaction before involving the regulatory agencies. 90% of the business out there is honest, ethical and hard working. They don't want dissatisfied customers any more than you want to be dissatisfied. If this is an honest mistake, you should not bring their name or reputation into question. It would be the same as if you yourself were slandered by your neighbors or acquaintances.

Q. From Paul W.(Location: Palm Harbor, Florida): Can a series 3 licensed person earn a percentage of the growth of assets under management? What if they share in the losses?

Can a person trade for 15 friends and family without a series 3 license?

What is involved in becoming a CTA?

A. Paul: It is more difficult to share in profits if you are registered as an AP (series 3) than if you are not. Although legal, once registered, the NFA will constantly be after you to register as a CTA or CPO if you have any profit sharing arrangements. As an AP you cannot have Power of Attorney on any accounts until you have at least two years of continuous registration. There are waivers possible, but not often given. So... the only way to be able to "direct" accounts and share in profits is by a method known as "exempt CTA", which, as I say is legal, but you will be hounded to register as a CTA.

You may act as an exempt CTA in a non-registered capacity and handle up to 15 accounts of family and friends. Remember though, you may not advertise, and you may not "cold call" for customers. Also keep in mind that you are exempt from registration but you are never exempt from the regulations regarding fraud etc. If you are interested in building a track record before becoming fully registered, this is an excellent method.

To become a CTA is very easy. You must pass the series 3, then fill out the proper registration. A form 7-R to register as a CTA, and an 8-R to register as an AP and Principal to the CTA. Total cost in registration and membership in the NFA is $670. At the same time you are doing the registration you should be creating your Disclosure Document. We do these documents for $750, but I always tell people that if you have time and don't mind doing the work, just get hold of the document of another CTA and revise it to your needs.

Best of luck in what you decide, and we are here to help any way we can.

Q. From Mack G.(Location: New York): I see things on your page about bad representatives, what about the bad customers?

I am dealing with a customer who is abusive. I have tried to work with him but all he does is threaten me with litigation. When I do a winning trade for him he likes to claim that it was his decision that made the trade, and with the losers of course they were my fault. I consider myself a very good rep and work with the one thought that my customers come first. Why is it we reps always get the bad rap and not the horrible abusive customers? Go ahead, put this on your page and see if the customers can give us a little respect too!

A. You're right Mack, and I will put this on the page. The reason there are not more of these on the FAQ page is because I don't get letters from reps about this kind of thing. I will not censor any letter I get (except for the foul language and persons names). I will post any letter with request or without request from the writer except when specifically asked not to post. In that case I will not post the letter.

You are right in mentioning the customer. I handled customers' accounts for over 13 years, and I too had a couple of these types. As far as "credit and blame"... face it, that is the nature of our business. On the other hand, when it comes down to abuse from the customer just simply don't take it! I have closed accounts of two customers who were just like that. You have the right not to be abused, and I wouldn't stand for it either. If a customer threatens litigation GET RID OF THEM!!! This business is tough enough. You have to do your best to make winning trades and if you are like me it really hurts when you lose money for your customers. Then you have to call them to tell them of the loss. It is a pressure business and you earn every penny you make in commission, so personal abuse and threats are not part of the job. I am happy you wrote, and hope customers and potential customers understand also. They deserve the best service we can give them, but if we give them that service, we deserve the same respect that they get from us.

I am sure you'll agree that 90% or more of the customers out there are as great as we expect them to be.

Q. Patricia L.(Location: Miami): I call my own trades and have for years. I do okay and have made some money over all. Would it be a benefit to me to take the exam and become a registered commodity rep so that I can lower my commissions?

A. Patricia: It would seem like a good idea at first blush, but it really isn't. If you intend to handle other customers or eventually register as a CTA to trade for others, it could be a good move. If, however, you are trading with a "deep" discount house, you will probably not lower your commissions more than $2 to $5 and for all the increased aggravation, it's not worth it. Remember, when you register, you must pay the registrations fee. Then if you become a branch office or Introducing Broker you additional fees and possibly another exam. Then you are also subject to the regulations of the Commodities Exchange Act, the CFTC and the NFA. Believe me, if you would be trading for yourself only, registering would be only a headache. Nice to hear your making some money though! Stay with it.

Q. Lazar K.(Location: New York): In your video you discuss only the buying of options. I heard the real money is in writing the options. Do you offer any information on strategies for selling the options?

A. Thanks for mentioning the video, and I guess it's a bit commercial that I should mention it too, but that's okay. I don't have anything in print at this time, but a new package is being developed for the "new" futures and options trader, and I hope to have it out soon. For now, I will tell you that if you would like to call, I am always willing to spend what time I can discussing such things. There are several option writing strategies that will generate "premium income". One such trade would be simply writing the call or put. Other trades with more income potential, and therefore more risk, would be writing the straddle or strangle, butterflies or condors, and of course you could do my favorite invention... the "suicide cross". I won't even go into that one, because you must have years of experience, you must be wealthy, and you must be crazy to make that trade! You should be sure to include the volatility, time decay factor, beta and several other factors into the equation before entering any option writing strategy. Remember although much money can be made over time with such strategies, the risk is unlimited and many traders aren't willing to take that risk for such limited income. There are ways to enhance option writing, but it would get too involved to include here.

Q. Bill M.(Location: Unknown): If I've been taken by a broker is there something I can do?

A. Yes of course! You don't give me much to go on here, and many of the things I suggest you may have already tried, but here goes...

If you have had a problem with your rep, I first suggest you discuss the problem with the rep. One of the major problems or causes thereof is the lack of communications. That seems to be where most of the problems originate. Explain what you perceive then listen to what he/she has to say and what their perception of the problem is. Then attempt to work out your differences to settle the disagreement.

If that doesn't work, tell your rep (not in a threat), you wish to speak with him and the compliance person at the same time. Again explain the situation and see if it can be resolved. You may not think so, but the compliance officer's job is to protect the firm AND the customer. It is always in the best interest of the company to reach an agreement with the customer, and if the compliance officer sees the problem as even remotely being caused by actions or lack of actions on the part of the rep, an agreement should be quickly reached.

If this doesn't work and you are not satisfied with the explanation of the compliance officer, then you can move to the next step. In this case, if you are dealing with an Introducing Broker, it could be the compliance officer of the FCM who Guarantees the IB. If however you are working directly with the FCM, you must move higher.

The next step would be to contact the National Futures Association (NFA). Their number is 800-621-3570. You would tell the person answering the phone that you are considering an arbitration, and would like them to send you the necessary information about filing a complaint. Once you receive the information and forms, fill them out and send them as directed. You will be kept informed as to the progress of the case.

If you choose to bring a law suit, remember that in most cases, the brokerage house has you sign an "arbitration" agreement. This says you agree to settle any disputes through arbitration. If you signed one of these, you must use arbitration. The courts are, for the most part, honoring these agreements.

You will have the choice of having an attorney if you wish, even at an arbitration hearing. The decision of the arbitration panel is binding, and cannot be appealed.

A DISCLAIMER AT THIS POINT... this is not to be considered legal advice! You may wish to contact your attorney before proceeding. I am simply giving you the logical steps that are normally taken regarding disputes regarding futures and futures option trading.

I hope this helps, and I still wish you had given me more to go on. I may have been able to help you more fully, and/or make some suggestions. Thanks for your email, and I do hope this can be resolved without anyone getting hurt.

Q. Keith A.(Location: Milwaukee): In recent weeks I have been introduced to writing options by my broker. So far we have only written a single call or put, but what about writing straddles?

A. If you have just been introduced to writing, take it slow. It sounds like you may have a rep who is willing to teach you new strategies, and that's great. Writing straddles or combinations can be real rewarding, and can be very dangerous at the same time. A straddle is writing (selling short) a call and a put on the same commodity at the same strike price. As an example, if gold is at $330 you would write the 330 call and 330 put. The premium you take in will be quite high, but one or the other of the options will usually be in-the-money. You are at unlimited risk on both sides, and if the market goes up or down significantly you could suffer a major loss if you don't set a limit and cover the positions if it does. If you do begin writing straddles, you may wish to start with the "strangle" or combination. In the example above, if gold is at $330, you would write the 340 call and the 320 put. These can be modified and tailored to fit current market conditions, but for the example of a strangle it works. In this case you will not receive as much premium when you write (sell short) the options, but you have also reduced your risk to some degree since you basically have a range of $20 movement before the options go in-the-money. Most people think you should write the straddle when volatility is low and the price of the commodity has a narrow trading range. The truth is that volatility moves in cycles just like anything else, and you should be ready to write options when the volatility is at or near historic highs since it should mean that the volatility will be dropping and the price of the commodity should fall into a narrow trading range. There are of course many other factors involved, but stay with that rep of yours, it sounds like he or she is doing their best to help you learn.

Q. Jacob C.(Location: Philly): I have been looking at several technical trading programs and will probably employ one or more of them in my trading strategy, but I would like to know more about the fundamental side of trading. What type of information is available, and where can I get it, or where should I start to look?

A. Most often people overlook the most important source for information... The exchange where the commodity trades. One of the functions of the exchanges is to act as a center for information. That should be your starting point. Then depending upon which commodities you are following, you should contact various government agencies and even private sector agencies. If for instance you are interested in the agricultural markets, contact the USDA and ask about reports that are available on your commodity. Get on every mailing list you can. Check with "trade" publications for the contracts you follow. You have an excellent resource right at hand, the internet. Search the government agencies to locate the ones involved with your particular interests. If you are interested in the financials, check out the Federal Reserve. If it's currencies, how about interbanks etc. There are so many reports out there that you could be reading for 24 hours a day and still not even make a dent in the volumes. If you want specific information about certain commodities, just email me again with the products you are interested in and I will do my best to help.

Q. Bernard B.(Location: ISSY France): I registered as a CTA with the CFTC during 2 years but didn't act as such. I started to manage few futures accounts about 1 year ago. Having some success there are more people asking me to manage relatively small accounts, (30 - 50 K$). In order to do it legally I am looking to setup a pool. I am based in France, but want this pool be located out of France. That means I have to register as a CPO and a CTA. What help could you provide me with regarding :

- paperwork, disclosure documents, registration with NFA and CFTC,

- pool's administration (accounting, compliance,etc..)

A. If, of course, you will be handling individual accounts, you would not need to be registered as a pool operator, your CTA would be enough. In that case, since you are already registered as a CTA you would only need the "disclosure document", and to become a "member" of the NFA if you are not already. This would be the easiest way to handle customers since the document is less involved and there is no need to create a limited partnership which is what a pool is. We create a "simple" CTA disclosure documents for $750. We write it, then get your approval. We then submit the document to the regulatory bodies. When it is returned, we correct it and resubmit. We continue to work with it until it is "accepted" by the CFTC and NFA. We then send you two originals of the document and the "advisory agreement", as well as a floppy disk with the file on it so that you may make further updates if you like.

Our Commodity Pool Document is not current. We would therefore refer you, at this time, to a friend and competitor of ours. His pool package includes a floppy disk with the proper format to complete the "Reg D" pool as well as a commercially produced accounting package for the proper tracking of the performance and the generation of customer statements.

The cost of the package is more than that of the CTA document since the creation of a Regulation D pool is much more involved. This is because it also involves individual registration in each State in the U.S. Some States require a "pre-file" which means you must register it in the State before you have a customer in the State, and some require "post- file" for after getting customer in the State. Most attorneys avoid the creation of Pool Documents, and charge as high as $30,000.

Whatever choice you make, feel free to contact us as you proceed, and if the contact we gave you does not work out. We will do all we can to assist you further.

Q. Jack B.(Location: Chicago): I have traded commodities for my own account for several years. I have been quite successful and am changing careers. I will be testing for registration as a commodity rep. I appreciate your web page and believe in honestly dealing with customers and giving them every chance possible to win at trading. How can I convey that to show the people I mean it?

A. People will know! There is an old joke (or saying)... you can't fake sincerity. There is a sign that many salespersons hang over their desks that reads "Smile... you are on the phone". All sales people know that their attitude comes through on the phone when talking to a prospect or customer. The same goes for being real and being sincere. The prospect you are speaking with expects you to be a sales person, but they also want to know you are and honest and truthful. If you deal with the public with sincerity, you will end up with more customers than you can handle, and you will never have a complaint. Glad you wrote, and keep me posted.

Q. Robert K.(Location: San Antonio): I just wanted you to know that I was one of the lucky (very lucky) ones during the 554 point correction. I haven't traded to long, about a year. I just felt the stock market was due for a correction. I certainly didn't think I would wind up with $102,000. I check your site often for the FAQs and now the "Tip" feature, and was hoping I could get my good luck in your page... Will you post it?

A. There ya' go..., and there isn't much I could add to that except one thing, KEEP SOME! Please don't learn the hard way like I did and so many others have. Take at least 50% to 75% of those winnings and get them working for you. Don't end up giving it all back. Get that money into something that will help you for an early retirement or for the kids' college, etc. I am happy for you and thanks for making all of us jealous.

Q. A. J. J.(Location: Irvine CA): I enjoyed your class. I tested and passed the first time. I know you are familiar with the company I was going to work for. I have been watching their sales practices and the way they talk to customers. They will not let the representative take a customer out of a company recommended position, and I have seen too many customers give back all the profits because of it. I want to change companies but the firm says that they will sue me since my agreement with them says I can't work in the business for anyone else for two years if I quit them, what can I do? Am I stuck in a place that insists on intimidating customers and only generating commissions?

A. No you are not stuck. You have a right to work in your profession. Such contracts have, for the most part, been ruled illegal. I am not offering legal advice here, just relating past situations which were similar. When you leave the company you are with, be sure not to take ANY materials that belong to the company. No pencils, no pens, no leads, no customer information, no equity runs, no nothing. You will be starting over, but at least you will work with self respect and you will be able to do your best for your customers. If you are threatened in any way after you leave the firm you are with, contact the labor board, the attorney General's office as well as the NFA and CFTC. The company will prudently back down if they have any common sense. Again, don't take anything that belongs to the current firm or you could be guilty of breaking the law yourself.

Q. Louis D.(Location: New Orleans): I used to trade the Major Market Index, now comes the Dow Index, what's the difference?

A. Not a whole lot. Since the inception of the Kansas City Value Line futures contract, the Dow Jones Company never wanted to have their name attached to anything futures related. Then came the Standard & Poors futures and soon came the Major Market Index. After DJ saw the "press" that comes with the trading of an index contract, they came around... took them 14 years, but then they apparently decided that they too wanted to get their piece of the action. The MMI index was based on 20 different stocks. 15 of the stocks followed by the MMI were from the DJIA and the other 5 were from the AMEX, whereas the new DJ index is based on the 30 stocks of the DJIA.

Q. Dave M.(Location: Saint Paul): I was taught that when you do a spread in futures you buy and sell different months of the same commodity at the same time, but My broker said that right now we should be buying heating oil spreads, what does he mean when he just uses the word buy?

A. Good question. First, the spread you define in your question is known as an inter-delivery spread. When trading the same commodity and spreading different delivery months, you will be either long or short the nearby month, and then the opposite in the deferred month. When an experienced trader talks of "buying" the spread or "long" the spread, they are referring to the position of the nearby month. If, for instance, you are buying the January Soybeans and Selling the November Soybeans, (bull spread) you have "bought" the spread. If on the other hand you Sell the January and Buy the November (bear spread), you have "sold" the spread.

Q. Courtney C.(Location: Malibu): I like the name of the proposed trade of my broker, an option "butterfly", but before I tell her to do the trade I'd like to know more about it. I guess I could read about all the different options positions, but a friend mentioned your page so I thought I'd try you as a shortcut, hope you don't mind.

A. Of course I don't mind, love to help if I can. This can get very complicated. You may end up having your rep spend some time on the phone or reading more anyway. The simple butterfly spread can be done four ways. You may have a long call butterfly, a short call butterfly, a long put butterfly or a short put butterfly. Each of these trades are done using four options (four commissions), and each has different qualities with regard to potential profit and risk. If you can get a specific example I will do my best to explain it fully. A full discussion of the butterfly or the condor spread could take pages, and to simplify it too much would not do it justice or give you the understanding you need and deserve prior to making this type of trade.

Q. Lyle J.(Location: Chicago): As a floor broker that reads your pages I noticed the letter from Dave M. in St Paul. I had to respond since that is not the way we "buy" or "sell" the spread. When we buy or go-long the spread we buy the month that is the premium over the other month in the spread. When we sell the spread or go short the spread, we sell the month with the premium. Sorry to challenge you on your info, but felt I had to say something.

A. Thanks Lyle. I don't mind the challenge. I have been wrong before...( in 1972 I think )... Only kidding, but as a rep I never really used the term. I only spoke of Bull and Bear spreads when it came to inter-delivery spreads. I didn't use the terms "long the spread" or "short the spread". I have only experienced that lately and checked with a friend on the floor of the NYMEX for the definition. If any of you traders out there are considering doing spreads, and if you choose to use the phrases "buying" or "selling" the spread, you had better check with your broker and/or his clearing FCM to see what they say to ensure you are in the trade you want..

Q. Peter E.(Location: Unknown): I am at the VERY preliminary stages of deciding to start up an IB/Trading Firm. I have been a private off the floor trader since 1988 and as such am quite familiar with the trading end of the business, what I would like to do is start up an IB so I can get into this business full time.

I breifly worked at a stock trading firm in 1996. The traders would come in with a certain amount of capital, use the firms data feeds and computers and would generate both commissions and trading profits for the firm. They in turn would be paid a salary equal to a % of their trading profits for the month. The firm would gain profits both thru commisions and profit on the traders acoounts themselves. Is this a viable option for futures traders? My idea is to run an IB, then have traders come in and trade their own accounts, generating profit for my firm.

Anyway, I am very interested in your program and would appreciate any insight you can give me. I am pretty clueless in regard to the brokering aspect of things, so would need help in that regard.

A. All that you mention is not only viable, but has been, and is being done. You would first need the series 3. Then register as an Introducing broker, and set up shop. You can make any arrangements you like with your customers so long as it is in writing. Another way that IBs have handled "on-site" traders is that they charge the normal commissions, plus they charge a monthly fee for use of the desk, quote equipment, telephone, tickets etc. Others have charged the commission plus a fee of a certain amount OR a percentage of profits, which ever is larger, not to exceed a certain amount. This way the trader didn't feel like he was being "robbed" if he made a large profit one month and lost money the next.

Your idea has additional merit since there are "wanna-be" traders out there who are retired, or who are company owners or only working part time and would like the help of a broker plus the company of other traders, as well as the use of quote equipment and a location to "go to work" each day. For several years I had as many as six traders who would come to the office each day. It made trading more personal, and a lot more fun.