GLOBEX Goes Down, E-minis Stop Trading.......What to do?
May 2, 2005
All seemed well in the world last Tuesday, April 26th, with several systems holding positions in both the S&P futures and e-mini futures. Then one of our orders to sell an emini S&P got rejected by the Chicago Mercantile Exchange's GLOBEX system, then another, and another. Then came the email:
Message: The GLOBEX June 2005 and September 2005 E-Mini S&P futures and the June - Sep 2005 calendar spreads have been halted as of 09:52:53 CT
Just like that, the CME was shutting their electronic system down, and in the process killing any and all orders in the system at that time. This suddenly left tens of thousands of e-mini investors up the proverbial creek. Their e-mini orders were no longer valid, and on top of that, they couldn't get out of those positions they were in.
System traders utilizing e-mini futures had a similar problem. If you're system runs on e-mini data and measures the market every few minutes, you suddenly didn't have any data to feed your program. This is problematic for several reasons, but mainly because there is no telling where the market will be when the system comes back on.
Those traders who utilize emini contracts but track the full sized S&P data had similar issues. If the market continued on and registered a winning system trade in the full size contract, the e-mini investor would be stuck in the position, and at risk of the market reversing course by the time the electronic system was back up and running. Similarly, if the market moved against existing positions and triggered their respective trading systems to exit, they were in danger of not being able to exit their system trades. Suddenly, trading an e-mini system which doesn't risk more than $500 per trade became a much riskier proposition, with a potentially unlimited downside.
Luckily for these investors, the pit traded full size contract has not gone electronic yet. There are real people in that pit who don't break down or suffer from computer glitches. The safety net built into the electronic contracts is the fact that the e-mini contracts are fungible with their larger, full size brethren.
Fungible is just a fancy word for interchangeable, and in this case means you can interchange 1 full size S&P contract for 5 e-mini contracts. Several investors were suddenly out of the woods, luckily, with the ability to buy 1 full size S&P to offset every 5 e-minis they held. Some smaller investors holding less than 5 e-minis did not have this ability, but should have been able to have their broker join their order with the orders of other smaller investors to get them out of a position.
Attain Capital didn't miss a beat, immediately instructing our floor brokers to switch our stops in the e-mini to 1/5 as many contracts in the full size S&P. As the majority of trading systems operate on the full size data anyway, the fill prices on the stops were in line with what could have been expected in the e-minis. We then had the clearing firm allocate the representative fills to individual investors in the e-mini contract, insuring each investor was flat by the end of the day.
Many individual investors unfortunately didn't know about that funny word, "fungible" last week, and it cost them. Investing is risky, and there is a reason this risk is repeated many times in account forms, performance reports, and websites. The best way to protect against these unforeseen risks is to insure you have a safety net, or at least someone who knows how to help. Make sure your broker has a procedure for handling a GLOBEX shutdown, an exchange closing, or a 911 type business shutdown, because this won't be the last time you get stuck in a position.
While many online traders think that the GLOBEX system goes down quite frequently, that is not the case. Most online traders are simply seeing their connection to GLOBEX (i.e. TradeStation) go down, not GLOBEX itself.
The last outage before this one was was an unbelievable 7+ hour outage in the heart of the trading day, from 10:40 AM until 6:15 PM on May 1st, 2003. In that time, the market had nearly a 20 point range, and sat 15 points higher when the electronic system came back on. We hope you didn't sell the low. Besides a brief outage in the very early hours of the morning on Sep. 20th, 2002; there had been no significant outages before that for over a year.
How could this happen? You were only supposed to be risking $500, not $5000. The answer, of course, is that anything can and will happen in the world of investing. The GLOBEX system is quite simply built to NOT go down. It has more redundancy than the government's network of spy satellites, yet something happened. Reuters quoted a CME official saying the outage was caused by problems with global network switches that route data from trading firms to the GLOBEX platform. Could they be more vague? Reading between the lines, it sounds like they don't know what happened. The CME, which has seen its stock price skyrocket since going public in December of 2002 curiously didn't mention the outage on their website.
- Walter Gallwas
IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can
carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading
losses are material points which can adversely affect investor returns.
Feature | Week In Review | Chart of the Week |
Feature | Week In Review | Chart of the Week |
While the month of April proved to be frustrating for "buy and hold" stock investors, futures investors welcomed the added volatility. The VIX volatility index's daily average spiked 23% for the month, as there were six moves of greater than 1% during April (4 down, 2 up), versus only six such moves in the entire first three months of the year. Trading system investors were generally able to capitalize on the sharp downward trend for the month, as 13 out of 15 day trading systems posted gross profits in April.
For the month, the Nasdaq Composite gave back 3.9% for its fourth straight losing month-the longest losing streak experienced since September of 2002. The Dow Jones Industrial Average was off 3% for the month and the S&P 500 lost a more tolerable 2%.
The hiccup in the stock market sent many investors to the safe haven of Treasuries, sending bond prices up towards levels not seen since early February. This reversal from March’s bearish trend not only knocked several long-term systems out of short positions, but most are now also holding long across the various Bond markets
Elsewhere, the slide in oil prices was cheered on by consumers but generally went against trend followers who were bullish heading into the month. For the month, Natural Gas futures were down -15.1%, followed by Crude Oil -11.8% and Unleaded Gas -10.6%. .
**Day Trading**
April’s volatility spike led to widespread profitability across the majority of the day trading systems, due to the large daily ranges and strong follow-through in the stock index futures. Although S&Ps were stuck in a range between 1135 and 1195 we saw several consecutive days with ranges of over twenty points, paving the way for many systems to grab healthy profits.
Mariner Trading, www.marinertrading.com, was far and away the top developer last month, earning the #1 and #2 top performers in April. Compass made $5,330.50 in its third profitable month in a row, while Clipper eRL continues to gain momentum after going into a drawdown to start the year, profiting $2,371.80 for the month.
Not far behind on the top of the April list was AG Xtreme SP , which has been picking up steam this year and tacked on another $6,200 this month. The most interesting trade of the month came form the Early Bird III SP system, which emerged from a near 6 month hibernation to gain $3,350 on a single trade on April 21st. (The system requires a move of greater than 1% by 8:50 AM to signal a trade)
Cipher ES had several trades that captured nearly the entire day’s trading range and went on to make $1,162.50 per contract, while R-Mesa came through with profits of $2,015 despite being weighed down a bit by some whipsaw trades in the early part of the month.
Elsewhere, RC Success was gunning for the equity highs it reached in February and gained $1,009.40 per contract, and RC Miracles profited $477.50 on about three times as many trades for the month as sister system RC Success. The Electric Day Breaker portfolio had a “breakout” month and made $935 with the majority of profits coming from the NQ and eMD markets. Day Breaker SP stayed above water making a modest $791.25 for the month.
Impetus eRL was very active for the month, but made just $342.80 due to most of the movement in the Russell market happening early in the day (the system will not initiate a trade prior to 1:30PM CST).
Rounding things our were Helix ES, which did not live up to last April but managed to squeeze out $166.85 per contract, and BWT Zones Russell, which got caught up in too many reversal trades but got out of the month losing just $3.40 after commissions.
On the losing side of the ledger, Magnitude ES generally held one position per day and took some pretty large losses totaling $1,405 per contract. Finally, BWT Zones SP continued to be mired in a drawdown, losing $7516.75 for the month.
**Swing Trading**
Many swing trading systems found the increased volatility in April a double edged sword, as results were mixed.
The trade of the month goes to Tzar eRL, which locked in profits of $2,576 on a short position it held from March 28th. Unfortunately, the system then went long, and ended the month up only +$1,476 due to current open trade losses. As of the close of the month, the Tzar portfolio, including the eMD, was better by $2,523.50. Including both open and closed traded equity Tzar NQ gained +$970, Tzar eMD earned +$355, and Tzar ES ended down -$277.50.
In other index trading, the Axiom Index system was forced to work hard the entire month as it attempted to battle back from a string of losses in the first 2 days of the month. After several days of rapidly rising index prices leading up to April 1st, many of the Axiom positions entered long only to see the market turn around for a 21 point decline (S&Ps) from the day’s high and eventually lock in a loss for the day.
On the month, the 4 mkt portfolio lost a total of -$1,448.30 in both open and closed trade profits. Axiom NQ gained +$575.90, Axiom eMD gained +$325.30, Axiom ES lost -$1,110, and Axiom eRL lost -$1,239.50. Finally, Eclipse eRL was also on the losing side, losing -$1,682.90 for the month. The bond markets were another story.
With the rapid sell off in the stock market, many investors fled to the bond market, sending it higher and adding to the open equity gains of both Mesa Bonds and Notes. By months end Mesa Bonds was earning +$5,062.50 on a long position from March 23rd. Mesa Notes also ended the month in the black as it was ahead by +$2,290.63 on one closed out trade and an open position.
**Long Term**
In addition to the traditional markets like Corn and Sugar, long term trend followers do operate on some foreign futures markets. Two such markets are the Nikkei, which was down 5.7 % for the month, and the Euro Bund, which was up 1.7 %.
Both Aberration Plus and Andromeda have entered into short Nikkei positions, and both have also entered long Euro Bund positions. Both systems are making $475 in the Nikkei and $540 per contract in the Bund in open trade equity.
Unfortunately, the sudden reversal in the bond markets did not come without repercussions for trend followers. Aberration Plus and Andromeda were both stopped out of multiple short Bond positions including Thirty Year Bonds, Ten Year Note, Five Year Note, Two-Year Note and EuroDollars - hurting the bottom-line for the month.
Axiom LT has avoided the majority of the noise and is making $950 and $528.13 on long positions in the Bonds and Ten-Year Note.
Please Login to: http://www.attainaccess.com for the latest updated statistics.
IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can
carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading
losses are material points which can adversely affect investor returns.