Commodities and Derivatives: 'Wannabe' wizards glimpse the future
Tuesday 03 May 1994
Mrs Clinton put dollars 1,000 to work in the live cattle futures market in 1979 and, with the help of a broker called 'Red' Bone, transformed her initial investment into dollars 100,000 in less than a year. Whether it was blind luck, trading skill, or something else, such an accomplishment captures the imagination of the 'wannabe' market wizard with only a small stake.
The often wild moves in the commodities futures markets means that is where players can win or lose most money in the shortest time. Live cattle futures haven't been exciting lately, but players in the coffee market have seen prices soar 25 per cent in the past two months, while potato futures have doubled.
Finding a way into the market is not easy in the UK, where trading futures and options by small investors hasn't caught on as it has in the US. And in the increasingly tight regulatory environment, the small investor is warned off the futures market at almost every turn.
A call to the London office of 'Red' Bone's old firm, Refco, isn't helpful. 'We haven't handled a retail account for many, many years,' says Chris Sayer, Refco's joint managing director. The industry has changed since Mrs Clinton's trading days, with much higher costs and tougher regulation, he says. These days, his firm deals only with experienced traders who have 'substantial' capital - millions rather than thousands.
Most futures brokers give a similar response. 'Regulations make it difficult to trade for the individual and expensive to set up,' says Martin Emery, of Sucden. And the risks for a small-timer are high. 'If someone comes in with pounds 100,000 and wants to speculate, that's one thing. But if someone comes in with pounds 1,000, I tell them that the 3.30 at Doncaster is a better bet.'
For the determined small operator, however, there are brokers who will deal; and there are stories of big successes. Charles Romilly, a broker at ECU Terminvest in London, tells of one client, a Norwegian postman, who spun dollars 5,000 into dollars 150,000 trading futures on the London Metals Exchange and bought a house for cash. 'Every broker has a similar story, but the odds of it happening are very long,' Mr Romilly says. The benchmark in the futures industry is that four out of five inexperienced private clients trading commodity futures will lose money.
ECU Terminvest will handle some small trades for a minimum round-trip transaction fee of dollars 32. But inexperienced traders are guided towards commodity trading advisers with a proven ability to make money consistently.
Although the futures market may be uninviting for the small investor, the share options market has a warmer welcome. The London International Financial Futures and Options Exchange (Liffe) has been fielding up to 1,000 calls a month since listing options prices on Ceefax last year and is seeing about 300 people a month go through its options training seminars.
There are signs that, shaking off their bad experience with options in the 1987 market crash, investors are coming back in force. 'Clients generally are becoming more knowledgeable about derivatives,' says Chris Butler, of Sharelink.
Share option dealing costs less than futures trading and involves lower risk when done properly, says Karin Forseke of Liffe. The risk of trading 'call' and 'put' options, which give the right, but not the obligation, to buy and sell the underlying shares, is limited to the amount paid for the options. Writing options against shares an investor does not own, known as 'naked' option writing, is as risky as the futures market.
'We are often asked who makes money out of options consistently,' says Ian Rankine, of London brokers Derivative Securities. 'It's the person who owns the underlying stock or has the resources to buy it.'
Small trader involvement still accounts for only 20 per cent of the UK option market. That could change on 18 July when new rules come into force for the London Stock Exchange, reducing the two- to-three week account period to 10 days. It is expected to be down to five days early next year.
'Brokers used to 30-50 per cent of their clients' trades done within the account period are beginning to realise that options are potentially big business,' says Ms Forseke.
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