Winnipeg Futures

[mcdon]

JD,

Your analysis is flawed and it has led you (and readers)to the wrong conclusion. Firstly, if you want to confirm the existence of a fund in a market, do what I did, go to the source. JR listed a long barley position on their website for everyone to see. Re size, everyone that had any skin in the barley futures during that period knew that they rolled their position on the last trading day of the month prior to the month preceding the delivery month. It was like clockwork. Take the open interest prior to 'roll day" subtract OI from the following day to get an approximate value. There is no room for discussion here, it happened exactly I have portrayed it. Like I said above get on the horn and ask anyone who had skin in the game.

Nothing personal JD but I do find it amusing when you challenge the facts as I have presented them especially when you don't have a clue with regards to how the barley contract unfolded. It is concerning that someone with your influence could be so ill informed given that you had some part in developing the new contracts. How do you promote new contracts to funds (like you said you did)after one of the most high profile funds just got bent over.

[jdepape]

Some of us are keenly interested in how this "event" could have happened and you seem to be the one in the know. So help us out:

The facts as you presented them:

1. Rogers was long 7500 contracts of Western Barley in 2007.
2. They held the position for two years, rolling it forward, one month prior to each expiry.
3. They lost $10M because the delivery mechanism was flawed and in favour of the short.

I added:
Through the period in question, prices rallied dramatically (which would be in their favour, being long).

I don't think anyone is interested in your opinion of me, least of all me. But I am certain there are some out there (myself included) that want to know what the problem was - as you see it.

So someone lost some money? So what? It happens a lot. The simple question for you is <b>HOW?</b>

Please give some detail, some math - anything to support your point other than "it happened exactly as I portrayed it", or "ask anyone who had skin in the game".

I'm asking you. One thing an exchange - any exchange - will never do - is listen to criticisms without substantiated facts to clearly identify the issue. Over the years, I have heard countless arguments about how the contracts are flawed - and the arguments usually sound like yours. They lost money because they got "caught" and therefore the contract is to blame. Well, I'm asking you to take the opportunity to demonstrate how Rogers lost money because of the contract design.

Only then, when we have your description, can we truly assess what the problem was. Quite frankly, you haven't done it so far.

I entered this discussion because I thought it would be interesting to discuss futures contract issues, not to spar with someone tossing lame personal shots. I sincerely hope you can do this without falling prey to the temptation to continue to make it personal.

[jdepape]

mcdon:

In the absence of any more details from you, I did what you suggested and investigated. Here’s what I dug up:
Using your facts and historical market data:

In 2006, the position would have gained roughly $8.00/tonne.

In 2007, the position would have gained roughly $6.00/tonne.

In 2008, the position would have lost about $140/tonne. I suspect this is where they got hit.

Your argument that we’re taking about is that the contract design favoured the short. Just being long and wrong isn’t about the delivery terms favouring the short (remember 2008 is when all commodities melted down).

What should also be noted is that the market was generally in a carry. When rolling long positions in a carry, you give up the spread when you roll. Not a true “out of pocket” loss, rather an opportunity cost. Markets tend not to earn their carry meaning, all else being equal, the deferred market will gravitate back to the nearby price.

Also, they would have rolled from old crop to new crop – in 2006 that was through an inverse which is good when you’re carrying a long. They picked up around $26 in “opportunity”.

I’m going to guess you thought the market hurt them because the spreads got too wide. I would agree that wouldn’t have helped. As a long, if you give up $10 rolling through a carrying charge spread, for your position to keep working the market in general has to rally $10 just to counter. (Even so, they made money until the crash of 2008).

Here are important facts and questions:
1. They were more than 50% of the OI – using your blanket number of 7500 contracts they were likely the WHOLE OI at times.

2. They advertised their position and intentions (to roll) to the market – you said everyone knew.

The question is why – on both points?

You become quite vulnerable at that proportion of the market. Where I used to work we would get reined in if we ever approached 50% of the OI because it changes your whole risk profile. A good rule is “you want to be IN the market – not BE the market”. And this was a company that would see taking or making delivery as just part of doing business – unlike a fund. So if the spreads got too wide, they just stood on delivery.

But when one player is over 50% of the OI (or close to all of it), it changes this dynamic. Who else is long and willing to stand for delivery?

And to be so systematic about rolling is deadly; no, idiotic. No one on the other side is going to help you out. Even I knew about “roll day” – we saw it in canola too – even though I wasn’t trading grains at the time (I was more into FX back then).

Think about this from the short side. You are short and can deliver. But when the spreads widen out to full carry (and beyond) and someone is advertising that they will be there to sell the spread to you - it is a gift. You would be an idiot to deliver under those circumstances.

A seasoned trader, wanting to maintain a long position and understanding spreads would have been looking to roll forward at any opportunity – not on a predetermined “here we come” day.

From what I can tell, they shot themselves in the foot - and then were long and wrong in 2008.

[mcdon]

JD,

You are getting closer but still missing an important point so I will tell you. The most important part is the spread that they rolled their position at. I have traded longer than you so my memory isn't what it was but I do know that their entry and exit points were approx $120. Roll 5 times per year, often beyond carry and ave long position increases accordingly.

The point you have completely missed is that they were forced to roll their position given a spec position limit of 250 that they could stand for.I know you are going to say there are provisions for standing for delivery but that argument is garbage. For a contract to work there has to be a threat that a long will stand for delivery. In this instance given the make up of the OI and the restrictive position limits, the threat of anyone standing for delivery was zero. As a result, the short was at a clear advantage. Oh, and the grain companies had a say in the position limits (grain cos designing contracts for grain cos.).

I find this thread discouraging for a number of reasons. It reflects poorly on the state of the futures industry in Canada. Years after the fact and in a chat forum nonetheless, you JD (and possibly others) and learning about the circumstances regarding the bly contract. How do you design a new contract without knowing why the previous ones failed ?

The process has to change. Those responsible for the new contracts don't have the expertise that is needed. Get people from outside the "old boys club" so the contracts will not be so biased. This past generation of "grain traders" have failed farmers. It is almost embarrassing to have witnessed it.

[jdepape]

Not to sound defensive, but I do get it. I even mentioned it above - their problem was rolling their large position through a carry that was at times wider than what you and I would consider to be full carry.

And I know what you are saying about position limits. But what you are missing is that if a spec reported to the exchange that it wanted to stay longer than their spec limit because it was planning on standing for delivery at full carry or wider, under the right circumstances, the exchange would consider that non-speculative (because they had a profitable sale in the deferred).

Also - in the spirit of full disclosure - I was in informal discussions with the exchange at the time on a number of issue, including spec limits. I shared my view that, although spec limits are a necessary evil to hinder market squeezes, it also reduces liquidity. We talked about how spreads were going wider than full carry - I suggested they needed to increase spec limits to allow more trade.

However - I maintain that the Fund managers were irresponsible trading the size they did KNOWING FULL WELL what their spec limits were. A more responsible position would have been a smaller position - as I indicated above. That's why I was suggesting to increase spec limits. It was to allow for larger positions which would contribute to liquidity.

It's like someone buying a Ferrari so they could drive really fast only to get a speeding ticket - and then blaming the law that stipulates a slower speed.

[OneOfMany]

Thank You mcdon!

Back to my original post

It is unfortunate that the grain contracts were designed by the grain companies for the grain companies!