Friday, April 12, 2013


For those of us PFG victims and for those who will be victims of other FCM crashes that are surely coming, I think you should save this blog post in your favorites and refer back to it over and over. This is probably the most important article I am ever going to write.

Look at this chart, which shows the Gold crash today ( Friday ). This could be a crash or an explosive rally in any market, it is just the one that is at hand now. With the story about IB that came out as well as the others, and in the wake of PFG and MF and Sentinel and all the others, we know one thing with 100% certainty. At some point in the future and probably not too distant future, some of us are going to wake up with our accounts frozen due to a FCM bankruptcy where they have stolen segregated funds. In this instance you will not be able to place any trades, and you will have to sit there and watch your positions get decimated if you are positioned wrong waiting for a liquidation process that in the case of PFG took two weeks. During that period you will not be able to do a thing to protect yourself in those accounts. This is exactly what happened to us with PFG. Keep in mind that even if an FCM has not stolen segregated funds which is the in vogue move, your money would still likely be frozen up in the bankruptcy process for a very long time. The whole concept of segregated funds is that they are supposed to be separate from this process but we have seen that is almost never the case. There are no segregated funds, that is an urban myth.

Here is what you can do to protect yourselves against this. If you have another account somewhere, you can put on opposite positions essentially hedging and assuring that your net exposure in your total portfolio is zero. With PFG they wiped out all existing orders so even if you had a GTC order in it was cancelled and you had to wait until they got to you to have your trades exited. This cost both Michael and I dearly with PFG. I always had previously had other accounts so I could hedge in this instance and was fooled by Gensler that piece of garbage into thinking everything was ok. I would take an Octagon fight with him as a fall back to my Wasendorf request since that is going nowhere. I see why Barry wants him to serve another term based on how dishonest and corrupt he is. He and holder should get a room.

Granted this would not be a perfect hedge because you will never know in a timely fashion when your positions have been liquidated since the communication will be terrible. We had no idea at all how we stood and there was nobody we could call. If you put on opposite positions in other accounts you can at the very least minimize the damage of a naked position in a situation like we have now with Gold. You would likely be net naked the other way at some point without knowing since the communication on your exits in the bankruptcy will be late by a few days at best. However, you have protected yourself as best you can. I think the ideal balance is really dividing your trading capital by 4, having 4 different brokerage accounts. This way the theft will only be 25% of your capital. Beyond that the next option is to use the idea of Notional Value.

What this means is that if you have set aside $100k for a trading account, deposit way less than that in the firm but trade it as if you have $100k. If it comes to margin calls wire the money in. Initially I was against this idea and it does take some mental toughness to see the inordinate percentage swings in what you see in your account statements. You have to view them within the context of a $100k balance. This is what I am doing now because of how sure I am of many more segregated thefts. The regulators have created a scenario where there is nothing really to fear if they decide to swipe some money. If you are a democrat you won't even be charged with anything see John Corzine, so why not take a flier. They will catch people sooner now but that will not save your money. Once it is gone it is gone. Just because they happen to catch someone sooner, the firm will still have to go through a bankruptcy process that will take years and your money will be gone, tied up in the process while everyone else gets paid their Corleone's for doing nada. They can't just claw back money with a phone call just because the NFA might be lucky to catch someone through electronic monitoring. You need to understand that once they catch them it will just start a multiple year process, you won't just get your money back and be fine. Keep in mind that if they steal your money and are caught the very next day after using it to make a trade or to run their company, the process of getting it back is years not days or weeks. As a result catching them sooner does not really mean much. It could make it easier for the trustee to claw back the money once the bankruptcy process unfolds, but that will be at least a year from the shut down if not longer.

Create your plan in regards to this and stay with it. The world has experienced a sea change and the days of large balances being safe are long gone. Do not make the mistake I did. I cannot emphasize enough how important this is if you are serious about trading. My trading was absolutely debilitated for 9 months due to this. Protect your money nobody else will. I think if you read the IB response to client inquiries and reconcile that with the complaint from the regulators, something is very wrong. This two versions of the same incident are quite a bit different. This is especially strange in light of the fact that they supposedly self reported. I know what I would do.

If it does happen to be true that the model of the FCM makes it such that they cannot operate profitably on their own then they should raise commissions to the level that makes the business viable. We have seen this in many industries when cost cutting happens through competition, only the strong survive. Monitor the earnings of the companies where your money is and if they are weakening dramatically take off. If you have the guts to have it at a private company now I tip my cap to you, you have more guts than I do. At some point in the future perhaps many years from now there might be some type of insurance plan but I doubt it. It is pretty clear that the whole wall street insider gig is living off OPM ( Other people's money ) so if the segregated money was truly segregated the whole premise of the game they play would be gone. This is why I expect nothing to change and more shenanigans to go on. It is good for business.


You may have caught me twitting about this and for those who read here regularly you know I have been calling for this for a long time, you can read the archives. I have recently been writing about it a lot. I am not happy to see this melt down because millions of people have been suckered into this just like every other prior bubble that has ever happened. However, if you are one of the people who got suckered, it is your fault for not doing your research and discovering that all of this BS about safe haven is exactly that. If you are a Newsletter subscriber you will see full coverage of this in the next issue. It is too bad since I have already written the draft, that I did not feature it last month, but I was on record in here on many occasions warning of exactly this type of situation.

When the next over hyped bubble happens and experts who make money from you buying into the story start talking, raise your middle finger then turn and walk away, in that order. Timing bubbles is almost impossible so there was no way of getting the exact high. Where you can save yourself is by not chasing markets that are extended. The stories always get really good right at the tops. The Stock Market is getting into this mode right now. We still have a tremendous up trend but the market is rising so contrary to so many things that should cause it trouble, it is a matter of time before price marries up with everything else. At this point I do think it is becoming a bubble being inflated by the FED to manipulate public perception. This does not mean it cannot go higher. it is likely we have low rates for many years to come and that is the main driver of this bubble, so timing this one could be really tricky. I admit to being early on Gold. The conditions for that bubble to burst were there for a long time before it finally did. Now we are getting the "it is still a great long term investment" story. Ughh, these guys just never quit. I remember the gal who cuts my hair telling me she was loading up a pyramid of condos in Texas against my advice in 2005 - 2006 claiming it was as an investment. Needless to say she puked em all out and lost hundreds of thousands of dollars. When someone tells you Gold is a great long term investment, your thought should be:


It is a commodity that goes up and down, trade it. It will become a good investment again under $500 or somewhere in that range perhaps a bit lower.

Trading a market in a bubble phase is no different than one that is not. It is more for longer term investing that identifying bubbles is important. What you don't want to do is buy into them late. You need to keep your original position until the time comes when the trend changes. There is no way of knowing how far they might go. When you pick price levels in space against trends you are asking for trouble because you are against the trend. Surprises come in the direction of the trend most of the time like today in Gold and Silver. They are both in downtrends on all time frames, so a big down move is less surprising than a big up move would be.

Gold will not go straight down under $500 without various periods of rallies and sideways moves, but there will come a time and we may see it right here where the emperor is exposed and all the weak hands rush the exits all at once. This will result in consecutive $100 down days which we could see right now. This will be very interesting to see what happens. After today we are short term very very oversold, but the trend is down. We are likely to have a snap back here after today, but we have a waterfall out there lurking that is going to surprise everyone except those of us who trade commodities. For us it is business as usual since we have seen the boom and bust cycle many times. Ho hum business as usual.


Vikas said...

This is an awesome post Chris, thanks.

Enrico said...

Best post, Period. Especially the middle finger part...


Alain said...

Dear Chris

thought segregated accounts are insured up to 500k for non investment money?

Chris Johnston said...

no there is no insurance of any kind for segregated accounts, if there were all of these problems would go away and it is also why the insiders don't want insurance, they want to be able to use this money for their own benefit. There are FCM's that would go away tomorrow if they weren't able to use segregated money for their own short term needs.

Chris Johnston said...

As far as trade station is concerned, I had accounts there for a long long time and it was only having one there with a good chunk of money that prevented my trading career from being ended by PFG. It was that money that has allowed me to survive and begin to recover. I love the TS Platform. I pulled all money out of every brokerage firm when the theft happened because I was just all of the sudden very un-trusting of the whole system.

I chose to open my new accounts at TD Ameritrade due to the FDIC insured accounts excess margin is swept into on a daily basis. No other firm does this. I was concerned about the poor financial ratings the ratings services were giving the parent of TS, so I did not consider re-opening with them. It is my feeling that when companies get into trouble that is when the segregated money gets stolen.

I never found anything at TS that told me they had any problems in their futures division, it was the parent company that drove me away.

In a way I owe TS a great deal they saved my family basically indirectly. If I had not had that money there I would have been bankrupted by PFG and have no idea what I would have done. There are many people who were bankrupted by this and the f.... court system just sails merrily along giving everyone the finger. The point of this post was to drive home how hard this type of thing can be on you and as hard as I try I can't have the impact I am trying to. All I can do is try, it is on readers to wise up. It can happen to you.

JM said...

By the way, here's the first of those 100 dollar down days in gold you've been talking about. Total collapse in silver, too. Good call.

Anonymous said...

Thanks to your warnings--and reading your sorry saga--I have moved all but a relatively small amount of trading funds out of non-insured brokerage accounts. One of the only decent results of the otherwise horsesh*t Dodd-Frank bill is that bank deposits are now FDIC insured up to $250K permanently. I have moved my money into the strongest banks in the US and out of the reach of the re-hypothecators.

Thank you so much for spurring me to action after many years of misplaced trust in financial institutions.

Chris Johnston said...

PD I just followed my own advice and opened a Schwab account they have $10 Billion of fraud insurance, this is an equities account and I am diversifying away from TD Ameritrade even though I think it is the safest place due to it being a bank. However, I want my accounts spread out so WHEN not if the next theft happens I can survive it better.