A CTA’s perspective

As a commodity trading advisor (CTA) you constantly take risks and try to manage those risks. One thing that you don't want to manage is the risk of your client’s futures commission merchant (FCM) failing. This is what happened on Oct. 31, 2011 when MF Global melted down. Here is what it's like to be a CTA when you're FCM melts down.

On Wednesday, Oct. 26, I got a call from a competing FCM; “Hi Robb, I know you have some business over at MF global. You may have heard that they have been having some problems. We’d certainly like your business. You might want to consider what is happening over there and we’d be happy to help.”

I hadn't really thought that much about MF Global’s credit rating being downgraded that week because that shouldn’t affect the futures division; all customer accounts are segregated. I didn't think much of the call because as a CTA I constantly have brokers and FCM's that want me to just move all my business over to their company with all kinds the promises of glory and how much money they can raise for me or how much better or cheaper they’ll do executions.

People in the industry get confused with the difference between a commodity pool operator (CPO) and CTA. With a CPO, all the money is pooled together into one or more accounts. This gives the CPO a lot of authority and power as to where it places the funds.

In the past, one of the dangers of having money pooled together was a Bernie Madoff type scandal. I remember decades ago a CPO manager telling me that he had so much control over the “account” that he could write a check and leave the country; that it would be a while before anybody knew what happened. The industry has learned from these mistakes and now implement many more safe guards, such as the use of an administrator and outside accounting firms.

To move accounts, the CPO can sign one set of paperwork and then inform the investors of the change in a timely manner.

A CTA doesn’t get to pool money, they manage each account individually.   Each client would have to make this decision and then re-paper the account at the new FCM if the client decided to move their money there. This can create fear, uncertainty and doubt.  Clients will wonder what the problem is. It’s just not worth it.

So when I got the call from the competing FCM, I didn’t think of it beyond just another competitor wanting my clients’ business. There was no reason, based upon rumor and innuendo, to cease my five-year relationship with MF Global, liquidate all positions, and have my clients re-paper their accounts. This also would delay any trading and create opportunity costs.

There was nothing to worry about. All the client funds are “segregated,” meaning that the firm could lose every dime, but those client funds are in separate accounts and not used for the FCM’s business operations.  These segregated funds are sacrosanct to the industry.  They provide a level of protection for all clients.

The futures industry is a relatively small industry. Especially because the Mecca is Chicago and many industry people have been in the business two to four decades. Reputation permeates the business. If somebody does something wrong, it will follow them.

I had a very good brokerage group at MF Global; I had no reason to change ships. Plus, many other CTA and CPO operations had long-standing business with them. The group I dealt with handled 24-hour trades through their Chicago and London desks. Sometimes I would put option trades on overnight. They handled them with total professionalism. When they made a mistake, which was rare, they paid for it without argument. I had a very good situation at MF Global.

Faceless net giants writing own rule books

Australians use them more than any other websites and to many they have become essential services, oiling the wheels of life and commerce at the click of a mouse.

But when Google or Facebook no longer wants you, it can be all but impossible to find out why, as internet entrepreneur Mark Bowyer and others have found to their cost.

Earlier this year Google banned ads from his travel website, Rusty Compass, because it said the site "poses a risk of generating invalid activity".

Almost four months and an appeals process later Bowyer is none the wiser as to what that means but is acutely aware of his dependence on an "arbitrary, algorithmic, human-free" service.

At every step Bowyer has been forced to communicate with the company through its website.

"I feel utterly powerless," says Bowyer, who says he is daunted by how much he depends on Google's services for his fledgling business - a website that offers independent travel advice to travellers to south-east Asia - from powering the search engine, providing analytics and directing traffic its way.

He is still unable to fathom what ''invalid activity'' Google is referring to, speculating that because a large proportion of his traffic comes from Asia - where ''click farms'' are often located - Google suspects he might be paying people to click on his ads.

"Of course, Google has the right to decide who it does business with. It doesn't have the right to terminate commercial arrangements mid-stream, withhold funds due, and run a closed appeal process that provides no information to the appellant," says Bowyer, a co-founder of the travel firm Travel Indochina.

Google has "redistributed" the $120 he earnt from advertising back to advertisers. He has consistently denied click fraud, even posing the rhetorical question to Google in his appeal: "Why would I take such a risk for such a low return?

"Since Google enjoys such extraordinary market power, it should be serious about its internal processes and the transparency and credibility of its appeal processes. And, pardon my naivety, but the introduction of a human face would be a good start."

Bowyer's dispute is similar to the three-year-long one the founder of the Aussie Tech Head podcast and website, Glenn Goodman, has had with Google over his Adsense account.

In 2008 Goodman accrued $100 in revenue from Google ads in the first six months of his business. But on the eve of getting the first payment he was suspended. Since the suspension he has submitted online appeals once every 12 months up until this year, when he phoned Google's Sydney reception. The receptionist merely advised him of the Adsense appeals procedure. ''I have given up,'' he says.

Like Bowyer, he says he's never clicked on his own ads and has no idea why he was suspended.

"It is very frustrating and to this day I do not know why my account was targeted," he says, adding that it has affected other methods of receiving ad revenue through Google such as through the video-sharing website YouTube and Feedburner, which inserts ads into RSS feeds.

"I was well aware of fraudulent clicks, and it wasn't due to this. It is due to another reason that at this stage is only known to Google.''

Making it Even Easier for Merchants to Reduce the Risk of Fraud

It use to be that merchants that accepted card-not-present (CNP) transactions were at significantly higher risk of fraud, chargebacks and cybercrime. The fraud prevention strategies required to protect their businesses from this kind of mischief were largely ineffective, often expensive and caused hassles in the customer experience or processing flow. Knowing this, Instamerchant.com, a progressive merchant account and credit card processing service, is proud to announce their newest add-on security solution that aims to remove the difficulties and limitations of existing fraud tools to further reduce the risk of fraud.

“We are constantly on the lookout to help our merchants fight fraud. This scoring tool will be a great tool for any merchant that wants to take their fraud prevention to the next level,” says David Standage, the owner of InstaMerchant.com.

Built in collaboration with their industry-leading fraud detection partner, Instamerchant.com’s latest fraud detection solution offers merchants of all sizes access to a sophisticated and comprehensive technology and, because it’s an add-on to their already expansive offering, merchants can avoid tedious and complex integration efforts.

This best-in-class fraud detection technology will help to identify and prevent chargebacks, as well as, it provides specific data on shopper behavior and trends to ensure merchants can appropriately acknowledge “good” customers. Additionally, it includes an automated, real-time scoring engine that evaluates the risk level of transaction data during the authorization process – creating merchant profiles that are unique and customized to handle scored transactions in several different ways.

Instamerchant.com is a known leader in fraud prevention and this newly released add-on technology is just another functional weapon in their arsenal of merchant protection. Above all, they are proud to provide an easy security solution that will remove all doubt and ultimately put more money in the pockets of their merchants.

Instamerchant.com provides every type of electronic payment which includes credit card processing, check guarantee, debit cards and gift cards for both retail and internet merchants. They work with all business types and sizes from home based Internet businesses to mom and pop retail stores, to large national chains. Instamerchant.com boasts one of the most competitive online merchant account solutions in the world.

Hackers Halt Sega Pass

Sega Pass online gaming fell prey to a cyber attack on Friday that netted the hackers over 1 million user names and passwords. According to Sega no credit card data was stored on the breached server because they use an outside company for their payment gateway.

This attack is the latest in what seems to be an all out declaration of war from the cyber underground. Sega joins Sony, the CIA and numerous other data and gaming websites that have been forced to shut down their sites and services because of external server breaches.

Presently the Sega Pass website has this message "Hi SEGA Pass is going through some improvements so is currently unavailable for new members to join or existing members to modify their details including resetting passwords. We hope to be back up and running very soon. Thank you for your patience."

So far no one has taken credit for the hack, LulzSec which has claimed responsibility for the Sony and CIA breach tweets staunch denial of the Sega hack, iterating their love for Dreamcast and willingness to locate and take down the offenders as proof they're innocent.

Sega Pass website displays the privacy banner "ESRB Certified" which in turn links to a privacy policy that says "the storage of data is on secure servers or computers inaccessible by modem." I guess that hackers hired the amazing Kreskin or used a crystal ball so they just willed the data into their possession.

The lesson everybody should learn from this is claiming security and actually providing security are two different things. Any company or person using SQL  databases are vulnerable to the good old injection code method of database stealing, and until that issue is fixed there will be a lot more data swiping and wiping going on. Doesn't anyone encrypt their stored data? Why did Microsoft make a big deal about "Bitlocker" If no one bothers to use it?

A World At Financial War – Analysis

When Greece exchanged its drachma for the euro in 2000, most voters were all for joining the Eurozone. Their hope was that it would ensure stability, and that this would promote rising wages and living standards. Few saw that the stumbling point was tax policy. Greece was excluded from the eurozone the previous year as a result of failing to meet the 1992 Maastricht criteria for EU membership, limiting budget deficits to 3 percent of GDP, and government debt to 60 percent.

The euro also had other serious fiscal and monetary problems at the outset. There is little thought of wealthier EU economies helping bring less productive ones up to par, e.g. as the United States does with its depressed areas (as in the rescue of the auto industry in 2010) or when the federal government does declares a state of emergency for floods, tornados or other disruptions. As with the United States and indeed nearly all countries, EU “aid” is largely self-serving – a combination of export promotion and bailouts for debtor economies to pay banks in Europe’s main creditor nations: Germany, France and the Netherlands. The EU charter banned the European Central Bank (ECB) from financing government deficits, and prevents (indeed, “saves”) members from having to pay for the “fiscal irresponsibility” of countries running budget deficits. This “hard” tax policy was the price that lower-income countries had to sign onto when they joined the European Union.

Also unlike the United States (or almost any nation), Europe’s parliament was merely ceremonial. It had no power to set and administer EU-wide taxes. Politically, the continent remains a loose federation. Every member is expected to pay its own way. The central bank does not monetize deficits, and there is minimal federal sharing with member states. Public spending deficits – even for capital investment in infrastructure – must be financed by running into debt, at rising interest rates as countries running deficits become more risky.

This means that spending on transportation, power and other basic infrastructure that was publicly financed in North America and the leading European economies (providing services at subsidized rates) must be privatized. Prices for these services must be set high enough to cover interest and other financing charges, high salaries and bonuses, and be run for profit – indeed, for rent extraction as public regulatory authority is disabled.

This makes countries going this route less competitive. It also means they will run into debt to Germany, France and the Netherlands, causing the financial strains that now are leading to showdowns with democratically elected governments. At issue is whether Europe should succumb to centralized planning – on the right wing of the political spectrum, under the banner of “free markets” defined as economies free from public price regulation and oversight, free from consumer protection, and free from taxes on the rich.

The crisis for Greece – as for Iceland, Ireland and debt-plagued economies capped by the United States – is occurring as bank lobbyists demand that “taxpayers” pay for the bailouts of bad speculations and government debts stemming largely from tax cuts for the rich and for real estate, shifting the fiscal burden as well as the debt burden onto labor and industry. The financial sector’s growing power to achieve this tax favoritism is crippling economies, driving them further into reliance on yet more debt financing to remain solvent. Aid is conditional upon recipient countries reducing their wage levels (“internal devaluation”) and selling off public enterprises.

The tunnel vision that guides these policies is self-reinforcing. Europe, America and Japan draw their economic managers from the ranks of professionals sliding back and forth between the banks and finance ministries – what the Japanese call “descent from heaven” to the private sector where worldly rewards are greatest. It is not merely delayed payment for past service. Their government experience and contacts helps them influence the remaining public bureaucracy and lobby their equally opportunistic replacements to promote pro-financial fiscal and monetary policies – that is, to handcuff government and deter regulation and taxation of the financial sector and its real estate and monopoly clients, and to use the government’s taxing and money-creating power to provide bailouts when the inevitable financial collapse occurs as the economy shrinks below break-even levels into negative equity territory.

Regressive tax policies – shifting taxes off the rich and off property onto labor – cause budget deficits financed by public debt. When bondholders pull the plug, the resulting debt pressure forces governments to pay off debts by selling land and other public assets to private buyers (unless governments repudiate the debt or recover by restoring progressive taxation). Most such sales are done on credit. This benefits the banks by creating a loan market for the buyouts. Meanwhile, interest absorbs the earnings, depriving the government of tax revenue it formerly could have received as user fees. The tax gift to financiers is based on the bad policy of treating debt financing as a necessary cost of doing business, not as a policy choice – one that indeed is induced by the tax distortion of making interest payments tax-deductible.
Buyers borrow credit to appropriate “the commons” in the same way they bid for commercial real estate. The winner is whoever raises the largest buyout loan – by pledging the most revenue to pay the bank as interest. So the financial sector ends up with the revenue hitherto paid to governments as taxes or user fees. This is euphemized as a free market.