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The Hidden Risks of Short-term Trading

From time to time, regardless of whose data service you use, you may experience a data transmission blackout or failure. This past week, on February 8th, 2001 at 10:00, I experienced a 9-minute loss of data, which is about the most I have experienced in recent years at any one time. Fifteen years ago, we had this type of interruption several times a week and occasionally failures would occur several times a day depending on the data source.

If you have entered a trade just prior to the loss of data information, it is probably best to exit at the market and relieve yourself of the risk of being in the market. Trying to follow price with a streaming data window on the TV set will suffice in my opinion. The first time this happens to a new trader it is like someone cutting off your breathing or your blood supply. It is a panic type situation if price was previously moving rapidly in one direction or another when your datafeed suddenly fails.

You could call a friend that uses a different data source and see if he or she is receiving data or you could call your broker, but your broker is not going to be willing to allow you to sit on the phone line while he gives you prices, at least not for very long. It is inconsiderate to expect your broker to do this for you, as you are not their only customer.

If you are trading electronically with one of the newer broker services that may be hooked directly into Globex it is a great way to trade and eliminates voice contact with another human being. Another human voice on the other end of the phone can be a source of difficulty and emotional problems if the broker should ask "You want to do what?" as he has not been listening to you as you gave your order. It will immediately cause you to question your decision and from that day forward that behavior will be associated with a live broker.

Trading on the Internet is fun, fast and easy. There is no emotion or comment from the other end of a phone line. It can also be expensive. If you enter the wrong information into your order screen, you may sell instead of buy and vice-versa, or you may be too slow and the order will be rejected as it arrived to Globex late and the price of the stop order has already traded.

Then there is failure. Failure of your ISP, failure of your computer or failure of the Internet routing system, which may not stop your order but will surely slow it up. The biggest problem of them all is failure of Globex itself.

This happened on Friday, February 9, 2001 at about 3:03 PM Eastern Time. Globex "went down" and was not functioning. It did not matter where your account was or how well your broker liked you -- the entire system went down.

What happens to your trade when this takes place? If you are "in" a position you are IN and there is absolutely no way to get OUT unless you have a quantity on that is comparable to or is a multiple of the full size contract in the open outcry pits, and you can offset your position in that manner. If you have a 1,2,3, or 4 lot and do this offset you have a totally different situation to deal with. You have offset one position and taken on another for which there is no ready solution until Globex comes back on line.

Globex came back on line at 3:46 Eastern Time, by my data feed, on Friday February 9th, 2001 and when it came back price wasn't far from where it was when Globex "went down."

There is little one can do however, if the cash markets have moved away from price while the system is down. You will reopen with a gap that may be in your favor or it may be against you. I know of one instance this year where a friend of mine gained several thousand dollars while the "system" was down. It could have just as easy been against him.

In this instance the system was down for 45 minutes or so and the orders you may have in the system are just that. They are in the system with no way of changing them. If Globex had not come back up Friday afternoon, you could have been long or short all weekend.

Do not count on the exchange making good on losses incurred due to a system failure. You may or may not be relieved of this risk by the exchange. To my knowledge I know of no one that has ever been relieved from this type of risk.

This may or may not be a serious factor to consider. In a small account I see it as a real detriment as the account could be decimated by such an event. In the case of larger account I see a drawdown as upsetting but with a profitable system it is just a matter of time until new equity highs are made.

Just beware the hidden risks, and have a contingency plan. Know your position at all times, and if you lose your datafeed, either find a way to exit quickly, or plan for some surprising news.

Copyright 2001 Ralph Russell, Sarasota, Fl.

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