From the November 01, 2012 issue of Futures Magazine • Subscribe!

Spotting broker red flags

In the world of futures trading, speculators know what they’re getting into as soon as a trade is entered. Go short cattle on strong supply numbers, then a mad cow scare hits, causing multiple limit up moves. Doesn’t matter the scenario, trading involves risk. 

But traders never should have to be concerned that their money on deposit with regulated entities might be in jeopardy. Unfortunately, the collapses of MF Global and Peregrine Financial Group (PFG) have caused futures traders to grapple with hijacked segregated funds. Speculators and hedgers alike need not only a trading plan to manage market risk, but also a plan to spot brokerage firm risk.

The Wall Street Journal recently ran an article titled: “True or false: Many Americans don’t understand the basics of investing.” While the majority of futures traders have a higher level of investment literacy than typical retail investors, these same traders — who understand leverage, complex economic analysis and moving average crossovers — have very little knowledge about the realities of segregated funds balances, open trade equity protections and the daisy chain movement of client funds.

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