Commodity futures and options are prime targets
for fraudulent offerings. Usually these are cold calls or advertisements
offering quick profits.
Look at solicitations which are based on seasonal
changes or in response to publicly-issued reports or well-known current events. For example, advertisements on radio or television may urge
you to purchase commodity options in heating oil because increased demand for
heating oil in the winter is likely to push up heating oil prices. Similarly, in
the spring, advertisements may tout commodity options in unleaded gasoline
because increased consumption of gasoline in the summer is likely to boost
gasoline prices. Or you may receive a phone call from a salesperson urging you
to invest quickly in futures for certain agricultural commodities because El
Nino has driven up prices on those commodities or a recently-issued government
report has described shortages of that commodity.
These sales pitches are false. Seasonal increases in the
demand for commodities do not necessarily result in the increased value of an
option or futures contract on those commodities because the market has already
factored seasonal demand into the price of futures and options. The same is true
of well-known information like El Nino or government reports. The markets
respond immediately – within a few hours, often a few minutes – to new
information. In other words, the prices of commodity options and futures
contracts already take into account all known or predictable market conditions,
such as seasonal changes in demand for a commodity or known shortages of a
commodity. The advent of the summer and winter seasons, or the latest United
States Department of Agriculture report on crop size, is not news that is known
to only a few.
Moreover, claims that the risk of purchasing commodity futures
and options can be predetermined or fixed are misleading. Purchasers of
commodity option contracts can lose every penny of their investments and because
futures contracts are "leveraged" or "margined," futures
investors can lose more than their investments.
If you are solicited by a company that claims to trade
commodities and asks you to commit funds for those purposes, you should be very
careful. Watch for the warning signs listed below, and take the following
precautions before placing your funds with any commodity trading company that
offers leveraged or financed commodity transactions:
- Avoid Any Company That
Predicts or Guarantees Large Profits Because of Predictable, Seasonal
Changes in Demand, Published Reports, or Well- Known Current Events
- Stay Away from Companies
That Promise Little or No Financial Risk
- Be Wary of High-Pressure
Efforts to Convince You to Send or Transfer Cash Immediately to the Firm,
via Overnight Shipping Companies, the Internet, by Mail, or Otherwise
- Be Skeptical about
Unsolicited Phone Calls about Investments, Especially Those from
Out-of-State Salespersons or Companies with Which You Are Unfamiliar
- Prior to Trading, Contact
the Commodity Futures Trading Commission or Other Authorities, Including
Your State's Attorney General's Office's Consumer Protection Bureau,
and the Better Business Bureaus and the National Futures Association
- Be Sure You Get All the
Information about the Company and Its Track Record and Verify the Data. If
You Can, Before You Invest with Any Company, Check the Company's Materials
with Someone Whose Financial Advice You Trust
- Don't Deal With
Individuals Who Won't Give You Their Background
- If in Doubt, Don't
Invest. If You Can't Get Solid Information about the Company and the
Investment, You May Not Want to Risk Your Money
Now take a look at web sites selling
commodity trading systems that guarantee high profits with minimal risks.
The United States Commodity Futures Trading
Commission (CFTC), the federal agency that regulates commodity futures and
options markets in the United States, has witnessed an increase in the
number of Internet web sites fraudulently promoting commodity trading
systems and advisory services. Among other things, these web sites falsely
claim that advertised performance results are based on real trading when,
in fact, the results are based on hypothetical trading. The CFTC urges you
to be skeptical when promoters of trading systems and advisory services
claim that their products and services will earn high profits with minimal
risks. You also should be forewarned that systems that trigger frequent
trading signals as part of a day-trading strategy could result in
substantial commissions and fees.
RESULTS CAN BE UNRELIABLE
Many trading system promoters advertise
their systems by reporting hypothetical trading results. Hypothetical
trading results typically are based on trading simulations using
historical price data or simulated "real time" computer
trading. To obtain these results, trading system promoters typically
pretend that they traded futures contracts at market prices that occurred
some time in the past. They then calculate the trading results that these
purported trades would have achieved had they been placed, based on actual
historical prices. These results often show impressive trading results and
large net profits with only a few, small margin calls.
Whether based on historical data or
simulated "real time" trading, hypothetical results do
not reflect the results of any actual trading. In other words, there is no
actual futures account, no actual investment, no actual trading, and no
actual profits. The results are purely the product of simulation.
Hypothetical trading results have several
Since the trading systems that produced the results were not actually
traded under real market conditions, the purported results fail to
take into account market circumstances that affect traders and their
decision-making process, such as anticipated news events that could
have an impact on the supply, demand or price of the commodity.
- 20/20 Hindsight with
Historical Results --
"Real-time" is not
When marketing trading systems, some promoters
claim that their systems have performed successfully in "Real-time
Trading." "Real-time Trading" only means that the
system has been tested using a live data-feed, rather than being
tested using historical market data. In "Real-time Trading,"
however, no trades have actually been placed in the market.
Performance results based on "Real-time Trading" are merely
a form of hypothetical results, with the same limitations.
Financial Limitations --
Hypothetical results may not adequately take into
account the ability of a trader to absorb trading losses or to meet
margin calls. Trading systems assume that the trader can withstand all
losses generated by the system and can meet resulting margin calls. It
is much easier to absorb a trading loss on paper (hypothetically) than
to do so in reality. Many traders find it unacceptable to sustain
several consecutive trading losses and/or margin calls. Moreover, in
an actual trading environment, a trader's financial condition may
change over time and affect his or her ability to continue following a
Not Tested Under Real Market
Hypothetical trading results assume that futures contracts have been
bought and sold at specific prices. Since these assumptions have not
been subjected to actual market conditions, they may overestimate or
underestimate the performance of a system. In addition, some market
conditions may make it impossible to execute a trade. For instance,
many systems assume that stop-loss orders will be executed at their
stop price. Under actual market conditions a stop-loss order might be
executed at a better or worse price, or not be executed at all.
Further, actual market conditions include bid/ask spreads that might
not be reflected in the prices used in hypothetical trading. Moreover,
the actual execution of a trade could impact the price paid,
especially in less liquid or illiquid markets.
of Results --
A member of the public should be alert to the
possibility that the system promoter manufactured results by selecting
historical trades that would have yielded the greatest returns.
Trading and System Costs
The profit claims of promoters may fail to take into consideration
the cost of purchasing or leasing a trading system. While the prices
of systems vary, many are sold for thousands of dollars. In addition,
most of these systems require that the user obtain a data feed from a
vendor. System promoters may also fail to take into consideration the
impact on profits of commissions and fees charged by brokers in
connection with futures and options trading. Such commissions can have
a substantial effect on profitability, particularly when the system
generates frequent trading signals. A user should take all of these
costs into account because they raise the break-even point in trading.
Because of these limitations, CFTC
Regulations require that the presentation of hypothetical trading results
be accompanied by a specific cautionary statement warning of the inherent
limitations of these results.
Now look at promises of easy profits from
buying precious metals and other commodities.
Consumers should be alert to companies that sell
investments in precious metals and other commodities based on sales pitches
claiming customers can make a lot of money, with little risk, by purchasing
metal through a financing agreement. Sometimes these companies offer
opportunities to speculate on the price movement of precious metals, or other
commodities such as heating oil, without actually taking delivery of the
The United States Commodity Futures Trading
Commission (CFTC) is the federal agency that regulates the trading of commodity
futures and options contracts in the United States and takes action against
firms suspected of illegally or fraudulently selling commodity futures and
options. Over the past several years, the CFTC has taken enforcement action
against wrongdoers who lured customers to purchase purported interests in
precious metals without taking delivery, through various misrepresentations
including claims that they would earn large profits with little risk.
Certain companies advertise on radio, television
or Internet web sites, or make telephone "cold calls," to promote the
purchase of precious metals such as gold, silver and platinum. The
advertisements, infomercials and telephone solicitations often promise quick
riches - such as the ability to double or triple the customer's initial
investment in just two or three months - all with low risk. Companies making
such statements typically ask that customers pay only a small percentage of the
total purchase price, and also claim that they (or another company) will
purchase and store the metal. These companies also pretend to arrange financing
for the customer's metal purchase so the customer can obtain a larger profit by
controlling a larger amount of metal with their relatively small down payment.
Companies often discourage customers from taking delivery of the metal. These
companies often charge a commission for the purchase transaction, a loan
origination fee, an interest charge on the remaining balance (which accrues over
time), and fees relating to storage and shipping of the metal they pretend to
purchase for the customer. Sometimes, not all of these fees are disclosed up
What's Wrong With Such Sales Pitches?
Companies making such pitches often:
- lie about or overstate
their ability to predict prices or the direction of the metals markets;
- minimize the degree of
investment risk involved in metals investments;
- fraudulently fail to
disclose how much the price of metal must go up for the customer to break
even (let alone profit), since hefty finance and storage fees and
commissions are deducted from the customer's account before any profits
- falsely claim to be
purchasing and storing the metal, when they do not actually do so. Indeed,
companies often discourage customers from taking delivery of the metal;
- charge phony
"storage" fees for metal, when no metal is actually purchased or
- charge phony
"interest" fees that diminish a customer's account equity to the
point where the customer has to deposit additional funds with the company or
have his account closed out at a total loss. The interest fees are phony
because no metal has been purchased, as promised, and the financing
arrangement therefore is fictitious;
- fail to point out that,
because you are buying on "margin" or with leverage, you will have
to send the company additional funds (or sell a portion of your "metal
position") if the price of the precious metals moves unfavorably.
Warning Signs Of Commodity "Come-Ons"
If you are solicited by a company to purchase
commodities, watch for the warning signs listed below:
- Avoid any company that
predicts or guarantees large profits with little or no financial risk.
- Be wary of high-pressure
tactics to convince you to send or transfer cash immediately to the firm,
via overnight delivery companies, the internet, by mail, or otherwise.
- Be skeptical about
unsolicited phone calls about investments from offshore salespersons or
companies with which you are unfamiliar.
- Be sure you get all
information about the company and verify that data, if possible. If you can,
check the company's materials with someone whose financial advice you trust.
- Learn all possible
information about fees and commissions charged, and the basis for each of
- If in doubt, don't invest.
If you can't get solid information about the company, the salesperson, and
the investment, you may not want to risk your money
Use Extra Care When Dealing with Foreign
Sometimes companies that solicit customer
investments in precious metals (or their purported storage facilities) are
located outside the United States, even if they do not reveal that fact to you
while soliciting your investment. United States government agencies generally
have little or no regulatory authority over entities operating outside the
United States. If you transfer funds to foreign firms, or place funds with
United States firms that are later transferred to offshore companies, it may be
difficult or impossible for you to recover your money. Storing metal offshore,
particularly in countries with secrecy laws, might make it difficult for you to
verify your investment.
Ask where all companies that would handle your
funds are located, where any telephone call you receive originates, where your
funds will be deposited and kept, and where the metal will be stored. If
possible, telephone the company.
Now we will take a further look at some of
the potential shortcomings with commodity trading and trading systems.
Commodity trading systems typically are
computerized programs that signal members of the public when to buy and sell
commodity futures and options contracts. Systems produce buy and sell signals
based on mathematical formulas and are typically based on technical analysis of
trading data (trading volume and prices), as opposed to fundamental analysis
(analysis of economic factors such as supply and demand). Trading systems that
are based on technical analysis attempt to predict future price movements based
on historical prices, price relationships and price trends.
In deciding whether to purchase a particular
trading system to trade commodity futures or options, members of the public
should remember that no commodity trading system can guarantee profits. And,
whether or not a trading system is used, commodity futures and options are
typically high-risk endeavors.
Persons considering trading commodity futures or
options should educate themselves about futures and options and realize that
they may lose large sums of money. The following checklist should help consumers
in deciding whether to use a trading system.
CHECKLIST - IS A
FUTURES/OPTIONS TRADING SYSTEM RIGHT FOR YOU?
- Do you have the financial ability to sustain
trading losses and meet margin calls? When trading futures contracts on
margin, you risk losing much more money than the initial margin amount. If
the market moves against you, you may be required to pay additional funds.
The use of margin creates potentially large exposures to loss.
- Can you lose your entire investment and more
without a change in your lifestyle?
- Do the trading results sound too good to be
- Are the advertised trading results based on
actual trading or "hypothetical" trading?
- Has any trader used the system in actual
trading? If so, how has the trader fared?
- Will the system promoter provide you with
independent verification of the claimed trading results?
- What is the total cost of the system?
- Have you factored into your purchasing
decision the impact of commissions and fees that can result from frequent
- What are the additional costs (data feed,
- Have you checked with the National Futures
Association (NFA) whether commodity regulators have disciplined the system
promoter? Not all system promoters are required to be NFA members or
registered with the CFTC. A call to the NFA (800-621-3570 or 800-676-4NFA)
or the CFTC, or a visit to the NFA's web site at
can confirm the status of a particular promoter.
Before investing, particularly in commodity
futures and options, know and understand what you are getting into. Remember: "If
it sounds too good to be true, it probably is too good to be true."