newsletter 110915 final volume 1 issue 20

Copyright © 2015 EQS Capital Management LLC, See important disclosure on last page

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SIGNALS

When you think about spoofs maybe some

classic movies come to mind such as

“Airplane!,” “Austin Powers,” “Hot Shots!,”

and “Naked Gun”, to name a few. Though

we could have some good laughs recalling

some of the good one-liners like, “stop call-

ing me Shirley”, but let’s take a deeper look

at trade spooking, not parody movies. Last

week a Chicago jury found Michael Coscia

guilty on 12 criminal counts against him as

authorities attempt to clamp down on de-

ceptive trading driven by computers.

So what is spoofing? Trade spoofing is a

disruptive algorithmic trading activity em-

ployed by traders to outpace other market

participants and to manipulate market pric-

es. Under the 2010 Dodd-Frank Act, spoof-

ing is defined as "the illegal practice of bidding or

offering with intent to cancel before execution."

Spoofing can be used with layering algorithms and

front-running, activities which are also illegal. In a nut

shell, (from Austin Powers, “Hey Look, I’m in a nut-

shell!) spoofers bid or offer with intent to cancel be-

fore the orders are filled and by doing this they can

improve entry and exit prices by manipulating orders

and thus profiting from the price movement.

In July 2013 the US Commodity Futures Trading Com-

mission and Britain's Financial Conduct Authority

brought a milestone case against spoofing and indict-

ed Panther Energy Trading and Michael Coscia, a

high-frequency trader for using a "computer algorithm

that was designed to unlawfully place and quickly

cancel orders in exchange-traded futures contracts."

They placed a "relatively small order to

sell futures that they did want to execute,

which they quickly followed with several

large buy orders at successively higher

prices that they intended to cancel. By

placing the large buy orders, Coscia and

Panther sought to give the market the

impression that there was significant

buying interest, which suggested that

prices would soon rise, raising the likeli-

hood that other market participants

would buy from the small order Coscia

and Panther were then offering to sell."

(continued on Page 2)

SPOOFING LEADS TO JAIL T IME

Difficult week in the market last week as EQS held a 4.19% loss in WTI, and a 1.56% loss in Natural Gas. Range bound markets pre-sent extra challenges prior to up or downside break-out which makes it even more important to have a disci-plined strategy and stop loss program to curb larger than necessary losses.

I N S I D E T H I S I S S U E :

Spoofing Continued 2

Oil and Products 3

Natural Gas 4

About EQS 5

Terms and Disclosures 6

E Q S T R A D E R E C O M M E N D A T I O N S

T H E S O U R C E

F O R C O M M O D I T Y

T R A D I N G S I G N A L S

Volume 1, Issue 20 November 9, 2015

A Weekly Publication on the Commodity Markets

©



The world of trading “bots” that use algorithmic and high-frequency trading has greatly

changed the way markets are traded, and arguments can be made on the merits of

liquidity, and the disasters of flash crashes caused by such automated trading. To

counter “bot” trading, the EQS trading model has gone through many iterations and has

a learning component that sees new trends caused by such things as high frequency

trading and spoofing. The EQS Hedge Fund uses a strategy that employs methods to

take profits and cuts losses at points that prevent “bot” trading by high-frequency and

spoofers from gaming stop losses and manipulating prices against the EQS Fund.

For example, a spoofer might dupe other traders into thinking oil prices are rising, say,

by offering to buy futures contracts at $44.45 a barrel when the market price is

$44.43. After other buyers join in with bids at that higher price, the spoofer pivots, can-

celing the buy orders and instead sells at the $44.45 price he set with the fake offer. By

doing this the spoofer was ultimately able to sell two cents higher than the true market

price. The spoofer can flip and then turn around and buy back his short positon by pre-

tending to place a sell order with the reverse operation that just took place, and repeat-

ed many times, spoofing can produce big profits. Not only does this strategy work to

get better entry and exit prices, but spoofers are able to use this method to game other

market participants stop-loss levels, and “flush” others out of their positions.

Now we have over simplified the process as the bids and the offers are placed and with-

drawn in milliseconds, and this is just one of many strategies that “bots” using algorith-

mic and high-frequency trading play to “game” the system. Anytime you have competi-

tion and money involved people are going to find ways to get ahead. Think of spoofing

as the edge used by traders that athletes use to get ahead by using performance en-

hancing drugs. Look at bicycle racing, to ride in the Tour de France you have to be a

very good racer, maybe you have seen old black and white pictures where riders used

to smoke cigarettes to “open up their lungs” as a way to get ahead, well, in hindsight

that may not have been the best idea, but the point is that competitors were and are

always looking for ways to get ahead of the competition.

Lance Armstrong was arguably one of the greatest athletes of all time, winning 7 Tour

de France races. Lance never tested positive for performance enhancing drugs while

competing, but was later banned as it was found out that he was just always one step

ahead of testing methods. The argument is that if other riders were doing the same

enhancement then it was a level playing field, and if no riders were enhancing including

Armstrong he likely would have won anyway.

Spoof trading gives an edge to a solid trade strategy, just like steroids in the hands of a

great baseball player makes him hit the ball just a bit further. There is no way that you

could take an “average Joe” off the street and give him steroids and he would instantly

be able to hit a homerun in a major league baseball game. Whether it is Lance Arm-

strong, steroids in professional baseball, or traders spoofing to front-run orders, it is

that little edge that makes others follow suit to keep up.

The case is made that cycling and baseball and other sports are “cleaner” now that

regulation has clamped down on cheating, but then again is a normal “average Joe” off

the street any more likely to win Tour de France with or without steroids? The savvy

algorithmic and high-frequency traders are always one step ahead and working to make

sure that the “average Joe” does not win.

SPO OFI N G…(C O N TI NU ED )

Spoof trading gives an edge to a solid trade strategy, just like steroids in the hands of a great baseball player

makes him hit the ball just a bit fur-

ther.



Oil prices remain in a tight range below $50 a barrel in recent weeks as the global oversupply of

crude, which has battered prices since last year, shows very few signs of abating. The market

made some key moves to buck the trend and breakout in a strong rally, only to see pullback from

the bears.

The big story has been the dollar, as investors are focusing on the monthly U.S. nonfarm payrolls

report, which the Federal Reserve takes into consideration when deciding when to raise interest

rates. After Friday’s surprise gain in jobs and earnings, the market is again fully expecting the U.S.

central bank to raise the rates at its meeting in December, a decision which would keep the dollar

in rally mode, and

with the dollar the

main currency for

commodities it

could kill the bulls.

Markets are also

looking for clues

about another

meeting in Decem-

ber—that of the

Organization of

the Petroleum

Exporting Coun-

tries, the 12-

nation oil cartel. Senior OPEC officials were quoted in recent days saying the bloc is unlikely to

waver from its no-cut policy unless oil producers outside the bloc, such as Russia, were also in

sync with the plan. OPEC stated that it will likely not cut output at the December meeting unless

non-OPEC oil producers follow suit.

It remains an interesting time in the global oil market as this oversupplied market has oil export-

ing countries fighting for global market share to keep oil revenue coming in. The likelihood of a

stronger dollar as a result of a Federal Reserve interest rate increase in December and the first

half of next year is a dangerous sign for these countries that depend on oil revenue to run their

economy. There however remains hope for the bulls and countries that are dependent on oil

exports as rig counts continue to decline. Last week, rig count dropped by 16 to 578, the ninth

consecutive

week of de-

clines. The

number of rigs

has fallen

sharply since oil

prices started

falling last year,

and the number

of operational

rigs has fallen

64% since a

peak of 1,609

last October.

For now the world data continues to look grim for world demand, but it looks like the American

consumer is alive and well. We will keep fighting the supply and demand battle and keep our

eyes on FED policy and changes in the dollar to flank the battle field and change the course of the

war, but for now we are cautiously bearish.

F L A N K S O N T H E O I L B AT T L E F I E L D

Oil and Refined Products

Last week, rig

count dropped

by 16 to 578,

the ninth

consecutive

week of

declines.

Bearish



Natural gas prices rose for the second week in a

row staging a possible comeback after trading

below the psychological $2/mmbtu level last

week.

Gains accelerated after the U.S. Energy Infor-

mation Administration said producers added 52

billion cubic feet of natural gas to storage in the

week ended Oct. 30. That is 6 bcf less than the

average forecast by analysts and traders sur-

veyed. The weekly report is looked to as a leading

indicator of supply and demand, and this lower-

than-expected addition would suggest that supply

NAT U R A L GA S : BAC K F RO M T H E DE A D ?

Bearish

Natural Gas

was smaller or demand was larger than expec-

tations which gave the case for the rally.

Despite the rally, natural gas prices have had

problems sustaining any momentum as money

managers have been moving into near-record

bearish positions. Front-month prices have

plummeted from near $3/mmbtu in August all

the way down to nearly $2 when the November

contract expired last week. A lot of that fall

came from the weather, with unseasonably

warm forecasts for November damping expecta-

tions for heating demand. Some recent fore-

casts, though, have shown cooler weather

settling in during late November, which has

encouraged buyers in recent days, but has

not been enough to cause any major spikes

in the forward curves.

While Thursday’s storage data gives the mar-

ket some support, it may be limited. Invento-

ries as of Oct. 30 surpassed 3.9 trillion cubic

feet, 10% above levels from a year ago and

3.9% above the five-year average for the

same week. The high stockpiles are still

nearing a record. And warm weather fore-

casts suggest that we may not get the spike

in prices this fall that so many traders have

come to rely on.

The high stockpiles

are still nearing a

record. And warm

weather forecasts

suggest that we

may not get the

spike in prices this

fall that so many

traders have come

to rely on.



Why You Need EQS

From technical to fundamentals to macroeconomics, analyzing commodi-

ty markets can be a daunting task. Let EQS do the work for you.

Through its subscription service, EQS Trading provides traders and

hedgers easy to follow trading signals for major commodity futures mar-

kets, including crude oil, natural gas, gold, silver and many others. Now,

strategies used by institutions and hedge funds are at your fingertips.

The subscription service includes both daily trading signals and the

weekly Signals Newsletter, which provides in-depth insight to the com-

modity markets.

EQS Capital Management also offers a commodity hedge fund (EQS

Commodity Fund LLC), which employs the same signals in its subscrip-

tion service in a private placement fund for accredited investors and

institutions. Because EQS uses a “long” and “short” strategy, it is de-

signed to

generate

returns,

regardless

of which

way the

market is

moving.

EQS

Commodi-

ty Fund

imbeds strict risk management principles through diversifying its portfolio

(energy, metals, and agriculture) and actively managing stop loss limits.

What is EQS?

Economic Quantitative Strategy (aka EQS) is an investment and trading

strategy that translates economic data and technical indicators into price

direction for

commodi-

ties. Be-

cause of its

quantitative

nature,

EQS has

been rigor-

ously back-

tested with

15 years of

historical

data to

ensure the

strategy works in a variety of market conditions. Furthermore, because

the global economy changes over time, EQS employs dynamic parame-

ters that evolve as the market changes.

About Us

Who is EQS?

Richard C. Rhodes

Mr. Richard C. Rhodes is the President and Founder of EQS Capital

Management LLC. Richard has a Bachelor of Science with honors in

Mechanical Engineering from Texas A&M University and an MBA

from Duke University. He brings almost 25 years of diverse energy

experience, covering all phases of the oil and natural gas value chain

from producer to end-user. Richard is a li-

censed Series 3 CTA (Commodity Trading

Advisor) with the Commodity Futures Trading

Commission and a member of the National

Futures Association.

Richard began his professional career on a

drilling rig in West Texas with Conoco Explo-

ration and Production. Richard continued his

oil and gas career with Koch Industries

(ranked as one of the largest privately-owned companies in the U.S.)

where he worked in midstream, refining, pipeline, and distribution

operations. During his eight years with Koch Industries, Richard be-

gan as an operations engineer and later found his true passion in

trading, which leveraged his professional interests in mathematics

and economics. Richard joined Duke Energy in 2002, where he spent

ten years working in the energy trading department and earned The

Pinnacle Award, the company’s highest honor. Richard then left Duke

Energy to launch EQS Capital Management in 2012.

Jonathan M. Lamb

Mr. Jonathan M. Lamb is the Director of Business Development at

EQS Trading. As a four year varsity hurdler

on the track team at Ball State University,

Jonathan earned Bachelor of Science de-

grees in Risk Management, Insurance, and

Economics, and started working on his PhD

in Economics at North Carolina State Uni-

versity before focusing on business and

trading.

As part of the first wave of Millennials to

join the work force, Jonathan started his

professional career almost 15 year ago,

joining ACES Power Marketing as an Operations Specialist, providing

demand side economics for Co-Op Power Providers before becoming

a Real-Time Electricity Power Trader. He continued his career trading

power for seven years with Progress Energy (now Duke Energy, the

largest utility in the nation) as a Senior Real Time Trader. Jonathan

then opted to become an entrepreneur and started a consulting firm

specializing in finance and economics, owning and running seven

different small businesses before joining EQS in 2015.



EQS Trading

A Division of EQS Capital Management, LLC

8480 Honeycutt Road, Suite 200

Raleigh, NC 27615

Phone: 919.714.7453

www.EQStrading.com

E-mail: [email protected]

Your use of this subscription is governed by these Terms and Conditions. You may print the documents published in hard copy for internal reference purposes, but not for any other purpose. Specifically, you may not copy, reproduce, distribute or modify the content. The information may be changed by EQS at any time without notice. While EQS will use reason-able efforts to ensure that the information is accurate and up to date, no representations or war-ranties are given as to the reliability, accuracy and completeness of the information. This material has been compiled and presented as general information, without specific regard to the particular circumstances or risks of any company, institution, or individual. It is not intend-ed as, nor should it be construed to be, investment advice. In no event will EQS, its affiliates, nor any of its officers, partners or employees be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of it, or in any connection with, your use of the Subscrip-tion or the failure of performance, error, omission, interruption, delay in operation or transmis-sion. Use of the Subscription Service shall be governed by all applicable Federal laws of the United States of America and the laws of the State of Delaware. The user hereby acknowledges and agrees that EQS may be harmed irreparably by any violation of this Agreement and that EQS shall be entitled to injunctive relief to enforce this Agreement. The information contained has been prepared solely for informational purposes and is not an offer to sell or purchase or a solici-tation of an offer to sell or purchase any interests or shares in funds managed by EQS. Any such offer will be made only pursuant to an offering memorandum and the documents relating thereto describing such securities.

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. HYPOTHETICAL PERFORMANCE RE-SULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESEN-TATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMI-LAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPO-THETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RE-SULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HY-POTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN AD-VERSELY AFFECT ACTUAL TRADING RESULTS. THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. YOU SHOULD THERE-FORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FI-NANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY INTEREST TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION ("CFTC") REQUIRE THAT PROSPECTIVE CLIENTS OF A CTA RECEIVE A DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO AN AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT'S COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. YOU MAY REQUEST A COPY OF THE DISCLOSURE DOCUMENT BY EMAILING EQS. THE CFTC HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS TRADING PROGRAM NOR ON THE ADEQUACY OR ACCURACY OF THE DIS-CLOSURE DOCUMENT. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIG-NIFICANT ASPECTS OF THE COMMODITY MARKETS. THEREFORE, YOU SHOULD PROCEED DIRECTLY TO THE DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. EQS CAPITAL LLC IS A CFTC REGISTERED COMMODITY TRADING ADVISOR AND COMMODITY POOL OPERATOR. PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH POOLS WHOSE PARTICIPANTS ARE LIMITED TO QUALIFIED ELIGIBLE PERSONS, AN OFFERING MEMORANDUM FOR THIS POOL IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A FUND OR UPON THE ADEQUACY OR ACCURACY OF AN OFFERING MEMORANDUM. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT RE-VIEWED OR APPROVED THIS OFFERING OR ANY OFFERING MEMORANDUM FOR THIS FUND. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EX-CHANGE COMMISSION (THE “SEC”) OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS AS A

T H E S O U R C E

F O R C O M M O D I T Y

T R A D I N G S I G N A L S

TERMS and DISCLOSURES

newsletter 110915 final volume 1 issue 20

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