KICK THE (SLIPPAGE) TIRES BEFORE INVESTING IN A TRADING SYSTEM

October 25, 2010

With the constant modernizing of the world we live in, where one can deposit checks via their mobile phone, download running statistics from
their shoes, and order nearly anything they can think of online - it seems easier and easier to forget to be the careful consumer who kicks the
tires and checks under the hood these days.

Whether the ease with which one can purchase something online is to blame, or the ratio of unscrupulous people to the uninformed willing to be
separated from their hard earned money is the same as it always has been; the team at Attain has spoken with several investors recently who
have been unhappy with trading systems they have purchased, leased, or ‘followed’.

Our fist question, where did you first hear about these systems? One of the investors ‘found’ a system on a popular website offering thousands
of systems (quantity over quality?), another bought a system directly from the developer on the system developer website, and a third opened
futures account after visiting a website offering the ability to follow some market veterans who average 100% or more per year.

Upon learning of the ‘online’ sources of the trading systems these investors had problems with; my feeling is that the ‘online’ world is as much t
blame as anything. And that is because when looking at these websites, there are two common themes amongst them: 1. NO slippage or
commissions included in the performance records and graphs, and 2. Big, shiny calls to action asking users to purchase based on that info.

We’re used to seeing a nice brand name product on websites and clicking the nice shiny button to purchase it, and that is definitely the way the
investing world is going. But the big difference between buying a Kindle off of Amazon.com and a trading system off of some slightly lesser
known website is the quality control and “picture” of the product.

With Amazon.com, you’re going to get the very product you see in the picture on the webpage you click ‘buy’ on. With any trading system or
‘follow the guru’ website you buy off of, where the product ‘picture’ is the performance data and graph, you are going to get something very
different.

Consider the following disclaimer on one of the websites we came across:

“………. does not, by default, include commissions and execution costs when displaying hypothetical results. These costs will certainly
make your actual trading results worse than the results you see here. For high-frequency trading systems, your results will be vastly
worse than the results you see here.”

Why would they choose to show you a ‘picture’ of the product which is “vastly” better than the product you will actually receive? Could it be
because they would sell much less of the “vastly worse” product? Consider the following example, where we received a system from an aspiring
developer a while back in which the past year’s hypothetical profits were reported as $106,400; but which came out to -$24,625 for the same
time period when we did the testing with our own slippage and commission numbers included. In seeing this example of just how large “vastly
worse” can be, it sure seems like the reason centers around getting more ‘Buy Now’ clicks.

While a discussion of the problems with trading system performance as it is reported by some unscrupulous websites out there may seem a littl
too much like learning how the sausage is made to some of you, the moral of the story is that making sure slippage and commission costs are
included in performance reports is paramount to success. If we can save even one investor from buying the pretty product on the ‘Buy Now’
page, yet receiving the “vastly worse” product – we’ll be happy.

What is Slippage?

So what is slippage? And why is it so important to trading system performance? When a system is being traded in real time by a live person,
slippage is the difference between where a computerized trading system thinks it got filled, and the actual fill received by someone following
that system. When we’re talking about running a computerized trading system’s code back in time on historical data, slippage is a small
adjustment made to each trade in that backtest which is meant to simulate the difference between where the computer signals a trade entry an
where actual clients, with actual money, would have entered and exited the market using the computer's signals.

But shouldn't the computer-reported profit and the profit in actual client accounts be one and the same, you ask? That would be nice, and that i
what many unscrupulous brokers and others selling trading systems would like for you to believe; but the truth is that there will always be a
difference between the prices where the computer generates the signals and the prices actual clients using actual money get.

This is because trading systems are reactive - working off of the last tick in the data. The last tick reported by the exchange is not necessarily
the next tick an investor trading the system will receive, however; given investors must buy the offer and sell the bid. As a refresher, traders
wishing to buy submit bids, or what they're willing to pay, and traders wishing to sell submit offers for what price they are willing to sell at. A
trade is done when a trader's bid matches another trader's offer, enabling them to buy and sell to each other at the agreed upon price. This
agreed upon price is the "last price" reported by the exchange and the price a trading system uses to generate its buy and sell signals. Of
course, the whole process happens near the speed of light at times in the real world, with traders frantically moving, canceling, and initiating
bids and offers nearly every second.

So slippage is a function of the spread between the bid and ask price of the market you are utilizing. For example, the average spread between
the bid (the highest price someone is willing to buy at) and offer (the lowest price someone is willing to sell at) in the emini S&P 500 futures
market is around 1 tick or 1/4 of a full point. Slippage on a market or stop order in the emini S&P, therefore, can be estimated to be 1/4 a full
point, or 1 ticks, or $12.50 per side, and $25 per R/T (two sides). In a market like Palladium with much less volume, the spread between the
bid and ask may be something more like 20 ticks and you could be looking at upwards of $100 in slippage per side.

There is also the size of your order to consider. Consider again the emini S&P futures, which have thousands of contracts bid and offered on
each side of the last price at seemingly all times of the day. In such a case, hundreds of contracts could be done at the bid or offer price withou
the market having to rise or fall to find additional takers for your order. Contrast that with the aforementioned Palladium market, whereby there
may be only 10 contracts or so bid and offered within a handful of ticks of the last price. Doing 100 contracts in that case would mean the
market would need to move up or down (depending on whether you are trying to buy or sell) to find more bids and offers to fill your order. The
less contracts that are bid or offered at each level, the more the market needs to move to fill your multiple contract order. If you have unlimited
funding, try putting in a 10 or 20 contract order in the overnight electronic Palladium futures and you will quickly see this theory in practice (my
guess is Palladium would rise 1% or so on the order, with you getting filled at the high price).

As we saw with the flash crash, when some High Frequency Trading firms pulled their bids out of the market, if there are no bids for what you
are trying to sell, that item will go down to the lowest possible bid (in the case of the flash crash, that bid was $0.01 for some stocks). Those
who tried to sell a stock at $40 and were filled at $0.01 saw $39.99 of slippage that day (those trades were eventually cancelled).

[As a quick aside, it is interesting to note that High Frequency Traders generally trade only the most highly liquid markets such as big cap stock
and emini S&P futures – whereby managed futures programs are usually more concentrated on the less liquid (comparatively speaking) markets
such as traditional commodities and exchange traded bonds and currencies. Could the willingness of some managed futures programs to trade i
these less liquid markets be the basis for any edge they may have in these markets?]

The good news is that slippage can be fully accounted for in backtesting, and fully measured in real-time (making it even more suspect when
someone trying to sell you a system doesn’t show performance including slippage). Too many developers take the easy way out, unfortunately
by assigning a single number for slippage to each market and assuming just a single contract order. This number generally includes commission
costs as well, and ranges from $75 per trade to $100 per trade. Assuming a round turn fee of $40 including all fees, the leading developers are
allotting just $30 to $60 for slippage.

Attain slippage estimates:

In contrast to what most trading system developers use for slippage across all markets, Attain Portfolio Advisors uses individual slippage
numbers per market, where slippage estimates for a $50 Million account risking 0.66% of equity per trade show an average slippage of just ove
$179 per round turn across 55 different markets. This is three times as much as most developers are allotting for slippage, and likely a big part
of why many people who construct their own models find the sledding rougher than they anticipated.

But our estimates are also larger because they are based upon a large number of contracts at each signal (400 on average). Most system
developers and individual investors argue they will be doing nowhere near that much volume on a system – and while there can be untold
numbers of investors on a publically available trading system, $50 Million is likely a little high, so we re-ran our numbers using a 1% risk per
trade level and $1 Million in equity to get base level slippage estimates and came up with an average of just over $70 across 55 different
markets.

To arrive at our slippage estimates above, we took a multi-level approach where three separate factors of each market were considered in
addition to the external factor of how many contracts need to be executed. First, we considered the depth of each market by looking at the
average volume per 25 ticks. Second, we considered the volatility of each market by looking at the average true range (in ticks). And third, we
considered the average spread between the bid and ask for each market based on our past experience. Finally, we used a simple sizing
algorithm to generate the number of contracts to be traded based on the daily ATR, risk budget of 1%, and equity of $1 Million. Each separate
factor calculated a slippage number based on its numbers, and the slippage of each factor was averaged to arrive at our final estimate.

You can see that the estimates are anything but uniform across markets, with slippage essentially equal to the minimum movement (1 tick per
side *2 sides = 2 ticks) in the very large volume markets like emini S&P, EuroDollars, 10yr Bonds, and the EuroBund and up to 15 ticks in lowe
volume markets like Feeder Cattle and Heating Oil.

Do Managed Futures have Slippage?

For those of you more focused on Managed Futures than trading systems, you may be asking if there is anything to worry about with CTA
reporting, and whether managed futures reporting sites need to be including slippage in the results.
While trades put on by managed futures programs suffer from slippage just like anything else (they have to buy the offer and sell the bid just
like the rest of us); the results of those actual trades are what make up a managed futures program’s performance record. The performance of
each client trading a CTA program is essentially summed up to create a composite performance record for all clients, and that is what gets
reported by managed futures managers for their programs – not a hypothetical backtest. Thus the problem of showing results with or without
slippage does not exist in the managed futures space.

Some composite performance records have their own unique issues (such as a large portion made up of clients paying less in fees or
commissions, or the performance the average of clients across variants of a program); but a CTA doesn’t make it very long in this business if
clients aren’t getting the performance they are reporting (and we don’t have any more room to go into it this week).

In conclusion – while slippage may seem like nothing more than a prudent testing method for the quants who devise trading systems, it is in
actuality one of the main components deciding whether a system is profitable or not and (unfortunately) marketable or not.

Make sure you kick the tires and check under the hood next time you are looking at a trading system (or any investment for that matter – as al
those who purchased supposedly safe mortgage backed securities should have). Avoid investing in a trading system if you can’t see how it has
done after realistic slippage and commission numbers have been included. And avoid at all costs any brokers or other websites selling systems
without showing slippage and commission adjustments. They either don’t know how to adjust for these costs (which is bad), or are purposely
misleading investors by not showing them so they can sell more systems (which is even worse). Either way, they do not have your best
interests in mind.

- Walter Gallwas

IMPORTANT RISK DISCLOSURE

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Feature | Week in Review |

Week in Review : Bump up in Dollar brings multi-market CTAs back to earth

A bevy of economic and quarterly earnings reports last week made for high volatility, but market reaction was mixed in most commodity and index futures. The
Fed’s monthly Beige Book release of economic conditions showed sluggish growth which has the marketplace warming to the idea that there is a strong chance of
another round of quantitative easing within sight. Earnings season produced another week of impressive results, but guidance by some tech companies was not as
robust as hoped. European business readings continued to build on their constructive trend, although a workers strike in France regarding pension reform sparked
little anxiety with regards to near term supply issues for staples, especially energy. News from Asia continued to focus on currency fluctuation in front of a weekend
G20 meeting, but the biggest headline was news of the Chinese central bank upping lending rates.

The food sector continued to be dominated by strong price activity, especially Cotton futures +8.96% on ideas weather in China could reduce the current crop befor
harvest. The balance of the complex followed along with Coffee +6.68%, Sugar +4.29%, Cocoa +1.46% and OJ +1.30%. Soybean futures +1.22% also continued
with the strong trend higher on strong demand readings, although Wheat -4.80% and Corn -0.50% took a breather after strong recent price appreciation. Lean Hog
+2.32% and Live Cattle +1.50% were also supported by the stronger worldwide demand drum beat.

Stock Index futures added another week to the recent price rally with high expectations for more Fed action and another round of favorable earnings keeping seller
at bay, although poor guidance from a few companies did halt exuberance from the past month. Dow Futures +0.60% led the rally followed by S&P 500 futures
+0.49%, Mid-Cap 400 futures+0.49% with Russell 2000 futures -0.11% settling a tad below unchanged levels.

Activity in the currency futures was a bit subdued with market participants sitting on the sidelines ahead of the weekend G20 ministers meeting not wanting to get
trapped by any surprises. The U.S. Dollar Index +.54% bounced a bit from eight months lows and action in Japanese Yen +0.16% maintained the strong recent
uptrend. Swiss Franc -2.00%, British Pound -1.85% and the Euro -0.19% retreated some on worries the strike in France could hamper commerce.

Price activity for interest rate futures saw U.S. 30-Year Treasury Bonds +0.16% and 10-Year Treasury Notes +0.05% as investors headed to the sidelines awaiting
further news from the G20 meeting and indications about possible Fed action.

Metals traded lower during the past week as the correction featured traders heading to the sidelines on uncertainty of the actions by G20 ministers along with
worries on the size of the expected quantitative easing by the Fed in the U.S. The slight rally in the U.S. Dollar after hitting 8+month lows late the week before also
sparked pressure as the extended fall in the Greenback has aided price activity in the metals. Silver -4.82% led the way down followed by Gold -3.42%, Platinum -
1.20%, and Copper -1.09%.
Most sectors in the Energy complex were under pressure from heavier than expected supply indications, although winter purchases for some heating petroleum
made slight advances. Natural Gas -5.91% led the complex down followed by RBOB Gasoline -1.30% and Crude Oil -0.29%. Heating Oil +0.87% was the lone
market for this sector ending higher for the week.

Managed Futures

Multi-Market managers gave some gains back last week as commodities pulled back after a late week rally in the Dollar Index. However, most of these trends
remain profitable and many of the CTAs we track remain in the black for the month. Leading the way is Robinson-Langley (RL) Capital Management with estimated
returns of +6.79% for the month. RL Capital has caught most of the upward trends in grains, cotton, interest rates, and stock index futures. Coming in a close
second is Covenant Capital Management Aggressive at +6.03%, while Integrated Managed Futures Global Concentrated +4.73% and Accela Capital +4.66% battle
for third place.

Other managers in the black this month include Clarke Capital Worldwide +3.05%, Auctos Capital Management Global Diversified +2.04%, Hoffman Asset
Management +1.40%, Futures Truth MS4 +1.13%, 2100 Xenon Managed Futures (2x) +1.09%, Mesirow Financial Commodities Absolute Return +0.78%, Attain
Portfolio Advisors Strategic Diversification +0.75%, Mesirow Financial Commodities Low Volatility +0.20%, and DMH +0.05%.

Multi-Market managers in the red include Sequential Capital Management -0.59%, Quantum Leap Capital -0.77%, Clarke Global Basic -1.15%, Applied Capital
Systems -1.56%, APA Modified -1.91%, GT Capital -3.24%, Futures Truth SAM 101 -4.07%, Dominion Capital Management Sapphire -5.70%, and Clarke Global
Magnum -7.12%.

In short term stock index trading Paskewitz Asset Management Contrarian 3X Stock Index bounced back last week and is now up +1.65% for the month.
Meanwhile, Roe Capital Management Monticello is at breakeven, while Roe Capital Management Jefferson is down slightly at -1.03%.

Option trading managers continue to remain mixed for October. The top performer has been ACE SIPC which is ahead an estimated +3.83%. SIPC is an index
only strategy that typically performs best during range bound and slow moving equity markets. Others option managers posting positive returns for October include
Kingsview Management +1.72%, FCI CPP +1.37%, and Clarity Capital Management +0.67%.

Option trading managers that are down for the month mostly include diversified trades that continue to be plagued by the run up in markets like cotton and the
currencies. Current estimates are as follows: Crescent Bay PSI -0.03%, Cervino Diversified -0.15%, Cervino Diversified 2x -0.18%, Crescent Bay BVP -0.79%, FC
OSS -3.97%, HB Capital -4.91%, ACE DCP -7.13%, and Liberty Funds Group -7.56%.

Specialty market managers have continued to perform relatively well. As we’ve been reporting, the top performer for the month and the year has been Rosetta
Capital with an extraordinary estimate for October of +18.98% brining their YTD estimate up to near +30% . Rosetta has been enjoying the rally in the agriculture
markets since late August and have accelerated their gains in the recent weeks. All eyes will be on them to see how they are able to protect these gains once the
markets turn over.

Other positive specialty market manager estimates for the month include 2100 Xenon Fixed Income +1.16%, Cervino Gold +1.15%, AFB Forty Eighter Gold Option
+0.88%, and agriculture specialists NDX Shadrach +0.45% and NDX Abednego +0.09%. Managers in the red for the month include spread trader Emil Van Essen
0.89% and agriculture option trader Oak Investment Group -1.04%.

Trading Systems

Swing trading systems continue to outperform day trading systems so far this fall. With the equity markets ranging for the majority of the pit trading hours last week
the day trading systems were often caught buying the high or selling the low. On the other hand swing systems were able to benefit from the overall moves in the
market since they have a longer term perspective and held on through the rangy action.

Leading the swing systems was Bam 90 ES. Bam 90 ES came in long from the previous week and first thing on Monday, Bam 90 ES took profit from its long trade
and reversed short. By 2:30 pm on Tuesday the market had dropped more than 20 points since the open on Monday and Bam 90 ES rode this entire move down,
took profit, and reversed long. By the open on Wednesday, the market had rallied back up nearly 15 points from the pit hour low on Tuesday and Bam 90 ES
covered its long position. On Thursday, Bam 90 ES got short near the high of the day and stayed short through the close on Friday. For the week Bam 90 ES mad
$3,935.00. Other positive results were AG Mechwarrior ES at $77.50, Strategic ES at $307.50, MoneyBeans S broke out of its slump with a finish at $1,268.13,
Strategic SP at $1,700.00, Bam 90 Single Contract ES at $1,835.00, and Bam 90 M Squared ES at $3,076.05.

In the negative for the week were the TurningPoint systems. Unfortunately, TurningPoint couldn’t build on its success from the previous week and got caught short
in the upward moving eMini S&P 500 market. For the week TurningPoint ES lost -$842.50 and TurningPoint X2 ES lost -$855.00. Other results in the red were
MoneyMaker ES at -$55.00 and Waugh CTO ERL at -$842.50.

UpperHand ES was one of the few bright spots on the day trading system side. Upperhand ES made one trade and it was on Wednesday. The market action
Wednesday was perfectly suited for Upperhand ES, there was a 4 point move up during the first half hour of trading. That is when UpperHand ES got long, the
market continued the rally for the majority of the day before having a big sell off near the close but despite the sell off Upperhand ES was able to book profit. Other
positive results were Clipper ERL at $50.00 and NPI Traders ES at $740.00.

Sadly, there were more results in the red on the day trading side last week. Many of the day trading systems were late to join a move last week and were hurt when
the markets reversed against their positions. Other negative results were Echo-DT ERL at -$28.57, BalancePoint ES at -$112.50, Compass ES at -$305.00, NPI
traders TY at -$373.75, NPI Traders S at -$519.69, PSI! ERL at -$610.00, Waugh ERL at -$850.00, NPI Traders CL $927.50, NPI Traders NG at -$1,116.25, and
Compass SP at -$1,637.50.

IMPORTANT RISK DISCLOSURE

Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect
investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex
programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance
based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the
individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes
proprietary results, and other important footnotes on the advisor's track record.
The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client
accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The
actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market
behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques.
Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this
website.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION
IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE
FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED
BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY
PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO
HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF 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 WHICH CAN ADVERSELY AFFECT TRADING RESULTS.

Feature | Week in Review |

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