The CFTC's Commitment of Traders reports can give you inside information on what the big boys are up to in any market...and it's all legal. The U.S. government has been quietly providing genuine insider information on a regular basis through the Commodity Futures Trading Commision's (CFTC) Commitment of Trader's reports every Friday afternoon. This report breaks down the open interest in futures markets by trade type and provides an insider's survey unavailable anywhere else. Although is has been published since the 1970's, most traders have ignored the Commitments report, thinking of it as "old news" not any longer. The CFTC has taken steps to increase the frequency and speed of reporting.

The CFTC has established reporting levels for each of the futures markets. Traders who hold positions in excess of reporting levels are required to report their actual positions to the CFTC on a daily basis. These large trader positions are the basis of the COT report. The CFTC separates the large traders into Commerical and Non-Commerical categories. Commerical hedgers are required to qualify with the CFTC by showing a related cash business for which futures are used as a hedge. Commercial hedgers are persuaded to register through lower margin requirements. The Non-commercial category is comprised of large speculators, most notably comodity funds. The balance of the open interest is carried under the Non-reportable classification that includes speculators. Although some analysts work directly from the raw numbers, the data is most easily analyzed when graphed as Net Positions opposite a price chart.

Commericals have shown an uncanny ability to position heavily just before important market turns. As large cash merchants in the business, commericals maintain their own intelligence gathering networks and analysts. In some markets in fact, such as coffee, cocoa and sugar, commercial trade houses are the primary source of fundamental supply and demand statistics available to the trading public. You can be sure they have already acted on the data before it is disseminated to the public. Besides their informational advantage, commericals by definition trade in size large enough to move markets. Given these advantages, their futures trading prowess is not surprising. Positioning with commerical hedgers when they become one-sided in their market view can prove very beneficial to successful trading.

The intelligence contained in the COT report is far beyond that available for any other market. Every week, readers of the report know the source and extent of the buying and selling pressure and its affect on price. Extremes in market sentiment can not only be measured objectively, but more importantly, broken down by trader category. Referring to historical net position patterns can help gauge the odds on the direction of hte next price move. Legendary trade Daniel Drew once said, "Anybody who plays the market without inside information is like a man buying cows in the moonlight". Large commerical hedging firms enjoy an enormous inside informational advantage over other market participants. But by tracking changes in their actual market positions we can accurately conclude their market view. When the commerical concensus reaches an extreme you are alerted that a potential trend change may be imminent. The COT report levels the playing field by exposing the players behind the trades. Trading without reference to this tool might be likened to "buying cows in the moonlight".

Futures Magazine, March 1994
back to top

Those Big, Bad Commodity Funds
By Jim Wyckoff

How many times do you read the news wires or talk to your broker and hear about the commodity funds (or just the "funds") doing this or doing that in the market? And it seems like these big bullies are always on the opposite side of the market than the smaller speculator.

To the less experienced traders the "funds" may seem like the CIA or the Mafia: a powerful and secretive force that has a reach far and wide. In this feature, I'll try to present a clearer picture of the funds, and maybe dispel some myths regarding them.

Just what are the "funds?". They can come in several forms, but usually it's a large pool of investor money (funds) that is managed by a single entity, such as a Commodity Pool Operator (CPO) or Commodity Trading Advisor (CTA). The CPO or CTA then trades futures contracts with the goal of gaining the best annual return on that money possible better than any other funds or "managed accounts."

Most wealthy investors do not put a big portion of their investment portfolio into futures trading. But some may put 10% or less of their portfolios into managed futures trading accounts. Still, given that it's usually the wealthier investors (and not the smaller investors) that put a small percentage of their portfolio in the futures market, even that small percentage coming from many wealthy investors into commodity pools can add up to a lot of speculative cash pouring into the futures markets. Thus, the "funds" can and do have the weight to move markets.

Generally speaking, the commodity fund operators are trend following traders who use a shortterm time frame to trade futures. Many tend to use moving averages as a major trading tool, or some type of mechanical trading system. Either way, these traders rely on technical analysis for the vast majority of their trading decisions.

The funds like to see a market start to "lean" one way, and then pile on positions in favor of the way the market is leaning. This is why markets tend to become overbought and oversold, on a technical basis. The fund buying or selling causes markets to over-react, or become overextended.

Probably the one commodity group where the funds have the most notoriety is the grains complex. The grains provide an excellent medium for the funds because of the liquidity (high volume and open interest). Given that the funds usually take big positions, it would not make sense for them to dabble in futures markets where the liquidity is thin, such as lumber or platinum. Also, the higher liquidity markets allow the funds to get into and out of positions more discreetly.

Even with the big pools of cash that the commodity funds possess, they can't stand up to the "big brother" of futures markets: the commercials (the hedgers). The major food processors such as Cargill or Pillsbury have the huge clout and very deep pockets to keep the funds honest and keep futures markets fairly priced at most times. but still, the funds have enough power to more than jiggle markets once in a while. Here's an analogy: The funds are like a fly and the commercials like a horse: A biting fly can still make a horse wince.


Source: Futures World News, June 20th 2001, 6:04 PM

***This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition.

back to top