What are the Commitments of Traders?

Every Tuesday the Commodity Futures Trading Commission (CFTC), which is the governmental body that oversees the Futures markets, gathers data on open interest in each separate futures market from the exchange on which that market is listed. The open interest is first sorted into two categories: reportable positions and non-reportable positions.

A reportable position is any position (futures and/or options) controlled by a single person or entity that exceeds a certain size (the reporting limit). Reporting limits vary from market to market. That portion of the open interest that falls into the reportable positions category is then broken down between commercial interests who have direct dealings in the underlying physical commodity, either as producers or as users, and other holders of largest positions whose interest is speculative.

The Commitments of Traders report presents this data in a table format and a fresh report (for futures contracts only) is released every Friday. The following Monday a report combining futures contracts and options is released. The basic significance of the report is that it provides a program of who the players are in the futures game: commercials, large speculators, and small speculators (non-reporting positions). It also shows what role they are playing (buying or selling).

The logical question is whether or not this information can be of any use to the individual trader. We believe, with some qualifications, that the answer is yes. In the past, the general rule of thumb was to bet with the largest speculators and/or against the small speculators. The reasoning was that the large speculators had invested time and effort to obtain accurate information which then motivated them to invest their money in a particular position. On the other hand, traders in the category of small speculators were seen, in general, to be trading off of emotion induced by the latest "news".

Over the past ten years or so, however, the make up of the large speculator category has been altered by the rapid growth of commodity funds. These are large pools of trading capital controlled by a manager or team of managers. Many, but not all, managers take positions, and liquidate them, based on technically generated signals. In and of itself, this is not a particularly bad thing until one considers that many of the managers follow similar technical systems. It could be argued that this type of herd behavior is not much different in net result from the "news" driven, emotional trading behavior ascribed to the small speculator albeit without the news and, perhaps, without the emotion.

At Capitol, we feel the commercial interests have replaced the large speculator category as the group whose trading activity should be monitored. The reasoning, here, is that they have both the motivation and the resources to get a better handle on the fundamentals underlying the markets in which they have positions. That idea has led us to develop this graphic representation of changes in the positions of the commercials as they become apparent through the commitments of traders report.