The Commitments of Traders Report:
A Clue to Who's Moving Markets

By Kristina Zurla Landgraf   ISSUE 404 | APRIL 2005

Ever wish you could get some insight into what other traders are doing? How the biggest players, such as large funds and institutions, may be positioning themselves in the markets? The Commodity Futures Trading Commission's (CFTC) Commitments of Traders (COT) Report offers a weekly glance into positions various groups of market participants are taking in the futures markets. Many analysts use the report to help determine what trends could come next, and it's a tool you might find useful in your trading as well.

The CFTC puts out its COT reports each Friday at 2:30 p.m. Central Time—one for futures and one combining futures and options. The reports contain a breakdown of open interest for markets in which 20 or more traders hold positions equal to or above levels the CFTC has established, as of three days prior (Tuesday) that same week. The categories of participants are grouped into “reportable” and “non-reportable” positions. For reportable positions, data are provided for commercial and non-commercial holdings, spreading, changes from the prior report, percentage of open interest by category and numbers of traders. A long version of the report also contains information on data by crop year, where appropriate for agricultural markets, and shows the concentration of positions held by the largest four and eight traders. You can go to the CFTC's Web site at www.cftc.gov to obtain current and historical data.

It's important to know what the CFTC is reporting, so below are brief definitions of some of the terms in the COT. We'll explore later how some analysts use this data to help determine market trends, and what you might look for.

CFTC COT Definitions

Open Interest – Open interest is the total of all futures and/or option contracts entered into and not yet offset by a transaction, by delivery, by exercise, etc. The aggregate of all long open interest is equal to the aggregate of all short open interest. Open interest held or controlled by a trader is referred to as that trader's position.

Reportable Positions – Clearing members, futures commission merchants, and foreign brokers (collectively called “reporting firms”) file daily reports with the Commission. Those reports show the futures and option positions of traders that hold positions above specific reporting levels set by CFTC regulations. The aggregate of all traders' positions reported to the Commission usually represents 70 to 90 percent of the total open interest in any given market.

Commercial and Non-Commercial Traders – When an individual reportable trader is identified to the Commission, the trader is classified as either “commercial” or “non-commercial.” All of the trader's reported futures positions in a commodity are classified as commercial if the trader uses futures contracts in that particular commodity for hedging, as defined in the Commission's regulations. The non-commercials, therefore, represent mainly speculators, the large funds. A trader may be classified as commercial in some commodities and non-commercial in other commodities. A single trading entity cannot be classified as both a commercial and non-commercial entity in the same commodity. Nonetheless, a multi-functional organization that has more than one trading entity may have each trading entity classified separately in a commodity. For example, a financial organization trading in financial futures may have a banking entity whose positions are classified as commercial, and have a separate money-management entity whose positions are classified as non-commercial.

Non-reportable Positions – The long and short open interest known as “non-reportable positions” are derived by subtracting total long and short “reportable positions” from the total open interest. Accordingly, for “non-reportable” positions, the number of traders involved and the commercial/non-commercial classification of each trader are unknown.

Spreading – For the futures-only report, spreading measures the extent to which each non-commercial trader holds equal long and short futures positions. These figures do not include inter-market spreading (e.g., spreading Eurodollar futures against Treasury note futures).

Changes in Commitments from Prior Reports – Changes represent the differences between the data for the current report date and the data published in the previous report.

Percent of Open Interest – Percentages are calculated against the total open interest for the futures-only report.

Analyzing the Data

So, now you know what's in the report. But the $64,000 question is—how do you use this information? Most analysts tend to focus on the net position changes from report to report for the various groups. Are the large funds net long this week, or net short? Where were they positioned last week? Many watch where the largest traders with the most assets, or what some call the “smart money,” are entering and exiting trades, because they generally have the most power in terms of moving the market. These typically are the large commercials and/or large speculators, although in some markets, the small speculators may be the ones making the best trading decisions, even if they aren’t the biggest players. It helps to track this data each week, see what each group is doing, and compare the price action to find out who has been on the winning side of the market.

Some Traders use COT data to help determine an overbought or oversold condition.If the COT report would show, for example, a heavy long position in a market that has spiked unusually and is high-priced, with high relative strength readings for an extended period, a trader may look to sell.” In this sense, the report can be used as a contrarian indicator—a sign the longs may be looking to take profits, and price action could take a turn.

You can use the COT reports to track historical tendencies and past extremes in net long or short posture for each group to gain some insight into their thinking, and perhaps even their next move. Of course, what's happened in the past may not happen again, and no one really knows what each group will do. But, the COT data has its place as another tool many traders find valuable.

Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com. This articel has been edited since its original publication.

Futures trading involves substantial risk of loss and is not suitable for all investors.

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