Each week on Friday afternoon the Commodity Futures Trading Commission (CFTC) releases the Commitments of Traders (COT) report counting futures and options positions held by four categories of market participants: commercial hedgers, swap dealers, managed money, and ‘other reportables.’
The commercial merchants include farmers, elevators, processors, exporters and other accounts that report to the CFTC as hedgers of the underlying physical commodities.
Swap dealers are the banks and other financial institutions that facilitate trading for hedgers and speculators; for example, hedgers of grain accumulator contracts or speculators managing a commodity ETF index.
Managed money includes the group of speculators that trade on behalf of clients who do not have a tie to the physical commodities and who can be bullish or bearish with stances that can shift quickly.
The ‘other reportables’ group consists of large retail traders and others who are required to report their positions to the CFTC but who do not fit under one of the other three classifications.
A Closer Look:
Commercial hedgers (grains)normally increase their net-short position growing larger in the fall as farmers sell their new harvest and as elevators short hedge their purchases. Those positions are then later covered (bought) as grain is moved from the country into processing and export channels where it is ultimately consumed.
The speed and depth of the commercial hedging cycles also give guidance about the pace and progress of farmer selling and the related impact on prices.
The faster and larger the short position grows, demand is being met with ample farmers selling. If the position is rapidly shrinking, demand is still strong but farmer selling has slowed, indicating basis or the futures may have to do more to buy the needed bushels.
Managed money is the most followed category of traders since it includes speculators with massive amounts of investment capital to deploy in the markets. While they are sometimes referred to as “hedge funds,” money managers do not have physical commodity ownership to hedge and instead, they have the flexibility to jump in and out of any market with the discretion to be bullish or bearish.
Managed money is often seen as having an outsized impact on prices because they possess that discretion to join different groups, like shorting the market along with the commercial hedgers or buying it along with long-only index investors.
Swap dealer positioning can also serve as a gauge of trader sentiment. The presence of a large swap dealer position may indicate confidence in the underlying contract as an investment vehicle or risk management tool. Swap dealers often form index funds that are also known as “massive passives” since they establish a position from the long side and are not actively managed. Swap dealer interest in a particular commodity can ebb and flow over a longer timeframe as capital rotates among different market sectors in a reflection of changing macro-economic sentiment. Interest rates, Stock market expectations, and the strength of the Dollar can have a long-term impact on the positioning.
The ‘other reportables’ category mostly mirrors the managed money position. They are a collection of smaller but still significant market participants.