More on the Big Traders Position Size

[Zack Zarr 5]

Traders in Financial Futures and Disaggregated Formats -New COT Format

 

In the previous post, I went over introducing the CFTC and the role it plays in bringing more clarity to the public from the futures trading world. The conventional style of reporting is the legacy report which I explain briefly in that post.

 

Since early 2010, CFTC decided to bring more transparency to the reporting methodology of the large institutions by introducing the Traders in Financial Futures (TFF) report. This is essentially a breakdown of the two major categories, commercials and non-commercials into four separate categories depending on the nature of their business. The CFTC staff use the Form 40 which is submitted by the large traders to determine the appropriate classification of each traders. This new format was created due to the fact that some of these large institutions have separate trading entities for handling different parts of their businesses and therefore, require separate analysis. More details about the TFF report can be found here.

 

In summary, the new TFF report divides traders into 4 major categories as follows:

Dealer/IntermediaryAsset ManagerLeveraged FundsOther Reportable

In their explanatory notes, CFTC specifically splits the traders into two types based on their function in the whole market structure. A trader is either on the “buy side” or the “sell side” of the market. The first group, Dealer, is on the sell side while the rest of 3 are on the buy side. I encourage you to read these explanatory notes which provide useful information about the definition of these 4 categories. I copy some of these notes here for convenience:

 

From CFTC explanatory notes:

 

“The category called “dealer/intermediary,” for instance, represents sell side participants. Typically, these are dealers and intermediaries that earn commissions on selling financial products, capturing bid/offer spreads and otherwise accommodating clients. The remaining three categories (“asset manager/institutional;” “leveraged funds;” and “other reportables”) represent the buy side participants. These are essentially clients of the sell side participants who use the markets to invest, hedge, manage risk, speculate or change the term structure or duration of their assets.”

 

While there are some commonalities between the legacy and new TFF format, CFTC specifies that the traders in each of these 4 categories could have been drawn from either commercials or non-commercials classifications in the legacy report. The new TFF format is intended to provide more clarity on the role of each trader and is therefore, more informative. However, many forex traders still use the legacy format because it gives them enough clarity and removes the complexities involved in the new TFF format.

 

Where to find the new formats of COT reports?

 

Above the legacy reports part, you can find the reports for the new disaggregated (see more below) and TFF format. See picture below:

 

 

Below is an example of the TFF report for the CAD:

 

 

As you can see, this is similar to the legacy COT format with only different categories. The long and short position as well as the changes in those positions compared to the last week and open interest are reported for each class of traders. Similar conclusions can be drawn from these number as to what I explained in the previous post.

 

Along the same line of action, CFTC created a new format of reporting the commodity positions under the title of “disaggregated COT”. Similar to the TFF report, this is intended to bring more clarity to the role of traders in the commodity sector. See the explanatory notes for this form of report here.

 

The major four categories are as follows:

Producer/Merchant/Processor/UserSwap DealersManaged MoneyOther Reportables

The explanations regarding the definition of each category is provided by CFTC in their explanatory notes. I encourage you to read over these definitions just get an idea of their roles in the market. Below I copied the main difference between the legacy and disaggregated COT forms according to CFTC:

 

“The legacy COT reports divide reportable traders into the two broad categories of “commercial” and “non-commercial.” The “commercial” trader category has always included producers, merchants, processors and users of the physical commodity who manage their business risks by hedging. It has also included swap dealers that may have incurred a risk in the over-the-counter (OTC) market and then offset that risk in the futures markets, regardless of whether their OTC counterparty was a commercial trader or a speculator. Those two categories of what has been reported as “commercial” traders are separately reported in the Disaggregated COT. The “non-commercial” category of the legacy COT included professional money managers (CTAs, CPOs, and hedge funds) as well as a wide array of other non-commercial (speculative) traders. These two categories of what has been reported as “non-commercial” traders are separately reported as “money managers” and “other reportables” in the Disaggregated COT.”

 

As you can see, the old commercial traders have been divided into two groups of producers and swap dealers. The non-commercial traders have been split into money managers and other reportables.

 

Below is an example of the disaggregated report for Gold:

 

 

The format is similar to the legacy report with only different categories of traders. In fact, you can sum the positions of the first two categories (producers and swap dealers) to reach the same number as the commercial traders.

 

While these new types of reports provide somewhat more clarity on the nature of different institutions and their impact on the forex market, looking at a single report does not provide sufficient data to make any useful conclusions about the next move in the market. Looking back at the past data instead, can provide some useful information on what each type of trader has done and what they might do in the future. This is where the data analysis on the past report plays an important role. The COT data analysis methodologies are the subject of my future posts. We will go over some basic concepts as well as more advanced analysis in the upcoming posts.

 

There is another important concept which needs further attention before we jump into the details of data analysis. It is the role of two side of the market structure, sell side vs. buy side. This seemingly simple concept has not found enough attention among retail traders. However, I feel some basic understanding of these two sides of the market is necessary when analyzing the COT report along your forex trading career. In the next post, I will discuss in brief about this important concept.

 

Zack