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In a previous article, I wrote about how futures traders could find transparency in the futures market using the Legacy Commitment of Traders (COT) report. In 2009 the Disaggregated COT report began being published and has even more transparency.
The following paragraphs will show the sources and differences between the Legacy and Disaggregated COT reports. It may seem overwhelming to read the tables from the CFTC, but don't let that discourage you. We will go to charts and show you this raw data in a readable format.
The Legacy COT Report
When the Commodity Futures Trading Commission (CFTC) began producing the Commitment of Traders (COT) report in 1962, the report was known as the Legacy report with three categories:
- Commercials, consisting of Producer/Merchant/Processor/User and Swap Dealers
- Non-Commercials or Large Speculators, consisting of Managed Money and Other Reportable Speculators
- Small Speculators, Non-Reportable
All traders must notify their clearing firm when they open a futures account if they are going to register as a commercial trader or speculator. Clearing firms are then required to report clients to the CFTC weekly with more than a specified number of open positions in a futures market, resulting in a category of commercial or non-commercial traders. The clearing firm will not report traders holding less than the reportable number of open positions, which will be non-reportable.
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Source: CFTC
The above table shows the Legacy COT report for the corn market. The Legacy COT is still the widely followed report, but if a trader is looking for more detail inside the numbers, we will introduce the Disaggregated COT report next.
The Disaggregated COT Report
Today, multiple trader classifications exist, and the Legacy report cannot offer the detailed transparency the CFTC is trying to accomplish. To achieve this transparency, the CFTC broke down the Legacy COT report in 2009 into more defined categories, and the results were the Disaggregated COT report for 22 futures markets. Financial futures markets were excluded, resulting in the Traders in Financial Futures (TFF) COT report.
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Source: CFTC
The above table contains the Disaggregated COT report from the CFTC for the same corn market shown previously in the Legacy COT report.
Breaking Down The Details
The first thing that comes to mind when looking at the Disaggregated COT report is that there are four categories of reportable positions instead of three, as in the Legacy COT report. Unlike the Legacy COT report, the Disaggregated COT report does not use the Non-Reportable traders.
The categories are:
- Producer/Merchant/Processor/User (Commercial Entity)
- Swap Dealers (Commercial Entity)
- Managed Money (Non-Commercial Entity)
- Other Reportable (Non-Commercials)
Producer/Merchant/Processor/User
The commercial entities that produce/process/refine the raw commodities are now reported alone in this category. The Legacy COT report combined the Swap Dealers with these commercials.
Producers/Processors/Refiners are incredibly knowledgeable in their area of expertise. They are known as smart money in the futures market arena.
Specialists like this know all the fundamental and seasonal information about their product.
Their style of trading is scaling into positions. You will see them buying in downtrends and selling in uptrends. The large size of contracts they trade makes it impossible to enter at just one price.
Swap Dealers
In simple terms, swaps are off-exchange non-standardized contracts that trade in the over-the-counter market. Here are a few differences between futures contracts and Swap contracts:
- Swaps allow participants to get delivery from anywhere rather than a specific location that a futures contract would use.
- Delivery dates can be anytime, unlike a delivery from a futures contract can only occur at the end of the futures contract expiration.
- The quality of the product can be different than ordinarily written in a futures contract.
- The units for delivery can be of any size in a Swap contract, whereas in a futures contract, the unit size is standardized.
A Swap Dealer is an entity that deals primarily in Swaps for a commodity or financial instrument and uses the futures markets to manage or hedge the risk associated with those Swaps transactions. A Swap Dealer could be a large bank (Goldman Sachs, JP Morgan, etc.) or a hedge fund.
Managed Money
These are money managers seeking a return on investments for their clients. A money manager could be a Hedge Fund, Commodity Trading Advisor (CTA), or Commodity Pool Operator (CPO).
For longer durations, managed Money usually uses trend-following strategies. When we look at a COT chart, we notice that managed Money and the current market trend are highly correlated.
Other Reportable
Traders reported by the CFTC as large traders but didn't qualify for the other three categories will be placed in Other Reportable.
These can be individual traders who trade significant contract positions.
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Source: Barchart
Viewing The Disaggregated COT Report In Chart Form
The numbers in the colored boxes are "net positions." The software gets the data from the CFTC and subtracts each category's short positions from their long positions to get a net number. The net positions are negative if there are more short positions than long positions. The net number is positive if there are more long positions than short positions.
Primarily there are two critical participants on this chart: Producer/Processor (red line) and Managed Money (blue line). We can ignore the green and yellow lines.
Prices on the chart will be inversely correlated with the Producer/Processor, the red line. Producers/Processors typically scale into positions; they add to longs in downtrends and shorts in uptrends.
Managed Money, the blue line, will be highly correlated with prices. Managed Money typically are trend followers. Adding to long positions in uptrends and adding to short positions in downtrends.
As you look at this chart, notice how inversely correlated Managed Money and Producers/Processors are. Their lines are usually inverse to one another. They are making it clear that Managed Money trends provide liquidity for the Producers/Processors.
Using The Data For Analysis
- When looking at COT charts, using a 1-year look back is a good starting point. This considers any seasonal pattern that may occur throughout the year.
- Managed Money trends sometimes get over-extended and need to correct for a while. Price trends tend to weaken when Managed Money net positions are at their highest point in the last year for uptrends. And when their net positions are at the lowest point in the last year for downtrends.
- At the same time, Managed Money is at yearly extremes, indicating a possible trend reversal; Producers/Processors will be at the opposite extreme of the Managed Money traders.
- It's always advisable to use other technical analyses to manage your trade. COT reports should not be used for timing trade entries.
More advanced research has been done on the COT report, which may be beneficial if you are interested in using this analysis.
In Summary
The Legacy COT report is still the most widely used of the two analyses. But, if you want to see what the smart money is doing in the market, then the Disaggregated COT report shows the Producers/Processors without combing the Swap dealers with them as in the Legacy COT report.
The Managed Money is now separate from the Large Speculators in the Legacy COT report. Seeing their trends shows where the money is flowing, buying or selling. As long as the Managed Money net position is not at a yearly high, their trends are accurate in price action.
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