Follow the Smart Money

In order to provide transparency to market users and the public, the U.S. CFTC releases a weekly report called “Commitment of Traders” (COT). This report contains a decomposition of Tuesday’s open interest for the future’s market, in which twenty or more traders hold positions equal to or above the reporting levels established by the CTFT that become available on the following Friday.

The breakdown is structured in three different groups: the “Commercials”, the “Non-Commercials,” and the remaining open positions classified as the “Non-Reportable Category.” According to the CFTC, the Commercials are mainly taking hedging positions, and one can, therefore, conclude that the Non-Commercials are primarily large speculators.

I did my master’s thesis in that subject and discovered that these reports contain useful information for trading/investing. For example: gold. The Commercials are mainly mining gold and trying to sell part of their future production, to diminish the effect of price fluctuations. This makes the business more stable and projectable, but may, in general, cost as much as every other insurance (risk transfer to the speculators).

The interesting thing is the Commercial’s relative hedging activity. Are they strongly hedged historically? Or is their hedging book rather small? This is useful information because the market price is determined by supply and demand. Commercials have deep knowledge of, at the very least, the supply side. Therefore, they are often called “smart money.”


 

About me

Former hedge fund portfolio manager/trader

15 years of experience in financial markets

✓ Master of Science (MSc) in Business and Economics from the University of Basel

✓ Developed quantitative tools for an asset management