How to Read Traders’ Activities Using the COT Report



Segments in the Commitment of Traders report

The Commitment of Traders (or COT) report, which publishes information for physical commodities, is divided into four categories: producers or users, swap dealers, managed money, and other reportable. 

We can interpret the changes in the positions of each category in order to understand the overall direction of the markets.

Let’s define each of these segments:

Producers use the market to hedge their exposures against unforeseen risk. A wheat farmer, a wheat processing company, and an exporter of wheat would all be classified producers.

A swap dealer is a company or an entity that deals in swaps, which are a series of futures contracts are used by speculators, hedge funds, and even commercial clients who want to hedge the risks they’re exposed to when dealing with physical commodities.

Money managers include traders that are transacting in the commodity (GLD) futures market. They’re registered commodity trading advisers or hedge funds.

Other reportables include traders who can’t be classified into any of the above three segments but who have open positions above the reportable level specified by the CFTC (Commodity Futures Trading Commission).

Above is an example of an agro-commodity COT report for producers. It gives investors an idea about the actions of wheat producers or commercial users in financial markets.

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Segments in the Financial Traders Report

The Financial Traders Report classifies participants into sell-side and buy-side participants. The sell side of the markets (VTI) is made up of dealers and intermediaries who generate income through commissions by capturing bid-ask spreads and offering services to buy-side clients.

Buy-side clients are clients who invest or trade in the markets. Examples of sell-side clients include stock brokers (SCHW) (AMTD), while buy-side clients include hedge funds and investment companies. Buy-side clients are classified into three separate categories:

Institutional/asset managers: insurance companies (ITIC), mutual funds, pension funds, endowments, and investment managers with institutional clients

Leveraged funds: hedge funds and other money managers involved in taking speculative positions in the markets

Other reportables: all other traders who aren’t in the above two categories, including individual traders and corporates

In the next part of this series, we’ll analyze the COT data for the S&P 500 Index (SPY) as of May 12, 2017.


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