So what’s changed? Well I am delighted to say virtually everything, and I hope the following will provide a brief explanation of the changes, what they mean for us as traders, and how we can use the new data sets to provide more detailed and meaningful analysis of all the various markets we trade.

For those of you who have never come across the COT report, or perhaps heard of it but never really investigated it further, it provides and overview of all the futures and options traded by various designated groups, and is issued weekly every Friday afternoon at 15.30 Eastern Time, by the Commodity Futures Trading Commission in the US, which is the regulatory body for all futures and options trading. The data is based on open interest trading volumes up to and including the previous Tuesday of each week, and until recently the report used three crude categories to report, namely large speculators, commercials and small traders. Over  the years these groupings had become increasingly meaningless with many traders discrediting some of these completely, and partly as a result of industry pressure, coupled with Government demands for reporting transparency on speculators activity in the markets ( particularly from hedge funds), the CFTC was finally forced to provide a new and more meaningful report, which came into effect on 4th September 2009 late last year. To use the CFTC’s own words ; “ the new disaggregated data has been produced to increase transparency and promote market integrity,”. For those of you familiar with the old reporting style, these are still available and running in parallel with the new reports which have now been kick started with over three years of historic data.

So, what are the new groupings and how do they differ from the old one’s, and what are the opportunities for us as traders to use this deeper insight into the futures and options world to provide more meaningful analysis and more accurate analysis and trading signals? First let’s start with the new groups which are as follows :

• Producer, Merchant, Processor, User : Examples in this group, for gold for example, would include gold bullion producers, bullion banks, refiners, large bullion users. The CFTC itself explains this group as ” an entity that predominantly engages in the production, processing, packing or handling of a physical commodity and uses the futures markets to manage risks associated with those activities”
• Swap dealers : This is perhaps the most contentious and interesting of the new groups, as it is this one alone that has seen spectacular growth in the last few years, with this group accounting for for over 37% of the futures and delta options on NYMEX, an increase of almost 10% from three years ago. For those of you unfamiliar with the term, a swap dealer is the individual who acts as the counterparty’ between two parties involved in a swap contract, generally in commodities, and uses the futures market to manage or hedge these risks. Swap contracts are generally privately negotiated between two parties and therefore an OTC trade with the swap dealer acting for a fee referred to as the spread. The swap dealers counter parties could be anyone from a speculative trader such as a hedge fund, to a more traditional type of trader such as a commercial client managing risk on a physical commodity. (If you would like to read about a real case, then simply follow the link here to a recent article in the Finanical Times which is interesting reading!) It is the rise of this single group that has made previous analysis of the COT data almost meaningless with the commodities and futures market now dominated by the financial players rather than the traditional producers and consumers, making much of the previous analysis meaningless and unreliable. Most of the growth in swap dealers has come from from an increase in volumes of time spreads, rather than more conventional long or short positions, with spread positions being more closely associated with the growth of commodity indices ETF’s and other forms of investment strategies, far removed from the original concept of hedging risk for producers and suppliers. Finally, it is this group that has been responsible for the breakdown in price structure within the commodity markets, with resultant contangoes in crude oil and related products.
• Money Manager : The money manager grouping primarily contains those traders who are registered commodity trading advisers, registered commodity pool operators, or unregistered funds identified by the CFTC, and as a group are identified as managing futures trading on behalf of other clients. In general this group would include portfolio managers, hedge funds and institutional funds.
• Other Reportables : This is basically the ‘catch all’ category for all other large traders that fail to fit into one of the above.

Outside of the above four major groups there are of course the non-reportable traders – these are the small private investors or traders who are not required to report their positions. So, what are we to make of the new report and more importantly how are we going to use the new groupings to obtain better insights for you in your trading, whether in commodities or in forex?

Like many other commodity and forex traders we are still analysing the new data to some extent, and looking at all the possible opportunities that this may present for us as traders. However, those of you who follow my trading regularly will know that I like to keep things as simple as possible, as the more complex an analysis becomes then generally the less insight it provides. As a result I have decided to start my weekly analysis of the new COT data with a comparison of Open Interest volumes against price, which provides a valuable insight into possible turning points and changes in market sentiment. Over the next few months I will be expanding this analysis to look at the new disaggregated groups in more detail, and if you would like to be updated with the analysis direct to your inbox, then simply fill in your details below, and you will receive my weekly analysis regularly, which I hope will prove to be a useful addition to your trading toolkit.

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With Japan’s fiscal year end now passed, we can begin to focus with more confidence on the COT index for the Japanese yen.   However, as always we need to bear in mind that the COT index must be viewed as a sentiment indicator and not a timing indicator and cannot always be correlated with the spot market.   All the index is telling us at present is that the commercials are continuing to build long futures positions in the Japanese Yen and that this will translate into Yen strength at some point in the spot forex market.

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Everything I say may appear slightly contrarian when viewed using the COT index as an indicator but the British Pound is a good example at present which I hope will make the point with a little explanation.  At present the Commercial futures holders are net long and have been for some time even whilst the pound has been falling heavily in the spot market which may seem odd at first glance.  However, if we stop and think for a moment about the nature of the commercial holders, these are institutions with very deep pockets who are taking long term view of the market and are therefore building their positions by buying at what they consider to be a low price with a view to selling the contracts in the 12 to 18 months once the pound has recovered.

All of the above merely highlights the timeframes one is dealing with when viewing the COT index; it is not a timing indicator as such but much more a sentiment and direction indicator for the longer term.  The extremes of the chart, whether zero or 100 are the points at which the sentiment shifts in the commercial holders and at which point we may expect to see a change in price direction in the spot market in the following period.