EMA Journal • Fall 2024 • Energy Markets Insights

I have been following the Commitment of Traders (COT) report since I started hedging in 2006. I noticed the positions of speculators (aka “managed money”) tended to get very long at market tops; I also saw extended price drops often accompanied their liquidation. Following this report guided me to have my Fall 2008 inventory fully hedged due to the risk of alarge liquidation.

Ironically, when we have been at multiyear price lows, these traders tended to be mostly out of the market. The takeaway here was to bias your position opposite of these traders. Unfortunately, this is not always intuitive — or easy. If they are on the sidelines, shouldn’t I be?

Recently, this question was asked of me: Why not focus on the “insiders”? This is the Producer/Merchant category in COT report, also called the commercial trader. These are hedgers who the futures market was made for. These firms conduct business in their market every day; shouldn’t they have an informational advantage?

I went back and looked at the data. While the absolute number of positions held by commercials on each side didn’t lend itself to easily see their bias like it did with managed money, the relative changes in their positions does appear to correlate well with market direction.

Looking at a four-week momentum indicator on changes in commercial trader futures positions, we see they seem to have a knack for increasing hedged positions at market tops, reducing short hedges at market lows. While this is no assurance the market direction will head in the direction of their bias, we advise customers to keep this in consideration when making their pricing decisions.

The COT report is a weekly accounting of all large trader positions in the futures markets. While individual traders are not listed by name, their weekly changes in positioning are captured and reported on each week. To make the report useful, the data is split into the following categories:

• Producer/Merchant, aka “Commercials”: Accounts for approximately 70 percent of open interest and is required to show risk exposure in cash markets to be in this category.

• Swap Dealers: Accounts for 10 percent to 20 percent of open interest, primarily banks creating an OTC market for customers.

• Managed Money: This category is only those speculating from price movement, often from 5 percent to up to 25 percent of open interest.

• Other Reportable: Traders with multiasset strategies and algorithmic traders, typically a small percentage of the market.

by John Wenzel, Senior Risk Management Consultant, StoneX Financial Inc. – FCM Division, EMA Executive Committee Council Corporate Partner

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