The U.S. Commodity Futures Trading Commission (CFTC) releases its Commitments of Traders (COT) reports at every Friday 1530 EST (or Singapore time Sat EST+13) for aggregate positions of at least 20 or more traders hold positions equal or above the reporting levels established by the CFTC. These positions are largely relevant to speculators, who intends to take the same sides as the maket movers, and hedgers who are indirectly taking a position against the majority in order to manage the risk of their portfolio which comprise of other assets. Yet, as relevant it is, it is not timely as positions captured reflects that of the previous week’s Tuesday. And if there are U.S. Federal holidays, release might be delayed by 1 or 2 days.
Position reporting requirements are set by the CFTC or, more typically, by the regulated exchanges. These limits could be anywhere from 25 to 3,000 contracts, depending on the size of the market, according to a 2005 Futures Industry magazine article, but reported positions typically represent at least 70% of the open interest in each market. When you consider how much of these markets are controlled by so few individual traders at so few firms, it becomes obvious how easy it would be to fix prices in a commodity, if there were no position reporting requirements.[link here]
Given that so much effort is done to collate these aggregate positions, we ought to spend some time to understand the COT various positioning definition.
OI = for one to long, another has to short. This shows how many are carrying their views over the week. Of course, one’s view could change over the week, but lets keep it on the aggregated (>20 traders) views.
We look for higher number of reportable traders for reliable net statistics. We look for high concentration for fraud activities or markets where direction are biases to a few person’s view and whose view we should pay attention.
Let’s look at positioning data from last week’s Tuesday 28 Feb 2017.
Pound and Euro Dollar have been in net short, since Brexit fears in Jan 2016 and Greece and other small nation debt issues surfacing, triggered by the credit crunch from US in 2008, before ECB monetary easing with negative interest rates in Jun 2014.
Net longs n JPY fell to a low when investors realised that BoJ have nothing much more to buy given that its owns most of the JGB such that alternatives solutions such as Helicopter money surface. Note that Yen was in net long from Jan 2016 – Sep 2016, which correspond to a persistent fall in Yen then.
Since Trump’s election victory, DXY shorts had fell to its lowest since 2014 to near 0.
CAD net shorts rose when WTI price was before $50 per barrel , until OPEC decision to cut production meet consensus among its key producer countries. This caused net longs in CAD to be positive.
Higher yield currencies like AUD and NZD have a large run in long carries. AUD is historically high net longs and could see a sell off that is already seen in NZD.
Net long in NZD is historically high now, and we had seen since 28 Feb a selloff, given no change in kiwi rates and housing crisis dominating domestic issues.
Idea is to stay with the big fish views as small fishes. But how do we know when their views are changing such as net longs become net shorts? How can we create more reliable positioning trackers? More timely and useable?
Given net long CAD and net short JPY, a diverging position, I would take a long CADJPY. I would also short AUDNZD if above reasoning is true.
Gold has seen its longs covered exensively after Brexit. But we see a pick up in net long Gold since Dec 2016.
GBP has been devalued the most against the Gold Standard, whereas JPY as a funding currency is relatively unaffected and holds its place as a safe haven currency, close to 1-1 to Gold.
History of CFTC
How did CFTC came about? Before CFTC, futures contracts for agricultural commodities trading were regulated under Federal regulation since 1920s (Commodity Exchange Act). In 1970, futures contract expanded rapidly beyond traditional physical and agricultural commodities into a vast array of financial instruments, including foreign currencies, U.S. and foreign government securities, and U.S. and foreign stock indices. In 1974, Congress created CFTC as an independent agency with one mandate: to regulate. Futures became available for stock indexes and SEC worked with CFTC to develop a joint regulatory regime for single-stock futures. However, since 2003, as exports and imports with trading partners became more frequent in a globalised world, values of swaps trading exploded to a multi-trillion dollar market. Since 2008, 2010 brings Dodd-Frank Wall Street Reform and Consumer Protection Act which expanded CFTC authority into the swaps market.
The stated mission of the CFTC is to foster open, transparent, competitive, and financially sound markets, to avoid systemic risk, and to protect the market users and their funds, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives and other products that are subject to the Commodity Exchange Act
Looking at their mission, one will think of “dark pools of liquidity”, OTC markets or any private markets exclusive to big players and inaccessible to the investing public. Say you wish to accumulate/cover a company shares due to improving fundamentals, which invalidate the thesis on why you had been holding short all these time. So now you have to buy back, but the company had been out of the media for a long while and the exchange bid-ask order book on it is light, so light that targeting to cover 10% of its short will cause the price to move against its initial short positions and this market impact will reduce its profits. So happen that there is another large player, could be a local or a foreign, investor looking to sell. One can then married the deal or take the deal off market. This lack of transparency makes both parties vulnerable to conflicts of interest.
Drawbacks of a non transparent market:
- (Protect the public and market users and their funds) Exchange prices not reflecting real market demand and supply such that dark pool buyer got a lower price while the public investor may have overpaid for it, and when news of its deal comes out, the price falls and the unwary public investor is at the losing end
- (Abusive practises) Internalisation of dark pool dealers inventory rise the issue of dealer’s prop traders trading against its pool clients. Some dealers sell access to dark pools to HFT firms – who then front runs large orders with latency arbitrage
(Financially sound markets) When the price of a barrel of crude oil skyrocketed to $135 in May 2008, CFTC wanted then U.S. President to direct them to take immediate action to curb excessive speculation in the energy markets. While major figures in the oil industry, including traders and analysts at some of the largest banks, trading houses and oil companies believe speculation was the cause of the irrational price, opponents argue that crude oil market fundamentals drive the price, not the speculative market. CFTC propose limiting the number of futures contracts financial players can hold at any one time.
CFTC had success in catching culprits that manipulated the financial market for profits. In November 2014, the CFTC and the UK Financial Conduct Authority fined six banks for manipulating the foreign exchange market; JPMorgan, Chase, Citigroup, HSBC, RBS, and UBS paid roughly $1.2 billion to FCA and $1.5 billion, or about $300 million apiece to the CFTC.