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Commitments of Traders (COT) Report
Read our guide to COT report and find out how you can use it for your market analysis.
COT is a report published by the Commodity Futures Trading Commission and provides details on the market behaviour of large and small participants in the futures market
The report breaks down the buying and selling behaviour of hedge funds, institutional and small traders across a variety of futures instruments
The COT report is freely accessible for all the traders on the CFTC website and it’s published every Tuesday
Traders can use data from the report to understand market sentiment and dynamics which in turn can help shape their trading plan
What is the COT report?
The Commitments of Traders (COT) report is a weekly report which provides traders with insights into the behaviour of participants in financial markets. It’s published by the Commodity Futures Trading Commission (CFTC).
The CFTC are an independent US government agency that regulates all derivatives instruments in the US. As with any regulator, the CFTC is tasked with ensuring competitiveness and efficiency in the markets that derivates are traded in.
One aspect of that is to provide comprehensive and up-to-date information on prices and participants. The COT report is one example of this, and it’s freely available on the CFTC website. The data for the report is supplied by reporting firms, such as futures commission merchants, exchanges, and foreign brokers.
The COT report shows the overall long and short positions of commercial hedgers, swap dealers, and institutional investors. It’s a valuable tool for traders trying to understand the market sentiment and dynamics and could be used as part of the wider market analysis, contributing to more comprehensive view of the market together with technical and fundamental analysis.
Main market participants in the COT report
The COT report includes information on the positions of various types of market participants, including:
- Commercial hedgers
Futures contracts are used for number of different purposes. One of them is for producers and manufacturers to lock the price of certain instruments that they need to run their business. This increases certainty on the costs associated with an oil shipment, barrel of grain, or other commodity used in production or for sale to other businesses.
Commercial hedgers can be considered insiders in their markets and so a significant change in their net long and short positions can be a reliable indicator of expected changes in the physical commodity market.
- Large speculators
Both hedge funds and institutional investors make up a large portion of this classification of market participants in the COT report. Because of their size, more profound understanding of the market, and their motives, including the aim to make money for their investors, their net positions can often be a good indicator of changes in volume and direction of trading activity.
- Individual traders
Market sentiment can also be examined through the overall actions of individual traders. Whilst they don't necessarily have all same advanced knowledge of the markets or share same motivations of larger investors, they will be reacting and contributing to overall market sentiment.
Hedge funds and institutional investors explained
A hedge fund is an investment partnership, where the pooled funds of a number of different investors are invested across a number of different assets and markets. The hedge fund benefits from the pooling of capital, and the hedge fund managers seek to achieve maximum returns for their clients.
Unlike mutual funds, which may be used by institutional investors, hedge funds are typically riskier, employ more derivative products and will have fewer types of investors because of the risky nature of the fund. In the COT report, hedge funds will be categorised as ‘Managed Money’ - large traders who actively manage and trade futures contracts for speculative purposes.
While hedge funds are known for their speculative activities, they also employ risk management strategies. This may involve using futures contracts to hedge against potential losses or to protect positions in other markets.
Institutional investors will also fall under the ‘Managed Money’ category on the COT report. In this case, entities such as pension funds and endowments (e.g., large gifts and donations given to foundations or universities) will actively invest for the purpose of capital appreciation.
How to interpret the COT report
Using the COT report and its data is considered a good way to monitor and understand market sentiment. Many traders use this report to gain market insights, and the movements of big players in the market can contribute even more to general price action in the respective market.
Let’s use a simplified numerical example to show how the information in the COT report can be used as part of sentiment analysis and help you make informed trading decisions.
Commercial hedgers' net long positions are usually a sign of the extent of bullish sentiment on the financial instruments they are trading.
In a given week, the net long positions may amount to 5 million contracts of wheat. Imagine that the following week’s COT report shows net long positions at 8 million contracts, meaning the bullish sentiment has increased in the market, and that may indicate a potential increase in the price of wheat.
The COT report is a useful tool but it’s wise to combine it with other analysis tools and data when making decisions about your trades, including entry and exit points and risk management strategies.
