My Conversation With The CFTC

April 10, 2019

Fundamentals are the supply and demand characteristics of a market that can drive prices higher or lower. I tend to base decisions on the medium to long-term path of least resistance for prices from a raw material’s fundamentals. Technical factors often drive both my levels of execution on long and short positions and my overall direction bias as charts, and other technical signals provide clues about herd behavior and the strength of price trends. The most profitable positions over my career have come from identifying price points where a raw material market is at the bottom or top of a pricing cycle and when buying or selling is running out of steam on the basis of technical signals. The combination of fundamental and technical conditions can be a powerful tool that is typically at first contrarian and often develops into a trend as a long or short position matures.

There are many sources for fundamental and technical data in the commodities markets that are at our fingertips. Government agencies and trade organizations publish supply and demand data periodically. While price volume, open interest, price momentum, and relative strength are technical tools that can tell us a story about the activities of market participants, each Friday the Commodities Futures Trading Commission releases the Commitments of Traders report. The COT has been the gold standard for many who trade, invest, or hedge using the futures markets. I do not use the COT data because, in the current environment of fast-moving data and technology, the report each Friday is stale as it has a three-day lag which is a lifetime in commodities markets these days.

Market participants watch the weekly COT report

The Commitments of Traders (COT) report has given analysts, traders, hedgers, and other market participants a granular view of open interest. The metric reflects the total number of open long and short positions in a futures market.

The first COT report came out in 1924 according to the CFTC's website; the US Department of Agriculture's Grain Futures Administration published its first annual report of hedging and speculation in regulated futures markets.

Starting in June 1962, a COT that detailed 13 agricultural commodities expanded market transparency. The report listed positions as of the end of the month for publication on the 11th or 12th calendar day of the following month. Before modern technology, the report provided an additional level of data for futures markets that made them more transparent.

In 1990, the CFTC began publishing the COT in the middle of each month and at the end of each month. In 1992, the CFTC began publishing the report every two weeks, and in 2000 weekly publication began.

The report provides market participants with a breakdown on a detailed and summary basis of the open interest data as of the close of business each Tuesday, highlighting the reportable and nonreportable the long and short positions of commercial, non-commercial, and other market participants in futures and futures equivalents of call and put options. While the open interest from each futures market is available each day, the COT comes out on Fridays at 3:30 PM EST.

The time lag is unacceptable

Markets have evolved because of technology. In the early 1980s, when I started trading futures and options, computers on trading desks were the exception rather than the norm. Over the years that followed, technology flourished. Computer power is now one of the most significant tools for traders across all asset classes The days of open pit trading have gone the way of the dinosaur. Electronic trading eliminated mistakes, made regulation more efficient, and created an environment of price transparency where real-time is now measured in nanoseconds. Meanwhile, traders can track volume on a second-by-second basis, but the COT data remains delayed by three long days making it as stale as three-day-old bread that has been sitting out on a counter in the open air.

The timing of COT data makes it useless in today's fast-paced environment in markets. I see no reason why COT data cannot be real-time in 2019. The lack of timely COT data increases the potential for market manipulation as only the dominant participants have an insider view based on their significant positions in markets.

Technology makes a real-time COT possible and necessary

Regulators and their keepers in Congress and legislative bodies around the world have been advocates of the need for transparency and a level playing field in markets The calls grew louder following the 2008 global financial crisis that led to Dodd-Frank legislation that, in many cases, interfered with the flow of business and risk. The regulations that came from members of Congress who were less than experts on markets. The increase in regulation had consequences as it tied the hands of many market participants with the unintended effect of draining rather than providing liquidity to markets. For example, financial institutions that made bid and offer markets to their customer base found it a challenge to provide a two-way market that would inevitably result in a long or short position giving rise to capital charges in commodities markets that can suffer from bouts of illiquidity. In some cases, bid-offer spreads widened hurting the market participants the legislators sought to help. Meanwhile, in the quest for transparency and a level playing field, a real-time COT report that provides market participants with the ever-changing picture of open interest on a granular basis slipped through the cracks.

The technology to make the report available exists. The only thing missing is putting the pieces together and disseminating a COT that has real value to all who participate in futures and futures markets.

A conversation with the Chief of Staff for the office of the Chairman of the CFTC

Recently, I sent off an email to the Chairman of the CFTC and his chief of staff. The email posed the following question:

Are there any plans for the CFTC to improve dissemination of COT data so that market participants can obtain the information on a daily or preferably real-time basis? Given today's technology, would you agree that delayed COT data is stale, and transparency requires a new and improved system of releases by the CFTC?

That day I spoke to Michael Gill, the Chief of Staff for CFTC Chairman J. Christopher Giancarlo who informed me that a real-time COT report is high on the list of priorities for the regulator. I suggested that if funding is a problem, the CFTC should extort the funds for the project from the CME and ICE. The two leading exchanges in the world make fortunes these days on execution fees as trading volume is an ever-expanding phenomenon. At the same time, both exchanges charge a mint for their data.

Mr. Gill pointed out that the Commodities Exchange Act (CEA), which is the governing statute for the CFTC, prevents the regulator from sharing trading data with exchanges. Therefore, it would be a violation of the CAE for the CME and ICE to produce a daily COT report. Additionally, government agencies may not accept money or in-kind distributions from exchanges or any other market participant. The funding for a real-time COT must come from the appropriations process, and we all know what that means. Funding for regulation is declining under the current administration while the proponents of more regulation in Congress lack the knowledge to oversee the regulator of the futures arena efficiently. It seems that grandstanding is the regulation they do best.  

The CME and ICE together with the CFTC should address the COT immediately

In 2019, there is no reason in the world why the dissemination of the COT report is not in real-time. If millions of long and short positions in the futures and options markets can be margined on a second-by-second basis, a modernization of the COT is a no-brainer.

With the constant pressure from Congress for transparency and combating manipulation and abuses in markets, the lack of a level playing field when it comes to the breakdown of open interest is unforgivable. It is a sign that legislators responsible for directing and funding regulators have no idea how markets operate or what tools are necessary to create an environment where both regulators and market participants have the essential information in current conditions. I view open interest data as no different than prices or volume data given the advanced systems operating these days.

It would be a simple task for the CME and ICE to work together with other exchanges around the globe to quickly create a COT tool that would provide the regulators and their customers with a real-time instrument that is long overdue in markets. The COT in its current form is useless. The exchanges in coordination with the CFTC need to generate a report that fulfills a void in the futures arena.

Concerning Mr. Gill's comments and the challenges faced by the CFTC, those legislators who have been the greatest proponents of transparency and who have railed against market manipulation should introduce legislation to make an exception and allow the exchanges to fund a new and improved COT process. Senator Warren should wake up and realize that effective regulation would create more of a legacy than throwing stones at the financial sector and deposing the CEO of a bank for political brownie points. At the same time, Senator Sanders who routinely accuses speculators of manipulating markets when prices move higher has been radio silent when prices move lower, could support an initiative that actually makes a difference. The Senators and members of Congress who grandstand while carrying the regulatory flag should bone up on the benefits of transparency and arrange for a real-time COT report that keeps pace with technology, immediately.

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Andy Hecht covers Commodities and Forex as one of the original contributing analysts at FATRADER.com. A former senior trader at one of the world’s leading commodities trading houses, Philipp Brothers (now part of Citigroup), Andy has worked and consulted for banks, hedge funds, and commodities producers and consumers around the world for over 35 years.

One cubic foot of gold weighs more than half a ton (1,306 pounds).