Basically, they give you an insight into what the companies did wrong and how they treated their clients. First, let us discuss the CFTC and its role in the broker companies. They want to bring back trust and confidence to the market by imposing strict market rules, standards, and policies. Let us now suppose that the non-commercial sector is overall long the USD in our example. So, for brokerages willing to accept the challenge and open accounts in the U.
Establishing the Commodity Futures Trading Commission (CFTC)
The United States of America takes the regulation of financial markets very seriously and has developed and implemented quite a few regulatory authorities over the years. However, there are a select few that stand above the rest in terms of credibility and importance.
By overseeing these markets, the CFTC hopes to create fair and transparent markets for traders as well as maintaining the integrity of brokerages in the markets.
The CFTC is known to be a very strict regulatory authority with many guidelines, restrictions, and requirements of financial companies offering investment services to American citizens. This has deterred many companies from setting up shop at a U.
However, for the brokerages that do register and become licensed by the CFTC, their traders and investors can be assured they will be a safe and secure brokerage to deal with.
Trading has been going on in the U. Since then, the American trading industry has vastly grown to include various financial instruments. With the implementation of this new authority, it took on the roles of previous organizations and implemented new rules and regulations to accommodate the new demands of the ever-changing financial markets.
This act required the CFTC to impose various new guidelines on the brokerages governed by them. As the CFTC is such an important and massive regulatory authority of so many financial instruments and markets, it is no surprise they have an overwhelming amount of responsibilities.
Although, when it comes down to it, the CFTC is responsible for the protection of participants in the financial market and the integrity and transparency of these financial markets. Now, with more detail, the CFTC is responsible for the effectiveness of the futures markets by encouraging strong and healthy competition and efficiency.
All while ensuring integrity by clamping down on manipulation, abusive trading practices, and financial fraud. One of the most important responsibilities of the CFTC is to review the terms and conditions of proposed options and futures contracts to ensure their integrity.
They do this by ensuring the contracts comply with the standards set out by the Commodity Exchange Act and the authorities own regulations. Along with this type of responsibility are the constant supervision and daily market surveillance to ensure orderliness is followed in the futures contracts being traded.
Another responsibility of the CFTC is the regulation of futures professionals. The CFTC must create and implement many rules and regulations for all the financial entities they oversee. As well, this includes rules and guidelines for the NFA to implement on their behalf as well. The authority has developed numerous rules and guidelines for the protection of investors by safeguarding the integrity of financial markets.
One of the largest areas of protection the CFTC provides investors is the prevention of fraud and financial abuse. They achieve this level of protection by making it mandatory for all U. The CFTC publishes information during the meetings of the Commission and the Chairman, providing topics of the meeting, briefings, and the list of attendees. They regularly body issues weekly, monthly, and annual reports which are publicly accessible. The CFTC regulated brokers are subject to these reports and you can find all the information concerning their broker companies.
They rate their work and inform the public of their activities. The CFTC website gives clear instruction to market participants on many aspects. For example, they educate the customers on the U.
They provide updates on disciplinary actions taken against some of the companies they regulate. They also instruct the market participants how to file a claim in case they notice suspicious activity. By keeping a check list of all companies that committed some illegal actions they inform customers and the wider public on companies that should be avoided. Basically, they give you an insight into what the companies did wrong and how they treated their clients.
Many other warning lists are issued as well, for example warning people of unregistered firms that are suspected to be illegal. Also, educational materials are available for beginners to familiarize themselves with the futures market, the risks involved, and the way the market operates.
The materials can be useful to experienced traders as well. The CFTC is committed to its task to keep the integrity of the futures and financial market intact. Someone who makes such a great effort to inform you on their every move builds up a great reputation among their clients. As a trader always looks for CFTC registered brokers to engage in business.
They offer you a safe environment given that they are under the supervision of one of the most trustworthy organizations. Thus the roles played by the two categories of traders is quite different. Spreading covers those trades who hold an equal number of long-short positions on the future contracts. The report provides data on the percentage of long or short contracts to the total, on the number of traders in all three categories with positions on a currency, and finally the changes in open interest in comparison with the previous reporting period.
Over the years the COT report has become quite a popular tool for all kinds of traders. Here are a number of ways of exploiting the data provided by the COT report. We can use the COT report data to create a diversified currency portfolio. Let us now suppose that the non-commercial sector is overall long the USD in our example. What should be the criteria in deciding the currency pairs that will be included in our portfolio in such a situation?
Why do we do this? Because all we want to do is to gain from the appreciation of the USD while limiting the volatility caused by the carry trade. By making our position interest-neutral, we will, we expect, be able to ride through such disruptions. This will reduce the volatility of our portfolio, and will also reduce the potential return from our investment, but it does create a longer-lasting, more resilient position.
Another, but much riskier way to create our COT-report based portfolio would be to simply long what the commercial sector is long, and to short the commodity or currency in which the non-commercial traders are long. And one can go on with this method, to create an interest-neutral portfolio in the previously described way, thereby limiting the volatility of the position, and ensuring a more successful long-term strategy. Correlations statistics of currency pairs are available from most major forex brokers.
It is nonetheless true that major changes in the strength of a trend, or its reversal on a permanent basis, are indeed noted by changes in open interest, and institutional positioning.
Our only suggestion is that the trader be aware of the potential of false signals, and, as per the usual principle, avoid trying too hard to catch bottoms and tops. An exceptionally useful and prudent use of the COT report is regarding it as a volume complement to the price studies generated by conventional technical analysis.
The trader can simply refuse to act when a technical signal fails to be confirmed by a similar movement signaled in increasing open interest in the COT report.