The funds speculate in the futures market, taking measured risks, in hopes of making a profit. The commercials, on the other hand, do not solely engage in futures to make a profit (although they do not want to lose money either). Commercials do not profit in the same way a speculator does because of their cash positions. Further, commercials do not necessarily exit all positions in the same way as a speculator. This is where a key difference lies. In addition to the commercial’s ability to take or make delivery of the underlying commodity, the commercial may also retain the same amount of hedging by rolling losing positions from one month to the next. Speculators, however, do not tend to roll losing positions. This is important to understand because of its potential impact (or lack thereof) on the market.
Small traders have some advantages in the market. Being small, they can get in and out of positions without being concerned about how the market may react. Large traders, on the other hand, have accumulated a large position in the market (as reported in the noncommercial category of the COT report), and everyone who looks at the COT data knows about it.
They can’t hide it. Since they are speculative traders, they have to liquidate their positions to realize a profit (if they have one) at some point. Price slippage during that liquidation process may also cost them much of their profit, given the size of the position.
Large traders and large trading funds are at a disadvantage in this area. Most individual traders are below the CFTC’s reportable levels and can get in and out of the market without reporting their positions and without much slippage overall.
Read More : FUNDS AND SMALL SPECULATORS
