However, there are basically two types of commercials: commercial producers and commercial consumers. To meet the definition of hedging, a commercial hedger should be taking positions in the futures market that somehow offset their exposure to risk in the physical tions, thereby fulfilling their contract obligations.
They may also exit out of established futures positions by buying back shorts or selling longs, versus taking or making delivery. Most of the time this is what happens since, in fact, only a few contracts, representing a small percentage of open interest, actually go to delivery.
The majority of contracts that trade never go to actual delivery for physical commodities. The commercials often exit their positions, or they may roll them into the next month. They may also allow the contracts to expire because many markets have a cash settlement, requiring no physical delivery of commodities. If the contracts are cash-settled, a commercial hedger holding long positions may also receive the cash settlement in U.S. dollars at expiration.
The noncommercial category is made up of large individual traders and trading funds, which may have positions in one or several markets. In this regard, they are not unlike large mutual funds in the equities markets that generally trade multiple markets. In addition, activity in the noncommercial category includes spread trades among large speculators and funds.
All other open positions that do not fit into the commercial and noncommercial categories fall into the nonreportable category (which is often referred to as “small speculators”). It is important to understand that the small speculator category can contain both small commercials and small speculators. All participants holding nonreportable positions share a common trait: The number of contracts held does not meet the reporting limits set by the CFTC for that particular market or commodity.
In this blog, as well as in my own trading systems, I focus on the commercial data as being primarily “commercial interest,” and the noncommercial as being composed primarily of “noncommercial interest” (although this category could have some cross-contamination). All the studies I have done on this data show that each category has a unique signature. They tend to move independently of one another, which also suggests and confirms to some extent the purity of the participant groups.
Read More : Hedgers And Speculators
