What Is a Commercial Trader?

In the commodities markets, the Commodity Futures Trading Commission (CFTC) has a special classification for "commercial traders", and describes them as traders that use the futures market primarily to hedge their primary business activities. For instance, an oil trader employed by an airline who hedges against expected jet fuel expenditures.

A commercial trader (i.e., institutional trader) may also refer more broadly to any trader who trades on behalf of a business or institution.

Key Takeaways

  • A commercial trader in the commodities markets, is defined by the CFTC as one who trades in the futures market to primarily hedge core business activities.
  • In the commodity markets, the CFTC publishes the weekly Commitments of Traders report which reveals the position sizes of commercial and non-commercial traders.
  • A commercial trader may also refer to an institutional trader, which is one employed professionally by a bank, brokerage, fund, or other financial firm.

Understanding the Commercial Trader Label

In the commodities market, the CFTC has a designated classification for commercial traders primarily for trade tracking purposes. The CFTC produces a weekly report, called the Commitments of Traders (COT) that provides a breakdown of activity from commercial and non-commercial traders.

The CFTC pays close attention to the trades placed and categorizes them by commercial and non-commercial for reporting purposes. The CFTC produces a weekly “Commitments of Traders” report which shows the number of trades placed, and contracts held, by commercial traders and non-commercial traders. The Commitments of Traders report is provided through the CFTC’s website.

Entities that make up the commercial trader classification can include futures commission merchants, foreign brokers, clearing members, or even investment banks that buy index futures to hedge current long positions. The Commitments of Traders report can be used by a variety of different investment professionals as an investment resource for futures market trading.

Commercial traders represent a large portion of the total futures market and as such are primary influencers of commodity prices. The Commitments of Traders reports can show the balance of long positions and short positions in different futures market sectors which can generally provide a great deal of insight into the strength of a price trend.

Many traders view the commercial traders as the "smart money" since the commercial traders are working in the actual commodity industry, and have insights into how that industry is doing based on what they see happening in the company around them.

Example of a CFTC Commercial Trader

An oil company commercial trader may use the futures markets to sell crude oil on behalf of their company.

Assume the company produces 100,000 barrels of oil per month, which meets the specifications for physical delivery under the crude oil futures contract listed on the Chicago Mercantile Exchange (CME).

Each crude oil futures contract represents 1,000 barrels of oil. Therefore, the commercial trader's job is to sell 100 oil contracts a month, which is equivalent to the 100,000 barrels of oil produced.

These transactions hedge the company's output, which defines a CFTC commercial trader.

On the opposite side of the transaction, a speculator or hedge fund may buy some of these contracts expecting the price to rise. This is a non-commercial trader. Alternatively, another company may buy the contracts, as they need the oil for their business.

Institutional (Commercial) Traders

Commercial traders may also refer generically, although less frequently, to market participants that trade for the benefit of a business or institutionally managed portfolio. Institutional traders place trades in the interest of the business for which they have been hired to work.

Traders may work for a portfolio management team, placing trades as directed by the team for a managed portfolio. Portfolios managed to different strategies will require commercial traders with different trading expertise. Managed portfolio funds may be available to institutional or retail investors for investment.

Another type of institution commercial trader places trades to support the revenue and business operations of the firm for which they are employed. Commercial traders are used by corporations for managing business risks, finding opportunities, and helping to level out the fluctuations in an underlying commodity to stabilize or increase revenues.

Institutional commercial traders are also used for speculative purposes, such as when an oil company hires traders to buy and sell oil futures contracts for profit (not hedging), or when a bank has a proprietary trading desk where the sole purpose is to make more money using the bank's money.