What Is a Commodity Trading Advisor (CTA)?
A commodity trading advisor (CTA) is an individual or firm who provides individualized advice regarding the buying and selling of futures contracts, options on futures or certain foreign exchange contracts. Commodity trading advisors require a Commodity Trading Advisor (CTA) registration, as mandated by the National Futures Association, the self-regulatory organization for the industry.
Understanding a Commodity Trading Advisor (CTA)
A CTA acts much like a financial advisor, except that the CTA designation is specific to providing advice related to commodities trading. Obtaining the CTA registration requires the applicant to pass certain proficiency requirements, most commonly the Series 3 National Commodity Futures Exam, although alternative paths may be used as proof of proficiency.
Registration as a CTA is required by the National Futures Association for individuals or firms who provide advice on commodities trading, unless one of the following requirements are met: advice is given to a maximum of 15 people over the past 12 months and the individual/firm does not hold itself to the public as a CTA; the individual/firm is engaged in one of a number of businesses or professions listed in the Commodity Exchange Act or is registered in another capacity and the advice given in relation to commodities investing is incidental to the individuals profession or the firm’s principal business; or the advice being provided is not based on knowledge of or targeted directly to a customer’s commodity interest account.
Generally, CTA registration is required for both principals of a firm, as well as all employees dealing with taking orders from, or giving advice to, the public. CTA requires registration to give advice regarding all forms of commodity investments, including futures contracts, forwards, options and swaps.
Investments in commodities often involve the use of significant leverage and, therefore, require a higher level of expertise to trade properly while avoiding the potential for large losses. The regulations for commodity trading advisors date back to the late 1970s as commodity market investing became more accessible to retail investors. The Commodity Futures Trading Commission (CFTC) has gradually expanded the requirements for CTA registration over time.
Generally, a CTA fund is a hedge fund that uses futures contracts to achieve its investment objective. CTA funds use a variety of trading strategies to meet their investment objectives, including systematic trading and trend following. However, good fund managers actively manage investments, using discretionary strategies, such as fundamental analysis, in conjunction with the systematic trading and trend following.