What Is a Non-Commercial Trader?

A non-commercial trader is defined by the Commodity Futures Trading Commission (CFTC) as someone who has no business activities related to a particular commodity in which they might have a position in the futures or options markets. In other words, non-commercial traders are not looking to take delivery of a commodity or to hedge costs related to a commodity-related business. Instead, they are taking positions in the market purely to seek a profit from market moves as a speculator.

Key Takeaways

  • A non-commercial trader is someone who has no direct business interests in the commodity that they are trading.
  • Instead, a non-commercial trader takes a speculative market position only to profit from price moves in the market.
  • The CFTC makes this designation in order to keep track of market activity in its Commitment of Traders (COT) report.

Understanding Non-Commercial Traders

Non-commercial traders tend to be individual investors, hedge funds, and large financial institutions. The classification of non-commercial traders is based on information gathered from CFTC Form 40: Statement of Reporting Trader, but the CFTC ultimately decides how a trader is classified and may do so regardless of claims made by the trader on the CFTC Form 40.

It is possible for an organization that has more than one trading entity to be classified as a non-commercial trader in one commodity and a commercial trader in a separate one. However, it is not possible for a single trading entity to be a non-commercial and commercial trader in the same commodity.

Futures prices tend to positively correlate with the positions of non-commercial traders, which can be seen in the CFTC's COT report: a weekly publication that shows the open interest and positions of different types of traders.

When most non-commercial traders are betting a commodity's price will rise, it is usually a strong bullish signal. By contrast, if non-commercial traders have a substantial number of short positions in a commodity, betting that the price will fall, it can be taken as a bearish signal. Over time, non-commercial traders have been right as well as incredibly responsive to market signals when they are wrong.

Non-Commercial vs. Commercial Traders

Commercial traders are largely seen as defensive players in the market, rather than trendsetters. While non-commercial traders share a clear profit motive, the trading motives of commercial traders are much more diverse.

When the positions of both non-commercial and commercial traders turn bullish or bearish, it usually results in sharp price movements that break through previous support or resistance levels.

For example, producers, merchants, processors, and users of a commodity are all considered commercial traders in that commodity even though their pricing and hedging goals are different and can be in direct opposition. This is another reason why the positions of non-commercial traders are seen as purer pricing signals than those of commercial traders.

Moreover, because non-commercial traders tend to take the opposite positions of commercial traders, they also play an important role in providing the liquidity required to keep the futures market running.