What Is a Small Trader?

A small trader is a regulatory designation for an options or futures trader holding or controlling positions that are below the required reporting thresholds specified by the relevant exchange or Commodity Futures Trading Commission (CFTC). The term can also refer to retail traders or small institutions whose trading volumes are quite low.

A small trader can be contrasted with a large trader. Any market participant who is, by definition, a large trader must identify themselves to the SEC and submit Form 13H, "Large Trader Registration: Information Required of Large Traders Pursuant to Section 13(h) of the Securities Exchange Act of 1934 and Rules Thereunder."

Key Takeaways

  • A small trader is a regulatory classification for those holding derivatives positions that fall below the mandatory reporting threshold.
  • A small trader can be an ordinary investor or a small firm, and having this designation may give it more freedom and minimize tax exposure.
  • Small traders are less of a regulatory concern since they will not have the assets to corner a market or manipulate prices.

Understanding Small Traders

A small trader is one who holds or trades futures or options contracts that are less in size or number than the point at which regulatory agencies require an exchange to report them. The applicable regulatory agency which holds authority over that particular exchange, location, or jurisdiction determines the specific threshold limit. The non-reportable category combines the positions of small traders and assigns a figure. This number comes by subtracting total reportable long and short positions from the total open interest in a commodity. As such, the total number of small traders grouped in this category and if they are commercial or non-commercial, remains unknown.​​​​​​​

Unlike a large trader who buys or trades a higher volume and dollar level of contracts, the small trader is unlikely to be able to corner the market or have a noticeable impact on it. On the other hand, a small trader may have more flexibility and agility and may be able to move in and out of trades more quickly and make rapid adjustments.

Observers or analysts may also use this term, in a comparative sense, to indicate that an individual or entity has a trading or holding activity level considered less than average when compared to others in the group.

Examples

An ordinary investor wishes to hedge a long position where he owns 1,000 shares of XYZ Corp. stock. He does this by purchasing 10 put options, which falls far below the reportable amount.

As another example, in Canada, a business whose sales do not exceed the C$30,000 threshold for four consecutive calendar quarters may be classified as a small trader, which may make it exempt from collecting and remitting the Canadian Goods & Services Tax. 

Small Traders and the Commitment of Traders Report

The Commodity Futures Trading Commission (CFTC) establishes reporting thresholds that vary for option and futures contracts on different assets and commodities. Thus, a large trader in the corn futures market would have different limits than one in the S&P 500 futures market. The CFTC tracks these trades and releases the Commitments of Traders (COT) report every Friday. The COT report groups the size and direction of all positions taken in a particular commodity into three categories. 

  1. Commercials traders who hold positions in the underlying commodity and use futures or options contracts to hedge their exposure
  2. Non-commercial traders who do not own the underlying commodity, and only carry positions in futures or options contracts, presumably for speculation. 
  3. Non-reportable traders include small speculators and investors who hold positions below the reporting standards of the CFTC.

Clearinghouses, foreign brokers, and exchanges file daily reports at market's close to the CFTC showing the futures and options positions of traders

When a trader holds a position at or above the reporting level in any single futures month or option expiration period their entire position in that commodity, regardless of size, is reportable.

The CFTC receives information on between 70% and 90% of all open positions in this way. The Commission will periodically adjust the reporting levels. Reportable traders count only once even if they hold both long and short positions. However, if they fall into both the commercial and non-commercial categories, they will count towards the total number of traders in each.