Monday, 14 September 2009
Save the COT Report!
U.S. regulators claim they are improving market transparency with some big changes to the Commitments of Traders report. But the changes threaten to sharply curtain the very transparency they hope to achieve.
Please help save this valuable free data by writing a comment to the U.S. Commodity Futures Trading Commission at email@example.com. The deadline is Oct. 1. More info on how to do so is at the end of this post.
The COT data comes in a free weekly report issued by the U.S. Commodity Futures Trading Commission. It details trillions of dollars in derivatives positioning in over 100 major markets - everything from crude oil to the Japanese yen, gold, frozen pork bellies, wheat and the S&P 500.
Just Raw Numbers
The data is just a bunch of raw numbers that are difficult to decipher until you look back over it for many years and start seeing patterns. Analysts like Steve Briese and Larry Williams pioneered methods to help decipher the data and increase popular understanding of its usefulness.
Taking off from their work, I crunched years of data and studied the long-term charts in search of a way to trade off it alone. This led to my COTs Timer system, a trading strategy based exclusively on this fascinating data that I offer here for free as a public service.
The strategy has a 72-percent win record since December, when I started to trade the first of a new generation of trading setups. The average has been a 5.4% gain with a 3.2-wk holding period, with a 18.3% real-time cumulative return (adjusted to remove gains due to leverage and adjusted to the maximum portfolio allocation of each setup).
Now, in the wake of the financial mess we've faced for over a year, the CFTC is rightly trying to increase market transparency. That includes making some changes to the COT report to give more details about the data, announced Sept. 2. (See the CFTC's additional explanatory notes here.)
But in so doing, the commission will actually curtail the very transparency it seeks to improve. Unless we speak up.
Historic Data Vital
The CFTC will replace two of the categories of traders in the report with four new categories. The commercial traders will now be broken down into a category for producers, merchants, processors and users, plus a separate category for swap dealers. The non-commercial category (popularly known as large speculators) will be broken down into "managed money" and "other reportables." Presumably, the third category - non-reportables (a.k.a. the small traders) - will remain untouched.
The CFTC is inviting comments on whether it should continue to publish the data for the existing categories alongside the new data. This is a vital issue for anyone who cares about this data. If we no longer get the data in the existing categories, the new numbers could be difficult or impossible to evaluate for years.
The CFTC has said it would publish historic data for the new categories going back three years. That's far from being enough for most purposes of statistical research. At a bare minimum, my calculations suggest we need at least about 10 years of data - and likely much more; as much as possible, in fact. Also, the data must cover as many diverse market conditions as possible for the data to have any statistical meaning.
In fact, the existing COT data, which goes back to 1995 for most major markets, just became useful for statistical purposes in the last few years when there were finally enough data points to research.
Comparing Apples With Oranges
The CFTC may argue that a researcher could just recreate the data for the old categories by adding together the positions of the new categories. But this is cumbersome and creates significant programming difficulties because the new data is reported in a different format.
It also raises the question of whether the new categories will exactly replicate the existing ones. For example, if we add up the positions for the new "managed money" and "other reportables" categories, will we get the same figures as for the old non-commercial category? Will the small trader category remain exactly the same? Or will we be comparing apples with oranges?
Do the changes involve any other kind of redefinition of categories or reassignment of traders? Could the new categories make such changes more likely because the old data will no longer be seen as relevant? All these things would reduce or eliminate the ability to compare the old and new data.
Email the CFTC
If you think the CFTC should continue to publish the existing categories, email the CFTC at firstname.lastname@example.org. Please write before the deadline for comments on October 1. (Mention that you are commenting on the CFTC's proposal of Sept. 2 to amend the COT report.) If you're pressed for time or not sure what to say, you can even just email them a link to this post: Save the COT Report!
Can we make a difference? Yes! The last time the CFTC reviewed the COT report, it received an unprecedented 4,659 comments from 23 countries. It was by far the most in the agency's history in response to such a notice. The response was unanimous in support of the reports. Remarks included: "Please, please do not discontinue this very valuable report," "Don't you dare," "Save the COT" and "Leave it alone you knuckleheads." The CFTC backed down from a proposal to discontinue them. If we remind the agency of the importance of this valuable data, the cause of transparency has an excellent chance of prevailing again.