Non-Commercial Trader

A non-commercial trader is an individual who has been classified as having no business interest in the futures positions being traded. This means that non-commercial traders are not looking to take delivery or hedge input costs. Instead, non-commercial traders are speculating in the futures market with only a profit motive. The classification of non-commercial traders is used by the Commodity Futures Trading Commission (CFTC) and is based off o CFTC Form 40: Statement of Reporting Trader. The Commitment of Traders report from the CFTC shows the open interest and relative positions of commercial and non-commercial traders. Non-commercial trader may also written as noncommercial trader.

Non-commercial traders tend to be individual investors, hedge funds, and some large financial institutions. Interestingly enough, it is possible for a single trading entity to be a non-commercial trader in one commodity and a commercial trader in a separate depending on the entity’s core business. It is not, however, possible to be a non-commercial and commercial trader in the same commodity. Moreover, the CFTC staff has the ultimate choice in how a trader is classified and can exercise their own judgment regardless of the contents of the CFTC Form 40.

Futures prices tend to positively correlate with the positions of non-commercial traders. When non-commercial traders are long in a commodity, then that is usually a strong bullish signal. If non-commercial traders have a substantial number of short positions in a commodity, it can be inferred that this group of investors believes the price of the underlying asset is going to decrease. Over time, the non-commercial traders have been right as well as incredibly responsive to market signals when they are wrong.

Commercial traders, on the other hand, are largely seen as defensive players in the market rather than trend setters. When the positions of both non-commercial and commercial traders turn bullish or bearish, it usually results in sharp price movements that breaks through previous support or resistance levels.

Interestingly, while non-commercial traders share a clear profit motive, the trading motives of the commercial traders are much more diverse. For example, producers, merchants, processors and users of a commodity are all considered commercial traders for that commodity even though their pricing and hedging goals are different and even in direct opposition. This is another reason the signals from non-commercial traders – the changes in open interest and the mix of long and short – 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.