Are there commodity futures traders who consistently outperform? Who are they? What information do they exploit? In the September 2010 version of their paper entitled “Identifying Informed Traders in Futures Markets”, Raymond Fishe and Aaron Smith examine the short-term trading abilities of commodity futures traders by recreating their trading histories. They distinguish between those who trade intraday and those who hold overnight, arguing that the latter are efficient processors of technical trading information, while the former possess the best signals about fundamental short-run price pressures. Using daily positions for 8,921 traders in 12 futures markets over the period January 2000 through May 2009, they find that:
- The average commodity futures trader has 1.4 years of trading experience (based on number of days holding an open position), with substantial variation across commodities.
- The typical trader holds positions in multiple expirations, with energy traders holding the most, and trades on more than half of days when holding positions. About half of all traders are net long on average, 20% of traders are always long, and 14% are always short. About 25% employ futures options.
- Trading outcomes suggest that prices impound information within a trading day.
- Roughly 1% to 4% of all traders hold overnight positions that systematically predict the next day‘s price change. Such traders tend to be floor brokers rather than commercial hedgers or managed money/hedge funds, suggesting access to order flow (technical) information and an ability to process that information to predict next-day order flow.
- Roughly 1% of all traders exhibit informed intraday trading with managed money/hedge funds and swap dealers (including commodity index traders) dominating and commercial hedgers conspicuously underrepresented. These successful intraday traders may act on macroeconomic or fundamental commodity-specific announcements.
- However, trader characteristics more strongly indicate informed trading behavior than line of business. Informed traders have more experience, trade more frequently, are more likely to trade both long and short and take larger positions than other traders. Informed overnight (intraday) traders tend to hold positions in more (fewer) expirations.
In summary, evidence from detailed trading data indicates that only a few percent of commodity futures traders systematically exploit useful information, distinctly either technical or fundamental. Success factors include experience, trading frequency and trading flexibility (long/short).
If you are not one of them, then you trade against them.
