What is a Commodity Trading Advisor (CTA)?

When it comes to commodity investments, a higher level of expertise and knowledge is required to make the right decisions. This is where a commodity trading advisor comes in. But what exactly does that term mean? What is a Commodity Trading Advisor? Do you need One? Are they regulated? Today’s blog will cover everything you need to know regarding a Commodity Trading Advisor, so let’s get right into it.

What is a Commodity Trading Advisor (CTA)?

One of the most common questions asked is, “What is a Commodity Trading Advisor?” A Commodity Trading Advisor (or CTA) is an entity, which could be both an individual or a firm, that offers personalized financial advice to individuals or firms regarding the sale and purchase of futures contracts, options on futures forex contracts or swaps.

Commodity Trading Advisors are generally labeled as Asset Managers as they follow data-based analysis to make critical investment decisions while managing futures accounts. Most CTAs primarily deal with futures investment for a range of physical goods such as agricultural products, metals, energy, bonds, etc.

If you’re an investor, then choosing the correct CTA is extremely crucial since they are responsible for directly influencing and managing futures. In the United States of America, they are regulated by and required to be registered with the NFA (National Futures Association) and CFTA (Commodities Futures Trading Commission).

The History

Commodity Advisors have been around for quite some time. Since the Grain Futures Act of 1922, futures trading has been regulated. After more than a decade, the Commodity Exchange Act of 1936 replaced it, further regulating certain aspects of futures trading. After the Commodity Exchange Act, some types of trading had to be done on the public exchange.

In 1974, The Commodity Futures Trading Commission Act was passed to improve the previous regulation enforced in 1936. This was when CFTC (Commodity Futures Trading Commission), the current regulatory body, was created, and the term CTA was first used for investment advisors and futures account managers.

CTA Fund

The term CTA fund refers to a cumulative hedge fund that invests in futures contracts and implements different trading strategies to maximize the profits of investors.

Technical Traders vs. Fundamental Traders

There are two distinct methods of trading and forecasting that most traders use. Technical Traders use computer programs and assistive software to predict price trends and perform quantitative analysis, while fundamental traders focus more on traditional methods.

The fundamental traders rely upon economic data and use the idea of demand and supply to draw their market predictions. Both of these methods have their own place in the market and are highly effective in specific situations.

Strategy

Generally, a Commodity Trading Advisor uses a wide range of strategies to handle investments and tackle the commodity market. However, their common standard of procedure is following trends. When their predictions show that the prices will go up, they buy, and when prices are expected to drop, they sell.

Some of the advisors look for price movements or what is known as price spikes and drops and then jump in to ride the wave. Some like to predict when prices will return to an average level and make moves based on that idea.

What Are Futures Contracts?

Future Contracts are a kind of derivative involving a standardized contract to buy or sell a certain security at a specified, pre-determined time or a specific price that is already agreed upon at the time of investment.

Usually, these contracts are agreements where two parties agree to buy or sell an asset at a set price on a future date. These contracts are essential in finance and cover things like commodities, stocks, and more.

A buyer usually commits to purchasing on the maturity date, while the seller commits to delivering the asset on the maturity date. Futures contracts can protect both parties against price changes by locking in a future price while also making profits.

Sometimes, a trader pays a small part of the contract’s cost upfront (margin). They might need to add more money if the trade goes bad (maintenance margin). Every day, the contract’s value changes based on the market and a trader can settle gains or losses every day.

Futures trading is highly beneficial as it helps the parties stay protected from unexpected price swings. Moreover, these contracts are easy to trade, which makes this trading model more flexible.

Changes in Regulations

Under the current legal structure surrounding the CTAs, they are obligated to provide reports and records unless they are exempted by the CFTA. After Dodd-Frank in 2011, the CFTC revised the regulations that affected the CTAs, who were now expected to comply with two new forms of data collection.

Due to these changes, financial advisors who worked with swaps and other commodities were also labeled as CTAs and expected to register with the CFTC. The United States Chamber of Commerce filed a lawsuit against CFTC for this change, but the defense was successful, and the new rules stood. Since then, all CTAs have to be registered with the CFTC if they wish to provide financial advice. Moreover, they must be members of the NFA if they wish to manage a client’s funds.

How to become a CTA?

It’s not that difficult to become a Commodity Trading Advisor. While this line of work does require one to have the expertise and experience to understand the futures market, the regulations and registration can be passed easily.

Firstly, the individual or the firm must register as a Commodity Trading Advisor with the National Futures Association (NFA). While this is generally a must-do, there are some exceptions as well. An applicant may decide to register as a CTA with the CFTC (Commodity Futures Trading Commission) but not with the NFA. In that case, they would be legally allowed to offer trading advice and recommend a course of action.

However, handling an investor’s money would not be allowed until they register with the NFA. A CTA who registers with the CFTC but not with the NFA is generally referred to as an educational CTA.

Examination You Need To Give

There are several ways to become an investment advisor, especially when it comes to being a CTA. One of the most common ways is to get a license for trading in stocks by passing the Series 7 test. This examination is organized by the Financial Industry Regulatory Authority (FINRA) and is known for its difficulty. It is extremely crucial to obtain a professional license.

While passing the Series 7 test is crucial, it does have its limitations. If you have this license, even though you are eligible to offer investment advice, you are only limited to a specific set of investments and can make advice and recommendations in a pre-determined manner only. In order to be a highly successful and reliable CTA, the next step is taking the National Commodity Futures Examination called Series 3. After clearing this examination, you would be allowed to provide alternative investments in commodities and futures securities, after which you can effectively work as a CTA.

Registration for a CTA

In order to become a legit Commodity Trading Advisor, you or your firm must be a part of the National Futures Association. This can be done by filling out an online membership form on their official website and paying a non-refundable application fee of $200.

Once you’re a member of the NFA, you can now easily register as a CTA. All you need is a security manager and digital access to the registration system. The online form is called “Form 7-R.” After filling this out, along with the questionnaire and the CTA membership fee, you will be officially registered as a CTA and will be eligible to give financial advice as well as manage your client’s investments.

However, your registration and membership will need to be renewed by filling out the annual questionnaires and clearing the annual dues for the NFA.

CTAs vs. Money Managers

Money managers or portfolio managers generally fall under the class of Asset Managers who deal with a variety of stocks and a diversified portfolio of bonds. Generally, they deal with current market prices and focus more on present-day trades.

On the other hand, Commodity Trading Advisors are completely different. They focus primarily on futures contracts and options. While the fundamental concepts of investment management may fall under both of them, there are significant differences in the types of trades money managers and CTAs do.

Commodity Investment Tips For You

Here are some trading tips if you’re just getting started with commodity trading:

Learn as much as you can about commodities and futures before you get started and understand the basics in order to build a good foundation.

Test the waters with small investments to get the hang of commodity trading and futures contracts before increasing your investments and going big.

Stay up to date with the news and ongoings related to the commodities you’re interested in. This will help you stay informed at all times.

Learn all you can about the commodity you’re looking to invest in and put in the investment you can afford to lose, as sometimes the market can be unpredictable.

Do not put all of your investment into one commodity, as diversifying your portfolio can help spread the risk and reduce the dependency on a single trade’s success.

It is recommended to set up stop-loss orders to limit your losses. This will automatically sell your contracts if the prices drop below a certain level.

Patience and discipline is the key to successful trades.

Don’t make impulsive decisions. It is important to always evaluate and assess your options.

It is crucial to stick to a well-defined trading strategy and make data-driven decisions to support your predictions.

Have a clear plan about your exit strategy and know when to exit a trade, whether it is for profit or to keep your losses low.

Frequently Asked Questions

Here are some commonly asked questions about Commodity Trading and futures contracts:

How much does a commodity trading advisor charge?

Commodity trading advisors usually charge a percentage, depending on the trade size and the account size. This percentage can be 10-15% of the profits, based on their performance. They may also charge an annual 1-2% account management fee.

How risky is commodity trading?

In recent times, Commodity Trading has been both fruitful and dangerous. While trading in commodities and futures offers higher returns than most equity investments, they generally carry a slightly higher risk as well due to price fluctuation.

What are the advantages and disadvantages of Futures Trading?

Trading in futures allows a CTA or an investor to enjoy stable margin requirements, which makes it easier to come up with a profitable contract. These investments also have a high liquidity, which is another plus point.

On the other hand, investors have no control over future events, and high leverage can often result in major price fluctuation on a constant basis.

Conclusion

Futures contracts are tools that help manage risk and potentially make some money. Just like with anything financial, it’s essential to understand them well and be cautious. Talking to an expert is always a good idea to make smart choices. Hence, CTAs play a major role in the futures market and are essential for investors.

If you’re looking to build a career advising others in the futures market, you will need to register and become a CTA. On the contrary, if you’re looking to invest in commodity trading, it’s best to reach out to a CTA like Platinum Trading Solutions for financial advice or investment management.