Commodity Trading Advisors - What Is Their Role?
CTA
A Commodity Trading Advisor (CTA) is an individual or firm who provides advice, very much like a financial advisor, but specific to the trading of futures contracts, commodity options or swaps. CTA also sometimes refers to investment advisors for hedge funds and private funds including sometimes mutual and exchange-traded funds. The CTA registration is required by the National Futures Association (NFA) and CTAs are generally regulated by the United States federal government through registration with the Commodity Futures Trading Commission (CFTC).
Registration as a CTA is required before they can give advice, as investments in commodities often involve the use of significant leverage and as such require a higher level of expertise to trade properly. The regulations for commodity trading advisors dates back to the late 1970s, as commodity market investing became more accessible to retail investors. The Commodity Futures Trading Commission (CFTC) has gradually expanded the requirements for CTA registration over time. Obtaining the CTA registration requires the applicant to pass certain proficiency requirements, most commonly the Series 3 National Commodity Futures Exam. However, depending on one’s role within a firm, alternative tests may be used as proof of proficiency.
The trading programs employed by CTAs can be characterised by their market strategy and the market segment, such as financial, agricultural or currency. There are two major styles of investment employed by CTAs: technical and fundamental. Technical traders often employ partially automated systems, such as computer software programs, to follow price trends, perform quantitative analysis, and execute trades. Successful trend following, or using technical analysis techniques to capture swings in markets may drive a CTA’s performance and activity to a large degree. Fundamental traders attempt to forecast prices by analysing supply and demand factors, amongst other market information, in their attempt to realise profits. Other non-trend following CTAs include short-term traders, spread trading and individual market specialists.