Commodity Trading Advisors (CTA)

Definition

The term commodity trading advisor refers to an individual or organization that provides advice to a pool of investors in futures contracts and commodity options. Commodity trading advisors are regulated by the Commodity Futures Trading Commission as well as the National Futures Association.

Explanation

A commodity pool is an enterprise in which funds are contributed by a number of investors. In doing so, they are able to gain leverage, participate in a greater number of trades and reduce risk. A commodity pool operator, or CMO, solicits funds and invests them on behalf of individuals. The CMO may provide this investment advice or they can hire a commodity trading advisor, also referred to as a CTA, to provide those services. Techniques used by CTAs fall into three broad categories:

  • Technical CTAs will chart patterns and use computer programs to track price trends, analyze the information and execute trades programmatically.
  • Fundamental CTAs try to predict prices by evaluating supply and demand patterns.
  • Quantitative CTAs typically have a strong background in mathematics and perform complex statistical analysis of price trends before executing trades.

Regardless of the approach, all CTAs are registered as a Commodity Trading Advisor with the National Futures Association and have typically passed the Series 3 National Commodity Futures Exam to demonstrate proficiency in the market.

Related Terms

commodity, commodity pool, commodity pool operator, Commodity Futures Trading Commission