The purchase of futures goes back thousands of years to when merchants would buy exclusive rights for farmers’ crops even before harvest. This allowed the farmers to reduce their risk, ensuring a fixed price for their yield, regardless of how it turned out. In 1730 Japan established regulations to control the trading and world wide standardization was established in the 1970s. It is at this point that the true commodity trading advisor was born.
A commodity trading advisor (CTA) manages assets while following a strategic system for investing in futures contracts and options for said contracts. While these advisors operated predominantly in commodities in early days, they invest in any liquid futures market at this time. A fairly rare breed, there are only about 800 registered CTAs. These individuals are members of the National Futures Association, a self-regulating body which operates within the United States.
CTAs must register under the Commodity Exchange act, passed in 1936. Registration is also required for individuals or firms that profit from their advice; an exception occurs if they have not provided more than 15 people with advice in the previous year and they don’t promote themselves as a CTA.
CTAs are divided in to two major groups: technical and fundamental traders. A technical trader might use software to follow trends in prices and perform quantitative analysis. In this case trend following will largely drive the CTA’s decision and activity. Fundamental traders anticipate and forecast prices by analyzing factors of supply and demand as well as other information available on the market.
As in ancient times, trading in futures involves a certain level of risk. All it takes is a late freeze or a bad hail storm to completely decimate a crop.