Passive Investors and Managed Money in Commodity Futures Part 1: Participation Levels Prepared for: The CME Group Prepared by: October, 2008

2 Table of Contents SectionSlide Number Objectives and Approach3 General Notes4 Trader Group Definitions5 Findings Corn6-15 Soybeans16-24 Chicago Wheat25-32 KC Wheat33-41 MN Wheat42-50 Cotton51-58 Natural Gas59-73 Crude Oil74-87 Summary88-91

3 Objectives and Approach The objective of this task is to describe participation by passive and managed money traders in each of the studied futures markets. Each trader group (except Small Traders) evaluated by their “total market presence,” or the relative proportion of total aggregate futures positions held by each trader type. The period examined covers the last 250 days of trading for each contract by commodity. Trends for each commodity are identified and discussed.

4 General Notes Only reporting traders are included. The non-reporting (or small trader) group which makes up the balance of positions is not shown in order reduce the “noise” in the charts. As expiration approaches, open interest falls dramatically and thus the market presence of a particular group can swing wildly. Option positions are not included. Futures-only positions likely capture the major trends and patterns. Also, including options would have required a delta-adjusted total option open interest which was unavailable. Full history was not available for all contracts because the data series began in Jan,2005 and ended on June 30, 2008, Thus, data for some of the early contracts (2005) begins just months before expiration.

5 Trader Group Definitions Commercial – Reporting entities, self-identified as having a connection to the cash commodity, who hold a position greater than the reporting threshold. Non-commercial — Reporting entities who do not have a connection to the cash commodity and thus their futures position is unlikely to be for the purpose of mitigating commodity price risk. Indexer – Accounts identified by the CFTC staff through an interview process that hold passive positions in commodity futures in an effort to replicate the returns to a commodity index. For natural gas and crude oil this information was not collected directly, but rather accounts identified as indexers in the agriculturals were assumed to also be indexers in the energy products. Money Manager — Accounts identified by the CFTC as primarily engaging in futures trading for profit, typically managing pools of money provided by investors Small Trader — all entities holding a futures position less than the reporting threshold.

6 Findings - Corn Commercial traders typically have the largest and most consistent presence throughout the final 250 days of trading of a corn futures contract. Their average market presence averages around 40-50% for much of the contract life. The average is generally a bit lower from around 50 to 75 days out through expiration as more trader groups enter the market. In the final days of trading, the large commercial position is highly volatile.

7 Findings - Corn Non-Commercial traders also have a fairly consistent presence during the final 250 days of trading of a corn futures contract. However, their presence becomes relatively volatile in the final stretch before expiration. This group generally makes up between 10-20% of the market until around 25 days out. At this point, there is a spike in activity until just a few days until expiration when this group typically surrenders their positions en masse.

8 Findings - Corn The presence of Money Managers is somewhat erratic compared to Commercials or Non- Commercials. Sometimes they hold a consistent presence between 10-20% throughout the entire trading period examined. However, this group occasionally waits until a little closer to contract expiry to take a significant position in the market. Money Managers exit quickly at around the 25-day mark.

9 Findings - Corn The presence of Indexers can vary widely within the trading period, but they generally do not make up more than 30% or 40% of the market. This trading group is the most likely to be absent over the final 25 days of trading. These traders build positions rapidly around 75 days to expiration and then liquidate that position rapidly around 25 days to expiration. The pattern of behavior of Indexers in trading on the corn futures market seems to have remained mostly the same over study period.

10 Findings - Corn Above is a typical example using the December 2007 contract. Notice the volatility in interest shares near expiration, after most trading groups hold a consistent relative share during the earlier part of the life of the contract. Also notice the burst in activity by Indexers with about 75 days to expiration only for them to exit quickly with around 25 days left.

11 Percent of Total Aggregate Futures Positions Held by Each Trader Type

12 Percent of Total Aggregate Futures Positions Held by Each Trader Type

13 Percent of Total Aggregate Futures Positions Held by Each Trader Type

14 Percent of Total Aggregate Futures Positions Held by Each Trader Type

15 Percent of Total Aggregate Futures Positions Held by Each Trader Type

16 Findings – Soybeans Commercials generally maintain a consistent presence in Soybeans contracts, although the level of their position sometimes becomes erratic. Commercials almost always have the largest share of positions in the market. Non-Commercials are a bit unpredictable in this market, especially early in the trading period. This group often holds between 10% and 30% of total positions in the market, but there isn’t a discernable trend in the behavior of this group over the study period.

17 Findings – Soybeans There also doesn’t appear to be a consistent pattern for the presence of Money Managers in the soybean market. Over time, it doesn’t appear that Money Managers have made any distinct changes to how they participate in this market. Indexers rapidly get into and out of the market. There is evidence of a “bubble” or flurry of activity from around 75 or 50 days until around 25 days until expiration. There seems to be little behavioral change in Indexers from 2005 to mid-2008.

18 Findings – Soybeans Commercials hold the largest share – around 50% - for most of the trading period. Non-Commercials and Money Managers each maintained a relatively consistent share of total positions until a flurry of activity at the end. Indexers, at first slowly and later rapidly, increased their share before quickly exiting at around day 25.

19 Percent of Total Aggregate Futures Positions Held by Each Trader Type

20 Percent of Total Aggregate Futures Positions Held by Each Trader Type

21 Percent of Total Aggregate Futures Positions Held by Each Trader Type

22 Percent of Total Aggregate Futures Positions Held by Each Trader Type

23 Percent of Total Aggregate Futures Positions Held by Each Trader Type

24 Percent of Total Aggregate Futures Positions Held by Each Trader Type

25 Findings – Chicago Wheat The presence of Commercial traders of Chicago wheat can be slightly erratic. Overall, this group typically makes up the largest trading bloc; however, other groups commonly exceed the presence of Commercials for extended periods. Non-Commercials also follow an erratic pattern and occupy a market presence between 10% and 40%. Both trading groups experience a flurry of activity near the end of contract, with large increases and decreases over the last few days before expiration.

26 Findings – Chicago Wheat Money Managers are a bit slower to take a larger presence in this market. They usually make up no more than 30% of the market, and there are occasional wild fluctuations over the last 25 days to expiration for this group. Indexers are the most predictable, maintaining a small presence until expiration is within 75 days. Indexers behave differently in the December contract, often commanding a large presence at very distant dates.

27 Findings – Chicago Wheat The presence of the major trading groups is a little more evenly dispersed for wheat than we saw with corn. Again notice the sharp increase in the presence of Indexers from around days to expiration through 25 days to expiration.

28 Percent of Total Aggregate Futures Positions Held by Each Trader Type

29 Percent of Total Aggregate Futures Positions Held by Each Trader Type

30 Percent of Total Aggregate Futures Positions Held by Each Trader Type

31 Percent of Total Aggregate Futures Positions Held by Each Trader Type

32 Percent of Total Aggregate Futures Positions Held by Each Trader Type

33 Findings – Kansas City Wheat Commercials typically held the largest share of total positions throughout the life of each of the contracts studied. Sometimes this trading group is very consistent throughout the entire trading period, while at other times there are broad swings in the market presence of Commercials. The presence of Non-Commercials can vary significantly from contract to contract.

34 Findings – Kansas City Wheat Non-Commercials are most likely to have their largest share of positions in the market early in the trading period. The Non-Commercial position share fades as expiration approaches. The presence of Money Managers was inconsistent from contract to contract. Sometimes Money Managers held a relatively consistent share of total positions throughout the life of a contract, while at other times this group’s presence was erratic.

35 Findings – Kansas City Wheat Despite some of the differences from contract to contract, Money Managers’ presence in the market maintained a fairly steady pattern over the study period from 2005 through mid Indexers were commonly missing from the market early in the life of many contracts, but Indexers can be counted on for a burst of activity between roughly day 75 and day 25 until expiration.

36 Findings – Kansas City Wheat Non-Commercials made up a much larger share earlier in the observed trading period but backed away as expiration approached. Money Managers consistently held between 5% and 15% of total positions. Indexers were practically non- existent in the market except for a flurry of activity between day 75 and 25.

37 Percent of Total Aggregate Futures Positions Held by Each Trader Type

38 Percent of Total Aggregate Futures Positions Held by Each Trader Type

39 Percent of Total Aggregate Futures Positions Held by Each Trader Type

40 Percent of Total Aggregate Futures Positions Held by Each Trader Type

41 Percent of Total Aggregate Futures Positions Held by Each Trader Type

42 Findings – Minneapolis Wheat Commercial traders by and large hold the largest market presence among trader groups from contract to contract. Their presence is often fairly consistent over the observed trading period for each contract, although there are occasionally some rather broad swings. Commercials, though, often make up more than 50% of the market, and their trading patterns have changed very little over time.

43 Findings – Minneapolis Wheat Non-Commercials often are the most active early on and then slowly take a smaller presence over time, but their presence is generally very consistent from about 150 days out until expiration. This group generally never makes up more than 20% of the market, and their pattern has changed very little, if any, over the observed time periods. While Money Managers commonly are found in the market before this point, it is generally after around day 125 or day 150 through expiration that this trading group is most active.

44 Findings – Minneapolis Wheat Money Managers typically hold no more than 20%- 25% of the total contracts, but they exceed that level by a wide margin in some instances in the waning days of a contract period. On other occasions, Money Managers are long gone by contract expiration. There was not any observable pattern in how they behaved over the study period. Indexers were primarily non-existent in trading of Minneapolis Wheat contracts throughout the study period, although very tepid interest is noted on the December 2007 and March 2008 contracts.

45 Findings – Minneapolis Wheat Commercials are consistently above a 50% share in the example above. Money Managers were much more active towards the end of the trading period, while Non-Commercials had the strongest presence early on. Indexers are non-existent throughout the observed time period.

46 Percent of Total Aggregate Futures Positions Held by Each Trader Type

47 Percent of Total Aggregate Futures Positions Held by Each Trader Type

48 Percent of Total Aggregate Futures Positions Held by Each Trader Type

49 Percent of Total Aggregate Futures Positions Held by Each Trader Type

50 Percent of Total Aggregate Futures Positions Held by Each Trader Type A sharp drop in open interest with about 25 days to go suddenly thrust the Money Manager position to a high percentage of the total. In actuality, the Money Manager position was less than 600 contracts during the last 25 days.

51 Findings – Cotton Commercials consistently make up the largest share during a contract’s life, sometimes dwarfing the other trader groups by wide margins. Non-Commercials also have a relatively consistent share of the positions, but it is generally around 20% or lower – although that number can be considerably higher when the contract is still more than 200 days away from expiration.

52 Findings – Cotton Money Managers appear much more reluctant to hold positions in the cotton market. Indexers behave much the same way here as they do with the other commodity contracts. Indexers are either missing or hold a very small position in the market until around 75 to 100 days out. At which point their presence plateaus until around day 25 until expiration when they exit the cotton market relatively quickly.

53 Findings – Cotton Notice the steady decline in the presence of Non-Commercials. Money Managers did not hold many positions throughout the life of the contract. Indexers had only a marginal presence early in the contract life only to quickly build on their positions around day 75 and then exit around day 25.

54 Percent of Total Aggregate Futures Positions Held by Each Trader Type

55 Percent of Total Aggregate Futures Positions Held by Each Trader Type

56 Percent of Total Aggregate Futures Positions Held by Each Trader Type

57 Percent of Total Aggregate Futures Positions Held by Each Trader Type

58 Percent of Total Aggregate Futures Positions Held by Each Trader Type

59 Findings – Natural Gas For Natural Gas contracts, Commercials hold a steady presence in the market that usually varies between 20% and 50%, and their share typically dwindles over the life of the contract as other trading groups take a larger stake in the market. Commercials commonly hold the largest presence in the market, but Money Managers often exceed their level of participation. Non-Commercials’ presence in this market is generally consistent and predictable over time.

60 Findings – Natural Gas The Non-Commercial trading group typically holds between 5-15% but sometimes exhibit a pattern of increased activity towards the end of a contract; however, overall there appears to be little change in their behavior over the study period. Money Managers often hold the largest share in the market, getting in early in the trading period and holding a sizeable share until the approach of expiration. A case could be made that Money Managers have at least slightly increased their level of participation over time when you compare more recent contracts with those in 2005 and 2006.

61 Findings – Natural Gas Money Managers generally held a strong presence in the Natural Gas market. Indexers typically have a consistent and stable presence in the market, generally below 20%, throughout the trading period until a “bubble” of activity around 25 to 50 days out from expiration. Like with Money Managers, the presence of Indexers in each contract has increased over the study period, although it appears to be by a rather slim margin.

62 Findings – Natural Gas Notice in the example above that Money Managers hold the largest share of positions for almost all of the contract period. Non-Commercials hold a very consistent share of the market, generally around 10%. Indexers display a more consistent pattern throughout with a peak presence with about 100 days left.

63 Percent of Total Aggregate Futures Positions Held by Each Trader Type

64 Percent of Total Aggregate Futures Positions Held by Each Trader Type

65 Percent of Total Aggregate Futures Positions Held by Each Trader Type

66 Percent of Total Aggregate Futures Positions Held by Each Trader Type

67 Percent of Total Aggregate Futures Positions Held by Each Trader Type

68 Percent of Total Aggregate Futures Positions Held by Each Trader Type

69 Percent of Total Aggregate Futures Positions Held by Each Trader Type

70 Percent of Total Aggregate Futures Positions Held by Each Trader Type

71 Percent of Total Aggregate Futures Positions Held by Each Trader Type

72 Percent of Total Aggregate Futures Positions Held by Each Trader Type

73 Percent of Total Aggregate Futures Positions Held by Each Trader Type

74 Findings – Crude Oil The relative presence of each major trading group in the crude oil market is generally consistent over the life of the contract. Commercial traders typically make up the largest share, although it’s fairly common to see the other groups approach or exceed their level of participation. Non-Commercials consistently make up between 10% and 20% of the market presence in crude oil but occasionally have increased activity from around 100 days to around 50 days out where they make up 30% or more of the market.

75 Findings – Crude Oil Money Managers also consistently hover around 10-20% in the crude oil market; however, their presence often increases with around 25 days left before exiting just prior to expiration. The presence of Indexers is generally consistent throughout the contract with peak activity coming around 25 days to expiration. The charts do indicate Indexers have at least modestly increased their stake in this market over time, with this group’s presence in earlier contracts generally ranging between 15% and 30% but more recent contracts showing a consistent presence between 20% and 40%.

76 Findings – Crude Oil In the example above, we see a fairly consistent pattern from all trading groups throughout the trading period observed. This was primarily true for all crude oil contracts from 2005 through mid-2008.

77 Percent of Total Aggregate Futures Positions Held by Each Trader Type

78 Percent of Total Aggregate Futures Positions Held by Each Trader Type

79 Percent of Total Aggregate Futures Positions Held by Each Trader Type

80 Percent of Total Aggregate Futures Positions Held by Each Trader Type

81 Percent of Total Aggregate Futures Positions Held by Each Trader Type

82 Percent of Total Aggregate Futures Positions Held by Each Trader Type

83 Percent of Total Aggregate Futures Positions Held by Each Trader Type

84 Percent of Total Aggregate Futures Positions Held by Each Trader Type

85 Percent of Total Aggregate Futures Positions Held by Each Trader Type

86 Percent of Total Aggregate Futures Positions Held by Each Trader Type

87 Percent of Total Aggregate Futures Positions Held by Each Trader Type

88 Summary In general, appreciable changes or identifiable trends in the participation levels of the major trading groups were not obvious. As would be expected, Commercials generally hold the biggest market presence among trading groups across all commodities over time. Another consistent theme is that Commercials almost without fail have a presence in the market throughout the life of the contract. Indexers and Money Managers are more erratic in their participation.

89 Summary As a trading group, Money Managers were much more likely to be completely out of the market for short or even extended periods during a contract’s life. There didn’t appear to be any trends or notable changes in the presence of Money Managers in these commodity markets over the 3-½ year study period. Indexer’s market presence was observed to change much more rapidly than the other trader groups during a contact’s life.

90 Summary Indexers were generally a very passive trading group throughout the early portion of the last 250 days of trading and would not hold a very large share of the market. Indexers would consistently have their strongest share of total market positions from around 75 days to about 25 days until contract expiration. Their entry into the market or building of positions, as well as their exit from it and declining share of the market would often happen very rapidly.

91 Summary Occasionally however, Indexers would exhibit a relatively stable or consistent market presence over time for a particular contract. For most commodities, significant changes in overall participation levels over time were rare. However, the presence of Money Managers and Indexers in the Natural Gas contacts and the presence of Indexers in Crude Oil did appear to increase slightly over the study period.