Who Trades Futures and How: Evidence from the Heating Oil Futures Market

Abstract

We document the trading activities over the period from June 1993 through March 1997 of the 223 largest traders of heating oil futures - traders who together account for 58% of the open interest in this market. Dividing these traders into eleven different groupings: refiners, marketers/distributors, commercial banks, investment banks, end users, energy traders, other energy firms, commodity pools, commodity trading advisors, floor brokers, and other non-commercial traders, we explore how their trading activities differ and compare. While past studies have documented the trading of a single trader, a single type of trader, or traders in general, this is the first dis-aggregated study of all large traders in any derivatives market. We find substantial and significant differences between the eleven trader types in: their propensity to take long or short positions, whether they hold outright (naked) or spread positions, the term-to-maturity of the contracts they hold, how long they hold a position, and the size of their positions. We also find that both trading volume and open interest positions are dominated by potential hedgers, rather than speculators, where potential hedgers are defined as traders with substantial positions in the cash and/or forward heating oil market. Finally, we find that it is not appropriate to treat traders which the CFTC identifies as commercials as hedgers as is common practice in the finance literature.