Commodity Trading Advisor (CTA)

What Is a Commodity Trading Advisor (CTA)?

A commodity trading advisor (CTA) is an individual or firm that provides individualized advice regarding the buying and selling of futures contracts, options on futures, or certain foreign exchange contracts. Commodity trading advisors require a commodity trading advisor (CTA) registration as mandated by the National Futures Association, the self-regulatory organization for the industry.

Understanding a Commodity Trading Advisor (CTA)

In 1922, the Grains Futures Act was passed, regulating futures trading. It was later replaced by the Commodity Exchange Act of 1936, which further regulated commodities and futures trading and required certain trading to be done on exchanges. Under the Commodity Exchange Act, the Commodity Futures Trading Act of 1974 was born, marking the first time the term "commodity trading advisor (CTA)" was officially used.

A CTA acts much like a financial advisor, except that the CTA designation is specific to providing advice related to commodities trading. Obtaining the CTA registration requires the applicant to pass certain proficiency requirements, most commonly the Series 3 National Commodity Futures Exam, although alternative paths may be used as proof of proficiency.

Alternative Paths

Registration as a CTA is required by the National Futures Association for individuals or firms who provide advice on commodities trading unless one of the following criteria are met for exemption:

Requirements

Generally, CTA registration is required for both principals of a firm, as well as all employees dealing with taking orders from or giving advice to the public. CTAs are required to provide advice regarding all forms of commodity investments, including futures contracts, forwards, options, and swaps.

CTA Fund

Generally, a CTA fund is a hedge fund that uses futures contracts to achieve its investment objective. CTA funds use a variety of trading strategies to meet their investment objectives, including systematic trading and trend following. However, good fund managers actively manage investments, using discretionary strategies, such as fundamental analysis, in conjunction with the systematic trading and trend following.