Commodity Trading Adviser refers to either a firm or alternatively an individual that delivers personalized advice on the purchasing and selling of futures contracts, foreign exchange contracts, or options on futures. For individuals to be commodity trading advisers, they will have to have a CTA registration which is required by the NFA National Futures Association regulatory organization with oversight on the futures industry. The NFA proves to be the self-regulating organization of the commodities trading industry.
These CTAs work and receive their compensation based on commissions in exchange for their advice on the prospects and value of futures trading on options on futures, futures contracts, swaps, and off exchange retail Forex contracts.
Such Commodity Trading Advisers function much as do their stock market counterparts the financial advisors. The difference of course pertains to the delivering advice relevant to commodities trading, hence the CTA designation. Getting this CTA registration means that the applicant must pass proficiency exams such as the Series 3 National Commodity Futures Exam. There are other proofs of proficiency besides this particular exam as well.
One of these is registration with the National Futures Association. The CTA designation would not be required in cases where the adviser is providing advice to no more than 15 individuals in the last 12 months. Of course the individual or company would not be able to herald itself in front of the public as a CTA if they were not actually registered as such.
Such firms and individuals might be involved in many different industries or professions covered by the CEA Commodity Exchange Act or be otherwise registered. So long as this given advice on commodities investing proves to be only incidental to the main business of the firm or professional, then it is generally alright. This also applies if the advice they are dispensing does not require knowledge or is not specifically targeted to the commodity account of the customer in question.
As far as requirements go, the Commodity Trading Adviser designation will always be required for the principals involved in the commodity trading company along with all employees who receive the order from or provide the advice to the clients. This CTA will need to be registered in order to provide advice on all types of commodity investments. This includes everything from futures contracts, to options on futures, to swaps, to forwards, to Forex off-exchange contracts.
Such investments made in commodities typically require that a high degree of leverage be deployed. This argues for a greater level of expertise in order to safely trade such instruments and simultaneously avoid the possibility of taking major losses. It was in the late 1970s when the regulations surrounding commodity trading advisors began to arise as retail investors suddenly gained access to commodity market investing. It was then that the CFTC Commodity Futures Trading Commission began to expand its powers as well as the regulations it maintained surrounding being CTA registered little by little.
CTA funds should not be confused with simple CTA registration. These funds are usually hedge funds which employ futures contracts in order to attain their investing objectives. These CTA funds utilize a range of different trading strategies in order to attain said objectives. These might include such things as trend following and systematic trading. The best fund managers will actively manage the investments relying on a raft of strategies including fundamental and technical analyses, discretionary strategies, and trend following plus systematic trading together.