Online Self-Directed Traders, and Full-Service Traders alike, will benefit from the Proper Broker/Client Relationship

Most traders in search of a futures broker are concerned primarily with trading platforms, commissions, and the quality of the information provided, such as newsletters. However, it is prudent to take your research a few steps further. Regardless of whether you intend to trade in a self-directed capacity via an online trading platform or work with a full-service commodity broker, it is crucial that you choose an appropriate brokerage arrangement.

Not only do you need to find a firm that is capable of meeting your logistic needs, but it is crucial that you choose an individual commodity broker with which you can properly communicate, are comfortable with their experience, and, most of all, trust to help you on your journey to being a successful trader. Further, even online traders have a “broker”; although you might never or rarely speak to your broker, he is earning commission every time you trade. Thus, you must make sure your point of contact (broker) is capable of alleviating any problems or questions you might have in a timely manner. Time is money!

A common mistake made by beginning traders is to choose the futures broker that offers the lowest commission. Obviously, we all like to save money; but sometimes the cheapest commission rate isn’t the best value. Simply put, traders often trip over dollars chasing pennies when it comes to transaction costs.

Understand Your Commodity Broker

Despite the impression that you may have gotten from watching the movie “Trading Places”, or reading industry publications, being a broker has few perks…unless you are good at what you do. The industry is commission-based, consequently, it is potentially lucrative for those who are willing to put forth the effort.

When it comes to being a successful broker, the effort is synonymous with an open mind and a constant yearning for information, a commitment to providing unparalleled service, and networking with industry insiders (trade desks, FCMs, platform vendors, system developers, etc.) to ensure efficient execution and market access for their clients. The hours are long, but it is easy to see how one could fall in love with the excitement of it all.

For those commodity brokers who fail to put forth the effort necessary to make a decent living, the pay is hardly worth the time. In fact, there is a high probability that a fast food chain, or even unemployment benefits, would pay more. In my experience, I estimate that about 80% of the brokers in the commodity industry fall into this category. The other 20% make a respectable living, hopefully through providing their clients with the service that they deserve at a reasonable price.

A big concern facing the futures industry is the fact that commodity brokers are provided incentives in the form of commissions. Brokers who are short-sighted, sometimes fail to employ a long-term business plan and are tempted to churn or overtrade accounts. Perhaps even worse, deep discount brokers servicing self-directed traders often offer highly discounted day-trading margin rates in an effort to encourage the client himself to churn their accounts. In other words, some futures and options brokers lacking integrity might encourage clients to trade in unnecessary quantities an attempt to increase their commission check. Obviously, such commodity brokers aren’t acting in the best interest of their clients. Accordingly, it is imperative that futures traders properly educate themselves in order to avoid being in a precarious situation.

Ironically, it seems that many brokers who approach their clients aggressively to generate commission fall into the 80% of brokers who struggle to survive. There are a few steps that you can take to evaluate whether your broker fits your needs as a trader and is qualified to earn your business.

The NFA Website (www.nfa.futures.org)

Once you have determined your candidate for a commodity brokerage firm, you should visit www.NFA.Futures.org (National Futures Association) to access their BASIC (Background Affiliation Status Information Center) database. The database contains CFTC (Commodity Futures Trading Commission) registration and NFA membership information. The site will give you the ability to submit a query on your prospective individual broker. The information provided will include the length of your broker’s registration and a list of regulatory actions, NFA arbitration awards, and CFTC reparation cases in which the broker has been involved. Keep in mind that a CFTC reparations claim doesn’t infer guilt; many of the claims may have been settled, dismissed, or withdrawn. However, you may want to confront your prospective broker in the matter. You may also find information on any NFA arbitrations, which is a dispute resolution rather than a regulatory action, and any regulatory actions. I am sure that you would agree that knowing whether your broker may have been party to questionable practices in the past can be important.

While you are there, you can also look up the brokerage firm itself. However, I must warn you; you probably won’t like what you see. Many brokerage firms have a long list of regulatory actions and dispute resolutions. Nevertheless, this doesn’t always mean you shouldn’t do business with them. It is common for larger brokerage firms to get grief from regulators for small and often inconsequential offenses. This is typically just part of doing business. Even the most careful of firms will have an employee slip up from time to time.

With that said, if you choose a smaller brokerage firm and they have a long list of offenses listed in the NFA’s BASIC database, it is probably a good idea to continue your search rather than settle.

Get to Know your Futures Broker

You probably wouldn’t choose a business partner before establishing the potential for efficient communication, have confidence in their ability to bring something to the table, and, most of all, trust. Why would you think of choosing a futures and options broker without doing these things?

Once again, this applies to self-directed online traders as much or more than it does full-service traders. Even online traders will find themselves in a pickle from time to time in which the service of a broker is necessary to avoid disaster (think flash crash, the Lehman Brothers collapse, or the Thanksgiving Day crude oil breakdown). 

Becoming familiar with your broker before you even begin trading is a significant step in the right direction. The vital areas of concern are their educational background, experience in the industry and general market knowledge. Though the most concerning should be their familiarity with the inner workings of the industry; it is this familiarity that will come in handy when you need a specific task accomplished in a timely manner.

A college degree in finance isn’t necessarily a reason to open an account with someone; neither is the fact that he or she has been in the business for twenty years. However, considering these factors in conjunction with a well-rounded grasp of market characteristics and proper lines of communication is key. You should be able to determine whether a broker fits your needs and personality with a twenty to thirty-minute conversation or a handful of emails. Don’t be shy. If they want to do business with you, they must be able to answer your questions, assuming they are reasonable. In addition, they should be willing to answer your emails in a timely fashion. If you find yourself waiting long periods of time for an emailed response, keep looking for another broker.

Work Ethic

In order for you to be a successful trader, you must have access to your commodity broker. If he is hard to reach or slow to return your calls and emails, you should strongly consider shopping around for another broker. Many brokers feel that once the markets close, they are off duty and free to leave the office; however, doing so isn't making themselves available for their clients. Those paying full-service rates deserve better, but even online traders should demand similar services.

Work Experience

This may seem like none of your business, but that is where you are wrong. Think about it, if you were interviewing someone for a position as a convenience store clerk, one of the first things you would require is a list of prior employers. When you open an account with a broker, you are, in essence, hiring them to provide you with service, knowledge, and honesty. Arguably, this position requires more experience than a cashier, and the interrogation should be at least as extensive. In my opinion, it is absolutely necessary to know what type of skill the broker can offer you, and this includes knowing their employment history.

Naturally, you wouldn’t want to be irrational in your quest for information; a general idea will be enough for you to properly evaluate the service you will be paying for. Remember, the only requirement to being a commodity broker is passing the series 3 exam. In other words, although the proficiency exam is challenging, the bar isn’t set incredibly high. I am not trying to paint a negative picture for you, but I also want you to keep your eyes open to the realities and encourage you to know who you are dealing with.

Discount futures brokerage firms are known for posting employment ads on Craig’s List seeking brokers to hire. As you can imagine, the employment pool on Craigslist isn’t always highly skilled. Further, many of the ads are seeking experienced salesmen, with little regard for the applicant’s ability to properly service commodity traders.

Trading Background

Don’t be afraid to ask a prospective broker how long she has been involved in trading. Her experience in the markets may pre-date her days as a commodity broker. Also, ask whether she trades a proprietary account or for friends and family. If the answer is no, you shouldn’t be immediately turned off. In fact, trading a personal account is seen as a conflict in the industry. As a result, brokers often have to “take a back seat” in their trading. For example, preferable fill allocation always goes to the client, while the broker receives the least favorable fill on a block ticket. While I agree with the concept, it leaves a broker slightly behind the curve. Additionally, I think that you will agree that you would rather have a broker that puts you and your account before hers. If a futures broker is concerned with the trades in her own trading account, she might not be giving you the service you merit.

Furthermore, though the most basic function of a broker is to execute your trades or provide you with a favorable online trading platform, if you plan on using your broker for trading guidance, you likely wouldn’t want to do so from somebody that has never traded or had real money on the line.

Trade Support

The most valuable service your futures broker will provide to you is trading support. This will mean different things to different traders; nonetheless, it is the job of your broker to ensure you have everything you need for smooth navigation of the markets.

For online futures traders, this equates to the following items:

• Quality futures and options platform choices
• Guidance in choosing an effective FCM (Futures Commission Merchant) for your needs
• Around-the-clock technical and customer support
• Quick response time to potential disasters (platform outage, technical issue, etc.)
• Margin call management
• Access to all available futures and options markets (many discount brokers limit the products their clients can trade)
• Market research and trading guidance
• Competitive commission rates (not the lowest, but the best value)
• Ongoing market and trading education resources

For full-service commodity traders, this equates to the following items:

• Fast and efficient order placement
• An experienced broker to bounce trading ideas off
• Quality strategy advice and in-depth market knowledge
• Distribution of commodity trading research, commentary, and trading recommendations
• Experience in managing margin, and margin calls
• Experience in avoiding futures delivery notices and rolling over contracts
• Quick and quality phone, email, and text message responses to questions and concerns
• Futures quotes and charting access
• Competitive commission rates (not the lowest, but the best value)
• Ongoing market and trading education resources

In Conclusion

Unfortunately, the potentially rewarding nature of the futures markets attracts attention from individuals with a “get rich quick” mentality. This is true of brokers, traders, system vendors, trading platform developers, etc. Given the ease of becoming a commodity broker and the false assumption that being a broker can be lucrative with minimal effort, many are drawn to the profession for the wrong reasons. Accordingly, many commodity brokerage careers are cut short by the realities of the business. Make sure that your broker is in it for the long haul before investing too much time into the relationship.