People who desire to become futures traders should realize that the broker is an important component of the business. Brokers can be classified as discount brokers and full service brokers, floor brokers and introducing brokers, and electronic and on-line brokers. A discount broker processes the transaction but does give any advice on strategy. A full service broker is more expensive but offers advice on how to avoid bad transactions. An introducing broker does not accept a commission from the customers but is paid by a larger broker. A floor broker is similar to the discount broker.
One of the most important links in the trading chain is the broker. Even as the global markets begin to tilt toward electronic trading and direct access becomes easier and cheaper, a good broker is essential to making your business successful. Knowing the difference between the types of brokers is important in helping you choose the best for your trading. There are several different broker distinctions: discount brokers and full service brokers, floor brokers and introducing brokers. There also has been a proliferation of electronic and on-line brokers over the past several years. (See “Making the electronic leap” on page 34).
Discount and full-service brokers Commonly, the question for traders is whether to pick a discount or full-service broker. The difference is no longer black-and-white. Typically, a discount broker simply executes the trade and does not offer any advice on trading strategy. A full-service broker, however, suggests trades, provides analysis and advises traders when to take or pass on a trade. A full-service broker can cost significantly more, but an experienced broker will warn against poor trades. Some discount brokerages warn, however, that full-service brokers sometimes try to push customers into their firm’s recommended trade.
But well-established discount brokers also offer customers a variety of services. Lind-Waldock, for example, is the largest futures discount broker. And like many other large firms, it offers a number of different brokerage services. The company says its “self-directed” futures accounts offer commissions “up to 80% lower than full-price accounts at other firms.”
But the company also sells a higher-priced full-service package that includes a broker who offers strategies, research and analysis, contingency orders and different trading tools. It costs more than the straight discount service but less than competing full-service brokers. Lind customers also can choose commodity trading advisor (CTA) services as well, which allows a trading professional to manage your money. Lind is not alone. Many brokers, whether they have a full-service or discount brokerage label, offer both services. ED&F Man, for example, not only offers full-service brokerage, but also operates discount broker Jack Carl.
Discount and full-service brokers pump out no shortage of information. Most provide charting software, extra data and market analysis, and some offer educational products and courses.
The key to choosing either is knowing what you want before you shop for a broker. If you have decided to make your own decisions, then obviously you want a discount broker who simply gives you the best service at a low price. If you value professional advice, you may want to opt for the full-service broker. But there are a few steps to keep in mind when choosing. First, ask about their background and knowledge of the market. For some industry experts, age and experience are the two most critical factors.
Some traders say they like to use brokers who have been in the business for five or more years. That not only should ensure good market knowledge but prove they have seen some volatile markets. And in a fast moving market, a calm full-service broker can help traders avoid pitfalls.
Beyond experience, you also want to know the breadth of a broker’s expertise. Is he or she as knowledgeable about grains as stock index futures? A full-service broker who knows the tendencies, nuances about volume, open interest, volatility and history can be helpful. It also helps to have the same trading style as your full-service broker. For example, you may want to ask whether he or she typically is a long or short-term trader, technical or fundamental, spread or straight speculator. Such knowledge will make trader and broker a stronger trading team.Another tip is to call the National Futures Association (NFA: 800-572-9400) to see if there is any pending litigation against the broker. And don’t be afraid to ask a broker for a financial statement. The financial stability of a broker is what guarantees a trader’s account.
Also consider all the services offered by either a discount or full-service broker. For example, are brokers available 24-hours a day to place orders? Many of the major discount brokers are offering such services as exchanges move toward [TABULAR DATA OMITTED] electronic trading, and some believe after-hours trading will pick up even more volume. Also check where the broker executes business. Large firms typically are clearing members on several international exchanges. This can aid traders who plan to trade multiple markets.
In addition, as you grow and possibly use more than one firm to broker trades, you’ll want to set up “give-up” trade agreements, which basically send all your trades back to your main clearing broker. The other brokers receive a give-up fee.
There are dozens of considerations, but perhaps the most important is the level of personal service you receive. Attentive and sharp brokers should be able to provide good order fills, especially in difficult markets. Perhaps the best advice came from Pierre Chaker, a CTA in Paris (see “Line To The Stars: What CTAs Need To Know About Brokers,” Futures, July 1995). “Many traders and CPOs look for the cheapest broker,” he said. “But the most important thing is to trust your broker. It’s more important than price. It’s more important than anything. You want the person who cares about your order.”
Introducing brokers An introducing broker (IB) is an individual or organization that solicits or takes futures trading orders but does not accept any direct money from the customers. They are paid through the larger broker, either by cutting a deal through brokerage commissions or a negotiated per-client account fee, etc. IBs must register with the Commodity Futures Trading Commission and carry all accounts through a futures commission merchant (FCM) on a fully disclosed basis.
In other words, they are the salesmen of the industry. Like the FCM community, IBs have seen a fair amount of consolidation – over the past few years. Many IB’s are small outfits with about half employing five or fewer people. IBs sell a variety of services to customers, including managed futures or directing clients to various brokers. As of last fall, the NFA registered 976 guaranteed IBs and 400 independent outfits.
Floor broker This is a relatively straight forward designation. A floor broker is similar to a discount broker in that he executes trades for the purchase or sale of any commodity futures or options contract for someone else. In other words, if you call your broker on the floor, he’ll execute the trade in the pit for you. This is not to be confused with a floor trader, who simply trades for his own account. Most floor brokers work for larger firms to process customer orders. If the broker is at an office off the floor, the order will be routed to a desk at the exchange and then sent onto the pit to be filled by a floor broker. In either case, the floor broker is simply filling your order.