Securing the services of a competent and reputable futures broker is a critical first step in your journey into the marketplace. A broker facilitates trades, extends credit, and offers expertise ― which means it’s essential to select a good one.
Depending upon the type of trader you are, brokerage suitability will vary. Above all else, potential broker candidates need to possess these two qualities:
- Competence: Providing high-quality market access and trade-related services are integral aspects of being a competent broker.
- Reputation: Any broker worthy of your business must be bound by a strict ethical and legal framework.
Years in the industry and word of mouth are great common-sense indicators of a firm’s competency. However, when it comes to determining how reputable a futures broker is, the process is a bit more scientific. By performing a little due diligence, finding out whether your broker is on the up-and-up can be easily be accomplished in an afternoon.
The Licensing Requirements of a Futures Broker
In the U.S., futures brokers are subject to a high regulatory standard. Firms must be registered with multiple authorities, and brokers are required to be licensed. These guidelines are in place to ensure the safety of all participants and preserve the integrity of the marketplace.
At the corporate level, brokerage firms are subject to two regulatory bodies:
- Commodities Futures Trading Commission (CFTC)
- National Futures Association (NFA)
For the individual broker, operating within a firm or autonomously, the licensing process is extensive. Here are the official requirements that aspiring brokers must satisfy:
- Series 3 certification: According to the NFA, “any individual who is applying as an associated person or NFA Member must provide evidence of passing the Series 3 exam within the past two years.”
- Submission of Form 8-R: Aspiring brokers are required to complete and submit Form 8-R to the NFA. It’s a full criminal, regulatory, and financial disclosure of the individual in question.
- FBI background check: When Form 8-R being completed, the applicant is fingerprinted. Both prints and the form are then sent to the FBI for a full background check.
If your chosen firm is in good standing with the CFTC/NFA, and your personal broker is licensed, you can bet that your funds are in good hands.
Checking up on Your Broker
A common question among those new to the markets is as follows: “how do I find out if my futures broker is licensed and in good standing?” In practice, coming up with an answer isn’t all too difficult. There are tools available online that can bring the reputability of futures brokers into focus relatively quickly.
One way to research the background of any futures broker is to reference online databases offered by the Financial Industry Regulatory Authority (FINRA) and NFA. Using these tools, you should be able to find out the legal status of your broker in under an hour:
- NFA BASIC Search Platform
- FINRA Broker Check
- FINRA Arbitration Awards Online
- FINRA Disciplinary Actions Online
While they’re certainly a good place to start, these tools are not the be-all and end-all to establishing a broker’s reputability. Information can change very quickly in regards to pending judgments and disciplinary actions. It’s important to stay up-to-date in this area and research any news items, both current and in the recent past, involving the broker in question.
Finding a Good Broker Is a Good Place to Start
Before ever placing a market order, it’s wise to determine whether your futures broker is reputable. Outstanding judgments or expired licenses can be signs of deeper troubles. However, by taking some time to research your broker, the perils of sub-par service may be avoided.
If you’re in the market for a competent, reputable futures brokerage, give us a look. Featuring cutting-edge technology, a dedicated team, StoneX is a solid choice for your venture into the marketplace.
