Choosing a futures broker is one of the most important decisions you will make for your commodity futures and options trading account. Whether you are an online trader, broker-assisted, using automated systems, newsletters, or in managed futures, you want a brokerage firm that can best service your trading needs while providing great value for your trading dollar.
There are two types of business models in the futures brokerage business. The first is the “Transactional Futures Broker’. The transactional model usually has a one-size-fits-all approach. Traders can sign up with the transactional broker and what you see is what you get. This typically includes access to the exchanges, base-level support, and clearing services.
“Relationship-Based Futures Brokers’ are heavily invested in giving their traders the best chance of success possible. These futures brokers will service trading accounts based on what the clients need for their trading. Some traders will need more support, tools, and resources than others. The relationship-based futures broker will work with their clients in whatever capacity they require.
Everyone wants the best deal they can get. It is important to realize you get what you pay for. When it comes to commission rates, make sure you have a clear understanding of the services and level of support that come with those rates, regardless if you are a self-directed online trader or broker-assisted trader.
The futures markets are 24-hour markets, which means you need 24-hour support. The more layers of support the better. Having access to a dedicated future broker, the trading desk, and the overnight desk for after-hours trading is a sign of superior futures trading support.
Even if you are a self-directed online trader, you’ll likely want to be able to talk to a futures broker when a high-stakes situation arises. Let’s say you are caught on the wrong side of a limit-up or limit-down move. Chances are the support team will be unable to help you. However, if you have an experience futures broker associated with your account, he can most likely get you out of the positions synthetically by the close when everyone else is locked out of the market. That is no small feat when thousands of dollars are on the line. This is one example, out of a very long list, of how a dedicated futures broker can help you when you need it most. For online traders, it is one of the most valuable lifelines you hope to never need.
If you are an online trader, you want superior technology, quotes and charts, and direct market access. Stability, reliability and speed are all important. Look for a futures broker who offers multiple platforms and ask them which platform is best based on your trading style and objectives. They will tell you point blank. If you are looking at a brokerage firm with only one trading platform, keep in mind that they have no choice but to tell you their product is the best option for you, regardless of your needs.
If you are a broker-assisted trader, you will have to have access to quotes and charts, online account access, and a read only version of the firms trading platform. While you many never use some of these resources, they are great to have if you need then down the road.
Whether you are a technical or fundamental trader, research and reports are an important part of your trading. Make sure your broker has fundamental and technical research, as well as news reports and a calendar for major report releases. Day traders don’t want to be in an Emini S&P 500 or 30 Yr Bond trade right as the US Fed meeting numbers come out. Good brokerage firms will provide this valuable information.
Different clearing firms specialize in different aspects of the commodity futures markets. It is important to match your futures trading needs with the core competencies of the clearing firm. Some FCMs specialize in online flat priced futures trading while other focus on offering their clients access to all markets and futures, options and spread strategies. No clearing firm does all aspects of the futures and options trading industry great across the board. Some excel in flat priced futures trading only, others have natural advantages on the floor with client option fills or the ability to get orders done in either great size or illiquid markets.
The only real way to find out which is best for your trading style is to use a futures broker who has multiple clearing relationships. Your broker will be able to tell you the pros and cons for each clearing firm – their trading technology, access to the pits, execution, customer service and many other important factors.
All brokers and clearing firms have to follow the overnight margin requirements set by the exchange. If you are a swing or a position trader, the overnight margin should be the same no matter which futures broker or clearing firm you choose.
The differences arise when we start talking about day trading margins. Some brokers do not offer any discount on day margins. This is usually because they don’t have the risk management infrastructure to handle the proper monitoring of day traders. If a firm can not properly monitor day traders, they run the risk of incurring debts. That is something clearing firms and brokers do not want to deal with.
Many firms will offer a 50% discount for day trading. If the trader is responsible and does not constantly incur margin calls for holding day trades after the close, the firm will let them trade with 50% day margin.
Any trades are educational examples only. They do not include commissions and fees.
Some brokers will offer special rates for the Emini S&P, like $500 day margins. The leverage $500 day margins are a double-edged sword. Leverage can turn a little money into a lot of money, and it can also wipe away your account in a heartbeat. Good futures brokers allow their clients to have access to $500 margins, but if the trader abuses the privilege or is reckless with the margin rules, the clearing firm can raise the day margin. Purely transactional firms just let their client trade regardless of how reckless they are being, until they become a risk to the firms.
When it comes to margin and leverage, the more leverage you use, the greater the risk of ruin. As we go from 50% reductions for day margin to 90% reductions, the risk of ruin probabilities grows exponentially. This is one of the main reasons why the CFTC has forced FOREX companies to reduce the amount of leverage their traders can use. Some firms offered leverage of 100:1, 200:1, and even 400:1. Studies have shown that these levels of leverage greatly increase the probability of traders blowing out their accounts. The CFTC now wants the max leverage to be 10:1, which I much closer to what the overnight margins are for the futures markets.
When choosing a futures broker, don’t just look for the lowest margins and highest leverage available. Ask your broker how they manage risk, how they monitor leverage, and what is the maximum leverage you should be using. Some futures brokers can set the risk controls on your account to make sure you don’t enter positions when you have reached a maximum leverage level.
Some futures brokerage firms only offer one kind of execution service. Others offer all most or all executions services. These execution services include self-directed online trading, broker-assisted execution, options execution, third-party trading advice or newsletter execution, automated system/strategy execution, and managed futures.
Once you have reviewed the previous nine items to consider when choosing a futures broker, you need to find out what the costs are for having those services and determine the value you are receiving. All traders are different and will have different needs. Don’t expect the industry's low-cost provider to offer much value. That doesn’t mean you need to pay top dollar for the best services either. The most important thing is to find the best fit for your trading account for the money.