| Choosing a brokerage firm and an
individual broker is an important component of any grain futures trading program. Though
commissions are an important factor to consider in choosing a broker, we at GRAINGUIDE do
not believe that it is the most important, especially for those fairly new to futures
trading and or hedging.
In choosing a brokerage firm,
several factors should be considered: Disciplinary Record, Clearing Arrangement, Length of
Time in Business, Services, and Commissions.
Disciplinary Record:The
brokerage firm you do business with should be of the highest moral integrity. Ask any
broker if his/her firm is of the highest moral integrity, and he/she will probably respond
with an affirmative statement. However, sometimes this isn't always the case. By
"moral integrity" we mean, they have resolved their customers problems in a fair
and equitable way. Making sure that the firm you are considering has a history of
resolving customer complaints with "moral integrity" can make all difference in
trading profits and losses, as one mistake on your brokers part can cost the speculator
several months (or years) worth of profits.
We strongly recommend before choosing a brokerage
firm, that one check with the National Futures Association (NFA) at www.NFA.FUTURES.org.
The NFA keeps a complete disciplinary record on registered individuals, brokerage firms,
Commodity Trading Advisors, and Clearing Firms. Having no NFA record is similar to having
to police record, though the firm you choose to do business with must be registered (if
you can not find them in the NFA database, do not do business with them without calling
them to get their NFA Identification number, and confirming for yourself that they are
registered).
Clearing Arrangements:There are three major types of brokerage firms out there: Futures
Commission Merchant, Guaranteed Introducing Brokers, and Independent Introducing Brokers:
Futures Commission Merchants: An individual or organization which
solicits or accepts orders to buy or sell futures or options contracts and accepts money
or other assets from customers in connection with such orders. Must be registered with the
Commodity Futures Trading Commission. FCM's can solicit business directly, but most act as
exchange liaisons for Introducing Brokers (IB).
Independent Introducing Broker: An introducing broker that is
subject to minimum capital and financial reporting requirements. This type of IB may
introduce accounts to any FCM. Independent IB's may be "mom and pop" shops, and
have no backing beyond their capitalization.
Guaranteed Introducing Broker: An introducing broker whose
operations are guaranteed by an FCM. This type of IB has no minimum capital or financial
reporting requirements. All of the accounts of a guaranteed introducing broker must be
carried by the guaranteeing FCM. By being guaranteed, the IB has all of its accounts
backed by the FCM, so your account is backed by the capitalization of the FCM, not your
IB.
When choosing a brokerage firm, our preference is for the
Guaranteed Introducing Broker, first and foremost. This is because the money in your
trading account is backed not only by the Guaranteed Introducing Broker, but also by the
FCM. Make sure that the brokerage firm you are doing business with is adequately
capitalized, by checking to see that that they are either a Guaranteed Introducing
Broker or an FCM. When checking the disciplinary track record of an Guaranteed
Introducing Brokerage, weigh the disciplinary record of the Guaranteed Introducing
Brokerage on its own merits, separate from the FCM, as FCM's rarely have clean
disciplinary records as they usually have problems with other professionals, which are
addressed in arbitration, and hence a record is kept.
Length of Time in Business: Your brokerage firm should be in business at least 5 years. Most firms,
brokerage included, go out of business in the first 5 years of operation. Since you are
planing on doing business with them for an extended period of time, make sure they have a
track record by being in business at least 5 years. Also, by doing business in the same
name for 5 years, one can examine their disciplinary record, checking to see that they
deal with customer complaints with "moral integrity".
Also, by 5 years in the "business", your brokerage firm
should have enough experience to deal with the day to day problems associated with
trading.
Services:Once you
have assured you are considering doing business with a registered firm (preferably a
Guaranteed Introducing Brokerage or Futures Clearing Merchant), that has been in business
at least 5 years, and has a clean NFA disciplinary record, then you should start looking
at the firms services.
Contact Medians: The very first a brokerage firm
should have is an 800 (or 888) toll free phone number for calling their brokers. You
should not have to pay for the phone call to contact your broker. Second, your broker
should have a web page, which is more than just a place to get account information. It
should have quotes, charts, and research on it.
Research: All brokerage firms should have an
in-house analyst (self serving, as I was an analyst and now sell research to brokerage
firms). The in-house analyst(s) should be available to the customers, so that the customer
can have access to an unbiased opinion of the market (by unbiased, I mean someone who does
not get paid directly by your commissions). The research department should produce nightly
reports, recapping the trading days events and news. The purpose of a firms research is to
produce commissions (sad but true, just like the purpose of GRAINGUIDE is to produce
subscribers), but trading recommendations should always have the following criteria: Entry
Technique, Profit Objective, Stop Loss, and follow-up procedures. Good research and
trading recommendations should be to be followed, not just we are bullish or bearish.
Besides news, and recommendations, the firms research department should be knowledgeable
about classic technical trading techniques (1-2-3's, Head and Shoulders, Triangles, etc)
as well as have a firm grasp on the seasonal nature of the commodities markets.
Question and Answer Forums: With the popularity of
Ken Roberts, Larry Williams, and other courses in the futures industry, a few service
oriented firms have begun to encourage practice trading, or "Paper Trading".
This innovation should be applauded, but also viewed with some hesitancy. Most Commodity
trading customers are not long term customers, so brokers and brokerage firms have to
constantly get new clients. With this in mind, they encourage "paper trading"
not only because it makes for a more prepared client (hopefully longer lasting) but also
gives a nice forum for the broker to sell his/her service. However, this is very time
consuming for the broker! As such, try to look for firms that have separate "paper
trading" departments, so that the individual "paper trading" broker can
spend time with you answering your questions. When you have real brokers doing "paper
trading", it is usually relegated to a back burner, or done at the expense of moneyed
clients (which is the end result of "paper trading". Do you want to be put on
hold when you are placing an order, so your broker can answer someone else's "paper
trading" question). Though it is nice to get to know your moneyed broker when
"paper trading", the firm and your broker are doing you a disservice by having
the same broker work with "paper traders".
Other Services: Nice features I have seen over the
years are 800# quote lines with real-time quotes, Fax on Demand services, as well as free
informational guides are nice touches from your brokerage firm. A brokerage firm should
provide you with all the information you need to place a trade.
Commissions: Commissions vary from firm to firm,
and client to client. The maximum any firm should charge is $85 round turn (plus exchange
and floor fees). Commissions are typically negotiable, depending upon your opening account
balance, prior trading experience, and trading frequency.
Do not choose a firm based on commissions. You typically get what
you pay for! If you do business with a reputable firm, meeting the criteria above, and
start your trading with $5,000 (the recommending minimum to trade grain futures) you
should expect to pay commissions in the ball park of $75.00 for Full Service and $35.00
for Discount, round turn plus fee's, if you are new to futures trading.
Trader's with less than 3 years trading experience, should use a
full service broker! Full service brokers are paid to keep your errors to a minimum. If
you forget to cancel a stop loss, a reputable full service broker will cancel it for you
when you exit your position, saving you from establishing a position you did not intend to
have. I have seen many new traders go the route of discount, and due to a confusion when
placing an order, lose $2,000 or more (that’s 50 round turn commissions before the
commission discount would have paid for the mistake!). Until you have traded for more than
3 years, you should seriously consider using a full service broker.
The bottom line to commissions is that brokers and brokerages get
paid for what they provide. If you require a lot of services and use a lot of time, then
expect to pay more. If you take up very little of the brokers time, then expect to pay
less.
Choosing an Individual Broker: Once you have decided upon a firm, you should then move to deciding on an
individual broker. Individual brokers very greatly in style, so choose someone you like
talking to. Yes, you should enjoy your broker's voice and manner, as he/she will be
calling with either great news or very bad news, so you better like the messenger.
Besides being professional and polite, he/she should be able to
answer these 5 questions off of the top of their head:
- What time of year are Corn, Soybeans, and CBOT Wheat planted and
harvested?
- What country is the largest producer of Corn? Soybeans? And Wheat?
- What country is the largest importer of Corn? Soybeans? And Wheat?
- What was the last USDA estimated production for Corn, Soybeans, and
Wheat?
- How many bushels in a metric ton?
A broker who can answer these 5 questions, with out consulting his
research staff is prepared. He/she will keep track of USDA reports, and will know when
prices have historically rallied or broke. He/she can be of great assistance.
Do not look for a broker to tell you when to buy or sell. If you
want someone to manage your money, turn it over to a CPO/CTA (Commodity Pool
Operator/Commodity Trading Advisor), not your broker as he/she has a vested interest in
you trading, generating commissions, while an advisor has to make money to get paid. Your
brokers job is to handle and execute your orders, keep you informed of potential news, and
to advise you on risk management. Make sure that he/she is qualified to do this by making
sure he/she has an understanding of grain futures, there seasonal tendencies and what
factors will effect prices during specific times of the year.
Some people like brokers who trade and some don't. We do not an
opinion on this subject, as the brokers personal life and trading is not very important.
Brokers who trade do have a better understanding of risk and losses, but an actively
trading broker can also worry more about his/her trades than yours, and they can help
perpetuate your losses by instilling their bad habits in you. Think of a broker or analyst
as a coach: Does a coach have to be a great player to be an effective coach?
Conclusion: Choosing a brokerage firm and
individual broker is a very important decision. Choose wisely and you will be rewarded,
not by profits but by a lack of headaches! Follow the steps above, and though we can not
guarantee profits, we can guarantee you will have a much greater chance for profitability
than the trader who just picks a broker because the add is nice, or their futures guru
recommends one! |
