Selecting a Futures broker
One of the most important decisions you will make as a futures trader has nothing to do with knowing when to buy or sell a futures contract; instead it is the futures broker that you choose to execute your trades through. Because futures trading is often more active and engaged than investing in stocks and ETFs, it is essential to select a futures broker that is right for your needs.
Understanding Futures Contracts
Buyers and sellers are brought together via exchanges such as the CME or ICE, and their trades are matched either at a physical location or via an electronic execution platform. A futures contract is a legally binding agreement between two parties to buy or sell an asset for a price agreed upon today, with delivery and payment occurring at a future point, the delivery date. Futures contracts are purchased on margin, meaning only a small portion of the total value of the contract must be deposited in the brokerage account to fund the position. When the position is closed the difference in price since purchase is settled. Because of the use of margin in this way futures are a leveraged product.
Futures contracts exist for a wide range of assets, from commodities such as grains and livestock or gold and oil, right through to stocks and currencies. In the US the main exchanges are the CME (Chicago Mercantile Exchange), NYBOT (New York Board of Trade), and CBOT (Chicago Board of Trade). The ICE (Inter Continental Exchange) handles both domestic and overseas contracts.
What Futures Brokers Do
To be able to transact futures trades on an exchange, the orders must be handled by someone with a seat on the exchange. This is where the futures broker enters the picture – it is their job to transmit your order to the exchange. Traditionally this meant that the broker had clerks on the floor of the exchange who would signal the order into the pit, but nowadays the vast bulk of futures volume is handled electronically. The broker serves as the vital connection between buyers and sellers.
For this reason it is crucial that you choose the right broker to match your trading requirements.
Two Types of Futures brokers
There are essentially two different types of futures brokers and the level of service that each provides depends on how the broker classifies themselves. Brokers may be either full service or discount. There are advantages to each type of broker model and these should be considered before you decide which type of broker to use.
Full Service Brokers
A full service broker is often a good choice for new or inexperienced traders or for those who use lots of fundamental information in their trading decisions. Full service futures brokers usually provide more information, advice and help to their customers; they often work with their clients to create personalized trading strategies. Full service fees are typically far higher because of the extra level of service and personal customer support that is being provided.
Discount Brokers
A discount broker provides a more minimal service. It is the aspects that the service entails that are fewer, however, not the standard of service that is provided. Typically, clients of a discount broker are expected to execute their trades electronically, and will make completely independent trading decisions to time the market (although the broker might provide some educational materials and resources on their website). A discount broker is normally only contacted by phone in exceptional circumstances.
Because of the more minimal service provided, discount futures brokers are able to charge far less than full service brokers. They are ideally suited to those who want to engage in self-directed trading whilst keeping costs to a minimum.
How Do You Find the Right Futures broker?
Choosing a suitable futures broker for you is as much about becoming aware of your own level of skill and knowledge, the amount of support you need, and your financial circumstances and goals. A broker that is ideal for one person may be a terrible choice for another. Once you have taken the time to determine your own needs, then you can begin to compare brokers and find a firm that matches your requirements.
Some things that you may wish to consider include:
The Broker’s Experience – If you’re considering a full service broker then if the broker you choose doesn’t have much experience then they will not be able to guide your trading decisions as effectively. You certainly don’t want your futures broker to teach themselves to trade at your expense. If you’re using a discount broker then you just need to know that the firm has enough experience to handle any issues that may arise when executions or margin requirements don’t go smoothly.
Customer Support – While a futures broker may promise world-class support in their literature, what you receive once you open an account is what matters. Try contacting a few different brokers and asking for an explanation of the difference between contango and backwardation; the level of response you get may provide a good indication of the support you will receive after you open your trading account.
Demo/Simulation Account - Most futures brokers will allow you access to a demo account to test the execution platform and other software, as well as other aspects of their service. These ‘simulated’ accounts are also a great way to practice your trading strategy without risking real money, and are essential for self-directed traders.
Choosing a Broker
As stated at the start of this post, finding a reputable broker who meets your needs and compensates for your shortcomings will put you firmly on the road to trading success. Unlike in other industries such as forex, there really aren’t a huge number of firms to choose from, and it’s fairly easy to differentiate between them.
Take the time to investigate different firms while you piece together the other elements of your trading plan, and by the time you come to open an account you’ll probably have formed a natural decision about which firm feels right for you.
One of the most important decisions you will make as a futures trader has nothing to do with knowing when to buy or sell a futures contract; instead it is the futures broker that you choose to execute your trades through. Because futures trading is often more active and engaged than investing in stocks and ETFs, it is essential to select a futures broker that is right for your needs.
Understanding Futures Contracts
Buyers and sellers are brought together via exchanges such as the CME or ICE, and their trades are matched either at a physical location or via an electronic execution platform. A futures contract is a legally binding agreement between two parties to buy or sell an asset for a price agreed upon today, with delivery and payment occurring at a future point, the delivery date. Futures contracts are purchased on margin, meaning only a small portion of the total value of the contract must be deposited in the brokerage account to fund the position. When the position is closed the difference in price since purchase is settled. Because of the use of margin in this way futures are a leveraged product.
Futures contracts exist for a wide range of assets, from commodities such as grains and livestock or gold and oil, right through to stocks and currencies. In the US the main exchanges are the CME (Chicago Mercantile Exchange), NYBOT (New York Board of Trade), and CBOT (Chicago Board of Trade). The ICE (Inter Continental Exchange) handles both domestic and overseas contracts.
What Futures Brokers Do
To be able to transact futures trades on an exchange, the orders must be handled by someone with a seat on the exchange. This is where the futures broker enters the picture – it is their job to transmit your order to the exchange. Traditionally this meant that the broker had clerks on the floor of the exchange who would signal the order into the pit, but nowadays the vast bulk of futures volume is handled electronically. The broker serves as the vital connection between buyers and sellers.
For this reason it is crucial that you choose the right broker to match your trading requirements.
Two Types of Futures brokers
There are essentially two different types of futures brokers and the level of service that each provides depends on how the broker classifies themselves. Brokers may be either full service or discount. There are advantages to each type of broker model and these should be considered before you decide which type of broker to use.
Full Service Brokers
A full service broker is often a good choice for new or inexperienced traders or for those who use lots of fundamental information in their trading decisions. Full service futures brokers usually provide more information, advice and help to their customers; they often work with their clients to create personalized trading strategies. Full service fees are typically far higher because of the extra level of service and personal customer support that is being provided.
Discount Brokers
A discount broker provides a more minimal service. It is the aspects that the service entails that are fewer, however, not the standard of service that is provided. Typically, clients of a discount broker are expected to execute their trades electronically, and will make completely independent trading decisions to time the market (although the broker might provide some educational materials and resources on their website). A discount broker is normally only contacted by phone in exceptional circumstances.
Because of the more minimal service provided, discount futures brokers are able to charge far less than full service brokers. They are ideally suited to those who want to engage in self-directed trading whilst keeping costs to a minimum.
How Do You Find the Right Futures broker?
Choosing a suitable futures broker for you is as much about becoming aware of your own level of skill and knowledge, the amount of support you need, and your financial circumstances and goals. A broker that is ideal for one person may be a terrible choice for another. Once you have taken the time to determine your own needs, then you can begin to compare brokers and find a firm that matches your requirements.
Some things that you may wish to consider include:
The Broker’s Experience – If you’re considering a full service broker then if the broker you choose doesn’t have much experience then they will not be able to guide your trading decisions as effectively. You certainly don’t want your futures broker to teach themselves to trade at your expense. If you’re using a discount broker then you just need to know that the firm has enough experience to handle any issues that may arise when executions or margin requirements don’t go smoothly.
Customer Support – While a futures broker may promise world-class support in their literature, what you receive once you open an account is what matters. Try contacting a few different brokers and asking for an explanation of the difference between contango and backwardation; the level of response you get may provide a good indication of the support you will receive after you open your trading account.
Demo/Simulation Account - Most futures brokers will allow you access to a demo account to test the execution platform and other software, as well as other aspects of their service. These ‘simulated’ accounts are also a great way to practice your trading strategy without risking real money, and are essential for self-directed traders.
Choosing a Broker
As stated at the start of this post, finding a reputable broker who meets your needs and compensates for your shortcomings will put you firmly on the road to trading success. Unlike in other industries such as forex, there really aren’t a huge number of firms to choose from, and it’s fairly easy to differentiate between them.
Take the time to investigate different firms while you piece together the other elements of your trading plan, and by the time you come to open an account you’ll probably have formed a natural decision about which firm feels right for you.