A FUTURES BROKER: 10 THINGS YOU SHOULD KNOW

A futures broker: 10 things you should know

Selection of a futures broker is one of the most important decisions a futures trader should make when opening a trading account. Independent of whether you are a self-directed trader or broker-assisted trader, you need a brokerage company which would satisfy your requirements in the best way possible and ensure the maximum efficiency to your trading. In this article we will tell you about 10 criteria, using which you will be able to select the best futures broker for yourself.

In this article:

  • Transactional or relationship-based broker;
  • Commissions and fees;
  • Round-the-clock support service;
  • Specialized support;
  • Trading platforms;
  • Market studies and analytical reports;
  • Futures commission agents;
  • Margin and leverage;
  • Trade execution services;
  • Usefulness.

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TRANSACTIONAL OR RELATIONSHIP-BASED BROKER

As a rule, futures brokers use two types of business models. The first one is the Transactional Futures Broker. The transactional model usually applies a universal approach. When you open a trading account with such a broker you get what such a broker offers all traders without exception. A standard range of services of such a futures broker includes online access to exchanges, basic customer support and clearing services.

The second model is the Relationship-Based Broker. Brokerage companies that use this business model are very responsible in their work with customers providing them with everything which is required for having high chances for success. Such brokers work with trading accounts of traders on the basis of their individual trading needs. Some traders need more customer support, instruments and resources than others. Such brokerage companies provide services in any required volume.

COMMISSIONS AND FEES

Every futures trader tries to find the best offer in the market of brokerage services. It is important to understand here that you get what you pay for. When it comes to the size of commission payments, make sure that you understand what services and at what level your broker provides to you, independent of whether you are a self-directed online trader or a broker-assisted trader.

ROUND-THE-CLOCK SUPPORT SERVICE

The modern futures market works nearly 24 hours a day 5 days a week, which means that you would need a round-the-clock customer support service. The more levels of customer support a broker offers, the better. Availability of access to specialized support and also to the department of trading operations during a trading day and after its completion is a sign of an excellent level of the brokerage company operation.

SPECIALIZED SUPPORT

Even if you are a self-directed trader, there is a high probability that you would prefer to talk to a specialist of your futures broker when you come across a risky situation in the market. Let’s assume that your futures position becomes loss-making when the market reaches the limit-up or limit-down of the price movement on the futures exchange. Exchanges specify the maximum value, by which the price may change during one day, for many futures contracts. In the events when free market forces try to find an equilibrium price outside the range set by the limit, the market reaches the limit and practically stops trading. A standard customer support service would hardly be able to help you in this situation.

However, if an experienced specialist of the brokerage company is assigned to your account, he, most probably will be able to get you out of the market synthetically (closing your position by means of other financial instruments) when other traders stay locked limit-up or limit-down. This is a real achievement, especially when there are thousands of dollars at stake.

This is just one of many possible examples of how the specialized support of the brokerage company may come to the rescue when you badly need it. This will be a valuable insurance for self-directed traders. We hope you will never need it.

TRADING PLATFORMS

If you are a self-directed trader you will need advanced trading technologies, quotations and charts and also a direct access to the futures market. Stability, reliability and speed of execution of your trades are very important. Try to find a futures broker who offers different trading platforms and ask him which platform would better serve your trading style and needs. For example, if you apply the analysis of the order flow activity and market volume analysis, select a broker who supports trading in the ATAS platform.

If you look for a brokerage company with one trading platform, keep in mind that they have nothing else to do but to tell you that their platform is the best for you independent of your real needs.

If you are a broker-assisted trader, you should have access to quotations and charts, online access to your trading account and also a version of a high-end trading platform with the read-only access (access to the historical trading data without a possibility to trade independently).

Although the majority of traders would never use a bigger part of these capabilities, their availability may come in handy.

MARKET STUDIES AND ANALYTICAL REPORTS

Independent of what type of analysis of the futures market you personally use, third-party studies and analytical reports could become an important part of your trading. That is why make sure that analysts of the brokerage company conduct fundamental and technical analysis of the market, issue newsletters and keep a calendar of main economic news.

For example, intraday traders that trade E-mini S&P 500 or US 30-year Treasury Bonds would prefer to close their futures positions before a meeting of the Board of the US Federal Reserve System (FRS) due to the expected strong market volatility. And responsible brokerage companies provide their customers with this valuable information.

MARKET STUDIES AND ANALYTICAL REPORTS

Independent of what type of analysis of the futures market you personally use, third-party studies and analytical reports could become an important part of your trading. That is why make sure that analysts of the brokerage company conduct fundamental and technical analysis of the market, issue newsletters and keep a calendar of main economic news.

For example, intraday traders that trade E-mini S&P 500 or US 30-year Treasury Bonds would prefer to close their futures positions before a meeting of the Board of the US Federal Reserve System (FRS) due to the expected strong market volatility. And responsible brokerage companies provide their customers with this valuable information.

FUTURES COMMISSION AGENTS

Different clearing firms specialize in different aspects of the futures markets. It is important that your needs in trading futures coincide with the main competence of a clearing firm. Some of them specialize in online futures trading while others provide their customers with access to all markets and futures, options and spread strategies.

None of the clearing firms can be perfect in all aspects of the futures and options industry. Some of them show excellent results working in the futures market only, some have advantages working with options or execute major customer orders in the low-liquidity markets better than others.

The only way to find out which of the clearing firms fits your trading style better than others is to open a trading account with a broker who has business links with many clearing firms. Your brokerage company will tell you about all the pros and cons of the clearing firms it works with, their trading technologies, delivery of customer orders to the exchange, customer service and many other important issues.

MARGIN AND LEVERAGE

All brokerage companies and clearing firms should observe night margin requirements set by exchanges. If you are a long-term or positional trader, the size of the night margin should be equal with all futures brokers and clearing firms when you transfer your futures position to the next day.

A difference in the size of margin requirements appears when it comes to the day margin. Some brokerage companies do not decrease the size of the day margin. It often happens because such brokers do not have a risk management infrastructure which allows carrying out a proper control over the day trades of their customers.

If a futures broker is not able to monitor the trading activity of intraday traders properly, these traders run the risk of having negative balances on their trading accounts. This is what clearing firms and brokerage companies do not want to be faced with.

Many brokerage companies offer traders a 50% discount on the size of the day margin. If a trader conducts responsible trading and keeps out of constant margin calls on open day trades after the exchange is closed, such futures brokers allow him to trade with a 50% day margin.

Some futures brokers offer traders special conditions with respect to the size of the day margin on E-mini S&P 500 futures mini-contracts (ticker: ES) based on USD 500 of margin collateral for one contract. Leverage is a sword with two edges even with a relatively low size of the day margin. Leverage can convert a small amount of money into a huge one but if it is used improperly, it may empty your trading account in no time. Good futures brokers allow their customers to trade with the day margin of USD 500 but if a trader misuses this possibility or doesn’t observe the rules of margin trading properly, a clearing firm may increase the size of margin collateral for such a trader.

Brokers that apply the transactional business model in its pure form do not pay attention to the riskiness of their customers trading until traders start posing risk to the brokerage company itself.

The bigger the leverage you use in trading is, the bigger the risk you pose to your trading capital. If you move from 50% to 90% of reduction of the day margin size, the risk of losing your trading capital grows exponentially. This is one of the reasons why the Commodity Futures Trading Commission (CFTC) forced Forex brokers to reduce the leverage size for traders. Some of them offer 100:1, 200:1 and even 400:1 leverage.

Studies show that this size of the leverage significantly increases the probability of ‘draining’ of a trading deposit. As of today, the CFTC plans to set the maximum leverage for Forex brokers in the amount of 10:1, which is very close to the night margin requirement in the futures markets.

When you select a futures broker, pay attention not only to low margin requirements and high leverage. Ask a brokerage company how they manage risks, how they control leverage and what maximum leverage size you should use. Some brokers can manage risks of your trading account in order to be sure that you would not open new positions when reaching the maximum leverage size.

TRADE EXECUTION SERVICES

Some futures brokers offer only one type of services. Others offer the most popular ones or absolutely all types of services which have to do with executing trades. Such services include: self-directed trading, broker-assisted trading, option trading, third-party-assisted trading, robot-assisted trading and also a possibility of managing your trading account by third parties.

USEFULNESS

After you got acquainted with the above 9 recommendations on selection of a futures broker, you need to assess the cost of the services you need and also usefulness of what you get in return. All traders are different and place different demands on brokerage companies. You shouldn’t expect that cooperation with a broker who offers low rates would bring you a big benefit. However, it doesn’t mean that you would have to pay high rates for the best brokerage services. The most important thing is to find the right broker for the needs of your trading account and for the money you are ready to pay.

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