The rise of the Internet and computerized trading has opened all kinds of trading opportunities and lowered the barrier to entry for retail traders, but one thing stands between you and the markets: your broker. Of all the decisions you will have to make, choosing the right broker is one of the most important; and making a good decision is almost entirely dependent on you being able to define and articulate your own goals and expectations. Only then can you be certain you’ve found the right fit: a broker who can deliver the right services at a reasonable rate.
Deciding between brokers will come down to analyzing and weighing several different factors, including: what you want to trade; how often you intend to trade it; how you want to execute those trades; how much service you need and how much you are willing to pay.
“Almost anyone can offer you the ability to enter your own trades electronically,” says Melinda H. Schramm, president of MHS Capital Resource Inc. and the founder and chairman of the National Introducing Brokers Association (NIBA). “The biggest duty an introducing broker has to their client is to be an educator and a facilitator,” she says, adding the introducing broker is a service person who can offer one-on-one consultations, discuss hedging requirements and strategies, watch for opportunities between the cash and futures markets, bring sector specific experience and help balance a portfolio. “A person who didn’t have the time or the expertise to follow all of the things that affect market price and market change would use a person to do that.” On the other hand, she says online brokers generally don’t ask for the trader’s long-range goal.
An experienced self directed trader, one who is knowledgeable, confident and ready to go it alone may do well with an online discount brokerage firm that offers a minimum of services and handholding. But many of us, especially new traders, need more and should expect to pay more.
Most brokers offer multiple service levels, which come at different commission rates. At the full service level, brokers will discuss each and every order, from entry and exit points to developing strategies and entering orders for you, says Anthony Pacion, a registered commodity broker at Alaron Trading Corp. At the mid-tier service level, “You are doing your own research, and you have your own ideas about which direction the market is going to go; but if you’re a little unsure, you call up your broker to make a decision about what to do with your account.”
At the least expensive level, a trader can expect little contact with the broker. Traders do their own research, enter their own orders and receive their statements online. “In the service economy that we live in, nobody gets any service!” says Stephen Davis, senior broker at RJO Futures. Davis says he acquired a new account after a competitor neglected to call the client during the month he had the account. “It was a real turn off to him.” And while that’s a radical example, it illustrates the disconnect between the broker’s and the trader’s service expectations and the importance of a rapport between broker and trader.
The easiest way to avoid a bad situation is to establish up front what you are going to pay and what services you are going to get. Most brokers offer an array of newsletters, data, analysis and educational resources, which can be extremely valuable. Some may be included with your account, or they may be available on an a la carte basis. Other value-adds include Web-based seminars and other educational opportunities and simulated trading accounts, which are an excellent way for you to get used to the trading platform as well as the way you and your broker interact and access the market.
WHAT DO YOU WANT TO TRADE?
Eric Payne, a broker at Carnegie Trading Group, says, “Commissions are very important, but they are not the most important. You’ve got to know what kind of trader you want to be and you’ve got to go to a broker who deals in the same territory you want to deal in. You want to be able to have a sensible conversation.”
What you choose to trade and your objective for trading it are important factors that should drive your broker selection. “It’s hard to focus on too many markets and do it well,” says John Andersen, an introducing broker and owner of Central Iowa Commodity Services Inc. Andersen has been trading grains and livestock since 1989, and his clients share a couple of common objectives: managing their grain inventories and drawing opinions from his highly specialized experience. “If I had someone who wanted to trade energies, do their own research and make their own decisions and place orders, that’s fine. But I’m not someone who specializes in that area,” he says, adding he’d probably refer that trader to another broker.
TRUST, BUT VERIFY
Assuming you know which market you want to trade, how much you can afford to put in a trading account and you understand the risks involved in trading, the next step is to research individual brokerage firms. Before you hand over your money, find out a little bit about the people you are dealing with. Ask them how long the company has been around, and how long they have been trading.
“Some of these guys consider themselves asset gatherers,” Payne says. “Ask your broker if he’s trading his own money. If he’s not trading his own money, he doesn’t have confidence in his own game.”
A good broker also should qualify you and make certain you understand the risks involved. “Look out for someone eager to sign you up too quick,” says Damon Pavlatos, chief operating officer and a partner at FuturePath Trading LLC. He adds that a prospective broker should ask if you have traded before, what you traded, what your goals are, how much you want to put in your trading account and whether you can afford to lose the money and not be too eager to take it.
Futures brokers, commodities trading advisors (CTA), futures commission merchants (FCM) and commodity pool operators (CPO) are required to register with the Commodity Futures Trading Commission (CFTC) and be members of the National Futures Association (NFA). The NFA makes available a free online database of members called BASIC (see “Other resources,” above), which provides registration and membership information and shows regulatory actions brought against the organization by the CFTC, NFA or exchanges. It also lists NFA arbitration awards and CFTC reparations cases.
In addition to verifying that your broker is an NFA member, you want to find out which futures commission merchant (FCM) will clear your trades. Get the FCM's NFA number and find out how much excess capital the company has (see “Other resources,” above). The minimum required by the NFA is $250,000, but a conservative trader might look for a minimum of $10 million.
When your money is on the line, you want to be confident that you can get the help you need when you need it. Call the broker on the phone; send them an e-mail and use the broker’s chat function to see how responsive the broker is to customers. Don’t wait until they have your money to find out how they are going to treat you.
Ask about the help desk, urges Pavlatos. “It’s really important for a retail guy. In the beginning, he’s going to make mistakes. He’s going to question his position and get worried. He’s going to need a 24-hour desk or at least a great help desk while he’s trading during the day.” Pavlatos says.
This is equally important for online traders, Pacion says. “If you are a self directed or online trader, and the system goes down or your Internet gets lost, you’ve got to call tech support. You’ve got to get in and out of trades. You want to know that they have the resources and tools there for you to execute trades for you when you get into a jam.”
IT’S NOT ABOUT THE MONEY
Choosing a broker strictly based on cost would be like buying shoes based on the price rather than the fit: it’s bound to hurt before long. Every futures broker makes a commission on every trade and those commissions range from less than $1 per round turn for large volume self directed traders to $60 per side for some options trades.
“We base our commissions on volume,” Pavlatos says. “We are not one of those guys that just offers one rate out there to get the retail clients to come pouring in. If you do more volume, we lower the commission.” For electronic trading, commissions start at just under $5 per round turn for an E-mini.”
Commissions are frequently negotiable and rates will depend on the size of your account, how frequently you trade and what level of service you need from your broker. “I talk to guys sometimes for an hour,” Payne says. “Some guys I talk to for 10 seconds. It depends on what they need. You’ve got to be a team. I talk to some of my guys three, four times a day sometimes. They call. I call. We are active. We have to do that to compete. The only thing I can offer you is the level of service. With some IBs, you’re just a number on an equity run.”
There will be other fees, potentially including the cost of the trading platform, clearing and exchange fees, fees for opening or closing an account or wire transfer fees. Make sure you read and understand your account agreement, as that is the only way to avoid unpleasant surprises. That said, if you are paying more you should be getting more. You’ve got to find the right fit and that depends on your requirements for guidance, speed, data and customer service.
Choosing a broker is very much like choosing a business partner. Pick someone you trust, who has the appropriate skill set and range of experiences you can both make more money. But if you choose poorly, it can put you out of business. A broker requesting anonymity says his favorite new clients are those who are opening their second account, having already traded through a discount broker and flamed out. They are better educated, and “they’re ready to listen.”