The futures industry is living through one of the most challenging and dramatic evolutions in its history. Consolidations, the fading of open-outcry and technology platform integrations are, only the tip of the iceberg of issues that are changing the landscape of the industry. And these issues are affecting all entities: brokers, exchanges, technology providers, clearinghouses and employees.
As we watch and participate in these changes, one voice should be heard above the rest — the customer. How do these issues affect the customer and more important, who exactly is the customer? Once we truly understand the customer, the ranking of futures commission merchants (FCM) takes on a new significance.
The customers of the futures industry are both institutional and retail and their needs must be forefront in this changing environment. But each customer’s needs are different, depending on their position in the industry.
Historically, it was simple to define how customers entered the futures market and how their specific requirements were met. However, with exchange memberships becoming a thing of the past, access becoming more important than execution and the international regulatory landscape being reviewed with every new cross-border merger, it is difficult to find a single definition of what best meets customer needs.
That is why FCMs find themselves in a particularly interesting position in the industry. Twenty years ago it was easy for a customer to determine what kind of FCM best fit their needs. There were boutiques, independent mid-sized brokers and the large international FCMs who were part of larger financial institutions. Customers chose their FCM based upon the specialty of the firm. However with the consolidations and mergers, size seemed to become the most relevant requirement.
But what does size really mean and how important is it to the customer?
Each year Futures Magazine compiles its “Top 50 brokers” list in the December issue. It has become interesting to see how the mergers and acquisitions change the names and positions on that list. It is also interesting to see what names are gone from that list. Yet perhaps one of the most important aspects of that list is how the term “Top” is defined. In Futures Magazine’s ranking, customer equity is the determining factor. It’s hard to disagree with that definition.
Certainly an argument can be made that FCMs with the largest customer equity must be meeting the customer’s needs, however, do new customers look to equity rankings when they are looking for an FCM? Or, do experienced customers look at equity rankings when they want to review their FCM relationship?
As an FCM in that top 50 list, our firm certainly knows the importance of customer equity. However, we know that customers look for more than these rankings when they seek partnerships with their brokers. What is missing from the list is the customer’s ranking. So we decided to ask customers what they looked for in an FCM — and if size really matters. Granted this information has not been statistically tabulated, but it comes from our considerable industry experience, customer input and top industry experts’ responses.
We began by breaking down the industry customers into four general categories that represented institutional and retail groups: Introducing brokers, commodity trading advisors (large, small and emerging), institutional/hedger (investment banks, hedge funds and pension funds) and proprietary traders (independents and prop houses).
We then reviewed our experience with customer requirements and also consulted representatives of each of these industry customer groups to give us their “rankings.”
The conclusion was that customers determined their own FCM “ranking” system based upon three categories: How customer needs are met, level of service satisfaction and transaction capabilities. Throughout our analysis and discussions, certain issues consistently surfaced as important tools for analyzing FCM capabilities. Here they are in the customers’ own words:
1. Financial. This includes capital, fund raising capabilities and financial stability.
“We look to partner with a broker who can provide the most current technology in execution and processing of our trades, and a relationship driven cap intro process where the broker draws on the resources of the entire firm to help facilitate introductions to new business and customers. The people behind each of these functions are critical as they need to understand our business and how they can add value.”
- Tom Moller, president, Eclipse Capital (commodity trading advisor (CTA))
“As an emerging CTA, having the FCM able to help raise capital would be a huge plus. I also look for reasonable fees, good interest rate on margin accounts and access to the markets I trade. I also like working with the principals of an FCM — you feel that your business is more important and you get more attention.”
- Scott Hoffman, president, Red Rock Capital (Emerging CTA)
2. Electronic Trading Systems. This includes front-end, connectivity flexibility, direct access to international exchanges and networks.
“Sophisticated electronic traders, now the majority of traders, have essential needs for their execution systems. The quality of trader and system support, reliability of the electronic systems, market connectivity, speed of execution and ability to respond to unique requests are all important factors. FCMs and customers often settle for less than optimal solutions when the FCM cannot meet the electronic system requirements of the customer. Born Capital closes this gap by independently hosting and managing a suite of electronic execution platforms. We typically bring our customers to the largest FCMs where that cap intro, research, cross margining, and back office processing are all core businesses, but flexible IT solutions may be out of reach.”
- Buck Haworth, president, Born Capital LLC (Electronic IB)
“As a non-clearing FCM that is very technology focused, we look to partner with a clearing FCM that embraces our same technology ideals. All FCMs are not equal in this area and there is not a correlation between asset size and technology offerings. Also, as we offer global access to our customers, we need an FCM with global clearing capabilities. The synergy between these two is very important.”
- Rick Tomsic, President, Open E Cry (non-clearing FCM)
3. Research/information, which includes access to a broad variety of experts.
“IBs are very relationship-oriented. While stability and capitalization are important factors when contemplating a clearing arrangement, an IB often values other services the FCM offers equally or even more than ‘bigness,’ or how large the FCM is. IBs look for FCM support such as specialized research, access to certain trading desks or groups, sales support and interest-sharing possibilities. Some IBs actually see a large FCM as unable to provide the individualized attention they want. Cost of doing business and reputation of the FCM in general, along with the firm’s ability to provide the services the IB needs for its customers, form the type of long-term relationship all FCMs and IBs want.”
- Melinda Schramm, chairman of the National Introducing Brokers Association
4. Rates and back-office systems, which includes transactional processing.
“There is more to selecting an FCM by a CTA than good execution and low commissions. A CTA requires a firm that will devote the time and effort to the bulk order handling of trades for multiple accounts at multiple firms and that is willing to receive trades executed at other firms. It also needs to have the resources necessary to process corrections on a timely basis.”
- Frank Pusateri, Adirondack Portfolio Management (Managed Futures Consultant)
“Professional traders seek a fast, reliable and seamless way to trade global markets with 24 hour access throughout the world at an attractive price. They also demand personalized service along with a fast account opening process, customized trade execution and clearing solutions, unique analytical tools and specialized training and seminars with world-class experts, technology and support processes. However, probably the most important thing to the professional trader is a clean, easy to read dependable statement recapping their futures trading activity.”
- Thomas A. Mueller, Spike Trading Services LLC
“Connectivity is probably the most important capability we look for in a clearing firm partner. We also look for a chemistry between our senior management and the senior management team at the clearing firm.”
- Neil Aslin, president, Peregrine Financial Group (non-clearing FCM)
“When selecting an FCM, we place high value on the quality of the organization, especially the professionalism of the personnel providing the day-to-day servicing. All futures activity is being risk-monitored placing greater emphasis on the timeliness and quality of execution and clearing.”
- Mark Rosenberg, chairman and CIO, SSARIS advisors, LLC
“We look for an FCM’s ability to respond to our immediate requirements. Smaller FCMs have less red tape and offer easy access to department heads. Problems are solved, and new ideas are implemented quickly and efficiently.”
- Carlos Alvarez, vice president operations and trading, Dunn Capital (large CTA)
Other criteria that were highlighted were floor brokerage, 24-hour desks, margin capabilities, advice, regulatory support, confidentiality of trade results, office security and back-up technology and disaster recovery (off site). However, the overwhelming response to our customer needs analysis was service and individual attention. In this ever-changing environment, we have found that one thing does not change — the need to assess customer requirements and service them to our best ability. This is how the FCM community will be ranked. This is how the entire futures industry will be ranked — by how we best service our customers.
Dennis Zarr is senior vice president of Rand Financial Services Inc., www.randfinancial.com.
