From the March 01, 2009 issue of Futures Magazine • Subscribe!

Know your broker

Your broker can be the most important person in your trading life, so you shouldn’t enter into a relationship with one lightly. You have to know who you’re dealing with and make sure they know and can give you what you want. If you don’t, you could be headed for a nasty (not to mention costly) break-up.

First, you have to decide if you want to manage your money on your own by working with an introducing broker (IB) or futures commission merchant (FCM) or if you want someone else to do it for you through a managed account or a commodity pool. It is a good idea to have part of your portfolio in managed futures even if you would like to trade on your own. You must determine your level of expertise in terms of markets and entering trades. Be honest because the money you could save entering orders directly to the market quickly will be lost if you make mistakes.

If you choose to manage your money on your own, you can open an individual trading account directly with an FCM or through an IB. You usually can receive more personal attention from an IB, for which you will pay higher fees.

If you open a managed account, a commodity trading advisor (CTA) will have authority to buy or sell for your account or will contact you for approval on suggested trades, according to National Futures Association (NFA). Many CTAs have prohibitive minimum investment levels. You can participate in commodity pools, which are offered at lower minimums but you will pay more in fees.

Know what commissions and trading costs will be involved. If you are giving your power of attorney to the broker to make and execute trading decisions, there may be management fees or some arrangement for the broker to participate in the net profits. All fees are required to be fully disclosed in advance, says Larry Dyekman, director of communications and education at NFA.

You have to learn as much as you can about a broker’s track record, so background checks are essential. All brokerage firms must be registered with the Commodity Futures Trading Commission (CFTC) and must be members of NFA. NFA’s BASIC search ( ) shows futures-related regulatory and non-regulatory actions contributed by NFA, the CFTC and U.S. futures exchanges.

NFA recommends conducting a background check of all of the individuals listed as principals of the firm, as well as the firm’s salespeople. “Sometimes the firm has no disciplinary record because it is fairly new, but the principals of the firm may have a disciplinary record from working at a previous firm,” Dyekman says. Due diligence is more than just background checks. Learn what services your broker offers and what it charges for different services. Talk to customers of the firm and find out what it does well and what it struggles with. Know where your trades are being cleared and make sure their clearing firm is in good standing.

“You can go on NFA’s Web site and check for filings, but that really doesn’t tell you a lot about the broker. In this age of consolidation, it’s important to know who the actual clearing broker is,” says Andrew Waldock, principal at Commodity and Derivative Advisors LLC.

Matt Simon, research analyst at Tabb Group, says due diligence is “becoming a bigger theme over the last couple of months especially with the fallout of some of the better names. Look at the fundamentals, the flow they’ve had in the past.”

Paul Zubulake, senior analyst at Aite Group, says you should pick a broker that has $100 million and above under deposit and if you want exposure to the futures market, it’s always better to go with someone who has experience. “You’re better off paying more in commission than having an unreliable broker,” he says, adding that if you do go self-directed, you should study technical analysis and charting.

Simon says that although reputation is important, there are many small and mid-tier brokers “that have more unique differentiated flow that can be provided to their clients. So much depends on the actual people in a firm.”


Educating yourself is essential. Everyone has different needs and different trading personalities, so you need to make sure your broker is listening to what you want. Communication will help you find a good fit.

While a broker should be able to guide you in many trading fundamentals and can make trading and risk management recommendations once a trust has been developed, you need to educate yourself first. “The brokerage function is different than the education function. Your broker is in it to make sure you’re able to do your trades and you have the right software. Don’t look to the broker for [educational] guidance. That’s not his role,” says Jeff Quinto, trading coach with

Dyekman says you must thoroughly understand the product you want to trade — that includes how much margin is required, the impact of leverage on your account and what your break-even point would be factoring in commissions and fees. Remember that brokers make money based on commissions, so they have a vested interest in you making trades.

You have to know what type of trading suits your personality, Waldock says. “Regardless of the success of a strategy, if it doesn’t suit the trader’s profile, they’re not going to stick with it. [A trader] should have an idea of what their needs are and communicate their time frames and their risk-reward profiles to their broker. A good broker should be able to trade in various styles to fit their customers’ needs.”

Understand your account agreement before you sign it. “Ask the broker to explain any part of it that you don’t understand. Pay particular attention to the firm’s margin requirements — how and when the firm expects margin calls to be met,” Dyekman says.


“Some trading platforms work perfectly fine when nothing is happening, but when the market explodes, they get way behind. That’s a problem because that’s exactly the time when you need to be reacting if you’re in a trade. You’re prevented from it because the software gets bogged down,” Quinto says.

Zubulake recommends checking on the broker’s platform and the type of connectivity they offer. The functionality and implementation of the broker’s platform and customer service are all important. He says to check if your broker provides a voice broker to execute the trades for you if your system goes down or you have connectivity issues. You can tell if the system has good connectivity by monitoring the market data. Zubulake says if the market data is constantly updating in a reliable fashion without freezing, you’re in good shape.

Waldock says you should check whether there are platform fees, roundturn commissions vs. half-turn commissions and account maintenance fees ahead of time so there are no surprises.

“If you establish an account with someone and you’re getting nickel and dimed to death as a trader, it’s going to be frustrating,” he says, adding that commissions depend on the type of trader you are and the level of service you require. “Commissions could be the least of your expenses in the long run regarding the success or failure of the account.”

Trading is hard work. You need to recognize this, educate yourself and keep yourself in the driver’s seat, otherwise you’ll crash. NFA says traders should beware of brokers who promise unrealistically high returns with little or no risk.

“You have to be the one who’s directing, no matter what they tell you about how great the returns are. [That] would be the first red light — anybody who’s saying ‘I’m going to guarantee you these returns’ — you hear those words, start running,” Zubulake says.

Waldock says before you pick a broker, you have to ask yourself if you’re really ready to trade on your own and devote time to trading. If you’re just looking for a presence in the market, he says you would be better off with a managed account. “Most customers have real jobs and it’s very hard to do both successfully,” he says.

If you plan ahead, perform due diligence, and keep the lines of communication open, you and your broker could be a perfect match.

comments powered by Disqus
Check out Futures Magazine - Polls on LockerDome on LockerDome