From the November 01, 2012 issue of Futures Magazine • Subscribe!

Spotting broker red flags

To spot broker red flags, you first need to understand better where your money is and just who has it (see “Follow the bouncing money”).

Based on our schematic, where is Trader Bob’s money? 

When Trader Bob discussed opening an account with the introducing broker (IB) Todd LLC, he should have asked these important questions:

  1. Is your IB relationship with a clearing or non-clearing futures commission merchant (FCM)? 
  2. If it is with a clearing FCM, which clearinghouse(s) does the FCM belong to? 
  3. If it is with a non-clearing FCM, who actually is clearing those trades? Who is the clearing FCM (or FCMs) that actually holds Trader Bob’s margin funds when he holds a position?

And because broker omnibus relationships can change all the time without notification made to the client, these questions need to be asked on a regular basis.

Returning to the fictional brokerage firms in the illustration, it is not enough to be told that Larry Co. is a member of a particular futures exchange. The question you want answered is whether or not Larry Co. is a clearing member of a particular exchange.

Now that you have a better understanding of what firm actually is responsible for your seg funds balance, you can begin your own red flag watch. 

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