Understanding Commodity Futures Brokers

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In order to trade futures you must trade through a brokerage firm, or more specifically a Futures Commision Merchant (FCM). 

An FCM is a member of an exchange and is thus permitted to execute trades on the exchange floor.  They have numerous clients and execute trades on their behalf. 

These brokerage firms also typically provide the price data, trading platforms, and charting software that their clients need in order to analyse the markets and place orders. 

For these services, FCM's charge commission fees, which are the bread and butter of their business.

Opening a trading account

To open an account with an FCM a trader must meet certain criteria, such as creditworthiness and minimum deposit requirements.  The minimum amount of capital required to open an account is determined by each FCM, but many will accept traders without specifying a minimum amount.  Some FCM's only require that a trader has enough capital to meet the minimum margin requirements set by the exchange.  


Commission rates will differ depending on the type of account that you open with an FCM.  Typical trading account types range from full-service accounts to self-directed (discretionary) accounts.  Some FCM's direct their business towards a certain type of trader - usually either full-service accounts or deeply discounted discretionary accounts.  But, many FCM's offer a complete range of account types. 

Commissions are charged either on a per-side or a round-turn basis.  Entering a market position is one side and exiting the position is the other.  A round-turn consists of two trades - one to enter and one to exit.


Types of Trading Accounts

1Discounted, or discretionary, accounts are geared towards experienced and knowledgable traders.  These accounts offer the cheapest commission rates because all of the work of managing trades is done by the trader instead of the FCM.  Also, some FCM's base their discounted commission rates upon the amount of capital deposited in your account, while others do not (meaning, the more capital you deposit into your account, the cheaper your commission rates will be.)  With discounted accounts the trader is responsible for researching and deciding upon trades, as well as for entering their orders.  The trader receives little or no assistance from the broker.  However, most FCM's do offer their in-house charting software, trading platform, and market research data for free to these account holders.  This type of account is the cheapest option for experienced traders. 

2Broker-assisted accounts are a step up from the discounted accounts.  With these accounts the trader will receive some advice and assistance from a broker, but not in a full-service capacity.  Analysis and deciding upon trades is still the trader's responsibility, but the broker will offer some helpful advice along the way.

3Full-service accounts give traders the utmost and dedicated attention from a broker.  With these accounts the trader can expect to have his "hand held" by the broker.  Here, the broker will usually monitor the account, update the trader via phone calls, enter orders, and give trading recommendations and guidance on a variety of topics.  Naturally, the full-service account costs more and is best suited to the beginning futures trader.

Managed Commodity Trading

The above accounts all give at least some degree of discretion to the individual trader.  However, there are options for those who wish to participate in the futures markets without managing their accounts at all.  The two most popular methods are managed futures accounts and commodity pools.

Managed futures accounts are managed by a Commodity Trading Advisor (CTA).  Through a power of attorney, the CTA undertakes entirely the management and trading of a client's individual account.

With a commodity pool, the funds of numerous clients are combined into one account, which a commodity pool operator manages.  Thus, they are similar to mutual funds in the equity markets.  Individual clients benefit from the profits of the entire commodity pool.