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How to Find a Broker

About Futures Markets

Futures markets are part of the U.S. business culture, whether that business is agriculture, finance, manufacturing or services. A futures contract is a price discovery mechanism — another indicator to determine the state of current economic values. The prices of many goods you consume, use or buy, such as wheat, gas, meat, or even bank account interest and your pension fund's growth are all "discovered" by the give and take of supply and demand in the trading pits of exchanges worldwide. Therefore, you could be an actual, but indirect, participant in the futures market and not even be aware of it.

Used correctly, these markets are valuable tools for minimizing business risk or diversifying investments. This guide is provided to assist you in getting started by helping with one of the most important decisions you'll make — choosing a futures broker. The suggestions made here are intended solely as a framework from which to get started. Each individual must select their own futures broker after conducting a thoughtful and thorough examination of qualified persons.

Finding a Broker

Before making a transaction in the futures or options on futures markets, you must open an account through a licensed Series 3 commodity brokerage representative. Often you'll be able to find a good futures broker through the reference of a friend or co-worker currently trading the futures markets, or a broker might call you directly and introduce him or herself. But, if you don't have someone who can help, there are several sources available, including CME®  Find A Broker  .

Types of Brokerage

There are several types of brokerage firms from which you can choose:

Full Service Brokerage

If you're following several markets, you may want the experience and

assistance of a full service brokerage firm. Your trading strategies will be a joint effort between you and your broker. If you're new to futures trading, you might feel more comfortable with the extra attention that a full service brokerage extends. A full service firm offers you advice on investments currently in the news, provides you with data so that you'll be knowledgeable in several areas, and contacts you regularly with trading advice, etc. Transaction fees are generally higher because of the additional services they provide.

Discount Brokerage

A discount brokerage firm allows you to make all the decisions about how to trade your account. You only need to call, place an order and the firm will execute it. You will also, in many cases, conduct your own research on products. Support is limited, but if you don't need the extra attention and are confident in your trading abilities, this is the most economical way to trade.

Introducing Broker (IB)

An IB is a full service brokerage firm, usually specializing in futures trading, which executes buy and sell orders on the commodity exchanges through a well-known, established firm. The established firm is a clearing member of the exchanges. The IB may not have an easily recognizable name, but can provide the same attention to your account as a full service firm. IBs are often found in smaller cities and can serve your needs as thoroughly as a well-known full service brokerage in a larger city.

Selecting a Broker

Many brokerage firms have their own Web site that contains information regarding opening an account and a general background on the firm. Once you've found a broker in your area, arrange for an appointment. It's best to call first, rather than just stop by, as brokers are usually busy during market hours. If you need additional information, or the firm does not have a Web site, ask the broker to send you an information packet about themselves and their company. To save everyone time, ask the broker to include references and be sure to check them out prior to the meeting.

When selecting a broker, remember that you will develop a long-term relationship. Your broker will work for you, so you must conduct the interview carefully if you are to form a close working relationship. You may need to contact several brokers before you find one who is right for you.

Strive for a high comfort level: It's important that you feel comfortable and trust your broker. You should be comfortable with your broker's personality, experience, knowledge, services and commission structure.

Make sure your broker fully understands your objectives for getting into the market. Is it strictly to take advantage of pricefluctuations? Do you want to hedge a risk exposure you may be carrying on your product? Communicate your goals up front so you will both know whether or not the broker's experience fits your needs. Beware the broker who promises to make money for you all the time. This is nearly impossible. A broker with integrity will not promise anything that's not deliverable.

After choosing a broker, you will be asked to provide a certain amount of personal and financial information. Be sure you carefully read and understand all material before signing anything. If you have a question, don't be afraid to ask. Don't be put off by the amount of material you may be required to sign. It is for your protection that commodity laws require these statements.

Questions to Ask When Interviewing a Futures Broker

Does the broker have a working knowledge of the fundamentals and technicals of the commodities you wish to trade? This is an important question if you are looking for a broker to provide price outlook and advice. You don't want to be limited in the trading opportunities you can pursue due to the broker's lack of knowledge. Consider whether or not the broker is willing, to better service your account, to bring his/her level of knowledge of selected contracts up to a standard with which you feel comfortable.

What is the minimum size account they are willing to accept? You should have received this information in the packet sent to you prior to your meeting. If it was not included, you need to know this up front, in case the broker or firm requires a higher initial amount to start than you are willing to put into a trading account. During this discussion you should also talk about the firm's minimum performance bond requirements and call procedures. Each firm has a different policy regarding performance bonds. They are priced from the performance bond requirements set by the individual exchanges, which normally run 3 to 18 percent of a contract's value. Hedgers' performance bonds are lower than speculators' because of the difference in risk. Note: For more information on performance bonds, see "What Is Margin?""

What services does the broker offer and what are the commission fees? Ask the broker about commission charges. As with most businesses, there is usually a volume discount in the brokerage business, and commission varies with the amount of service. Also, make sure you understand all additional fees for value-added services.

What is his/her track record like? Find out if the broker has been in business for a long time. Is the broker willing to keep abreast of new trading techniques and strategies? Is the broker responsive to clients' trading ideas? If the broker handles many clients, is there time for personal attention? Are most of the broker's clients commercial hedgers, speculators or a mix of both? Most of these questions will be answered if you check his/her references.

How are issues handled? Find out the brokerage firm's policies and procedures regarding trading issues. Who should you contact regarding questions about your account statement or disputed orders?

After you've had the opportunity to visit with several brokers, evaluate each one on based on the criteria that is most important to you. Take this time to contact the National Futures Association (001/312/781-1300) and find out if there are any disciplinary actions against a broker you are considering. If there are, ask the broker to explain the circumstances before dismissing them from your list. Keep in mind that no matter how technically competent a broker appears, or how many services he or she may offer, you are unlikely to have a satisfactory working relationship unless you feel comfortable with that person.

What is Margin? Futures performance bonds, sometimes known as margin, work differently than margins in the stock market. For stocks, if you do not pay in full, the amount you do pay is known as margin and you borrow the rest. The government sets the maximum amount you can borrow.

In futures, however, your performance bond is not partial payment for the product at all, but a "good faith" amount posted with the exchange to ensure performance in case the market moves against you the next day. In effect, an estimate of your maximum possible next day's losses are escrowed in advance. Because no one knows which way the market will move, both buyers and sellers post performance bonds. The result is great confidence among all parties that their gains will be there if the market moves in their favor, because those gains come directly and immediately from the opposite side of the market.

If the market does move against you, and after money from your brokerage account moves through the exchange to the other party, there may not be enough left in your account should you incur any losses on the following trading day. In that case you'll get a "margin call" from your broker. Have your prospective broker work through some examples with you.

Good Trading!


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