Online Futures Brokers

Most trading on the commodities and futures markets is done through online futures brokers that buy and sell commodities on the main exchanges for their customers. Who you ultimately decide to use for your brokering needs is important, and we will break down the elements of a good broker in the article below.

1. Easy to Understand Commissions
When it comes the futures market, it is generally understood that the amount you pay to trade doesn’t really matter. That’s not entirely true, but the point is that the amount a trader would spend in commissions from one broker to the next really isn’t all that important given the amount of money that is made or lost with each trade. Generally speaking, most futures traders are willing to pay more for a broker that makes their life easier, and is better equipped than another broker to handle their trading style.

However, it is important to work with a broker that has a very clean commission schedule so that you know how much you’re paying, and how you pay. Because futures brokers usually sell a number of different financial products, they often also have very complicated fee schedules. In between may be hidden fees like withdrawal penalties or wire transfer fees. These fees add nothing to your trading, and should be avoided, if possible.

2. Execution
The new buzzword in online futures brokers’ marketing is “execution speeds,” but it’s for good reason. Trade execution is the amount of time it takes for you to click “buy” and the broker to add the position to your account. For very high volume, professional traders, execution through an online futures broker is everything, since only a few seconds time can make a difference of several hundred dollars in profit and loss.

Likewise, brokers with execution are unlikely to experience slippage. Slippage occurs when a trader enters an order at current market price and the trade, though executed instantly, is placed at a price significantly higher or lower than the order’s quoted price. Due to very well crafted legal papers in your member account policy, there is often very little recourse for trades that aren’t executed with accuracy.

3. Lot Flexibility
While the range of lots might not be important to investors with larger account balances, the ability to trade minis or large lots may be very important to a trading strategy and should be evaluated closely. For example: thought e-mini S&P 500 futures are very popular futures contracts, the full lot isn’t so popular on the retail end, thus it isn’t all that rare to see a broker encourage trading on the mini contracts and discourage trading on the larger lots with a different fee schedule or leverage amount.

4. Credibility and Regulatory Filings
There are few markets regulated as tightly as the futures market, and as a result investors have plenty of resources through which they can examine their broker with a fine tooth comb. The first agencies to check are the Commodity Futures Trading Commission (CTFC) which regulates mostly the commodities markets and trading protocol, and the National Futures Association (NFA) which regulates the futures brokers themselves. Finally, on a minor level the National Association of Securities Dealers (NASD) works in tandem with the SEC to regulate the industry as a whole.

Never ever open up an account with a company that does not have sufficient clearance to accept investors from your country. Due to the fact that the futures market pricing is international, many investors open an account with just about any broker, thinking that they’re all the same since the commodities are all the same. This is not the case.

In fact, there is a very big difference between the investment products legally available to US investors compared to UK and Canadian investors. Where US investors can trade only commodity futures, the UK and Canada allow traders to buy and sell contracts for difference, a product very much like a standard futures position, but one that is not backed by commodities. Instead, CFDs are backed only with cash, making them a straight up, cash bet not much unlike a casino.

Trading CFDs in the United States, regardless of your understanding of the law or the difference in products is 100% illegal.

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