Intro: Overview of Commodity Brokers
Trading commodities has been around for many years. Allowing investors to utilize a variety of resources for accessing investments, commodity investing has become increasingly popular in the last few years, particularly with the rise of online commodity brokers.
Today, it is considered practically essential to allocate at least a portion of investments to commodities to achieve proper diversification. Commodity investments offer a number of benefits, including hedging against inflation.
What Is a Commodity Broker?
Image Source: What Is A Commodity Broker?
It’s not uncommon for individuals who are new to the concept of commodity trading to ask, “What is a commodity broker?”
Before exploring what to look for when choosing commodity brokers, it’s first important to understand exactly what to expect from commodity brokers. Commodity brokerage firms place trades on behalf of their clients. Such brokerage firms must be designated as either Futures Commission Merchants (FCM) or Introducing Brokers(IB) for registration purposes. Individual commodity brokers are designated as Associated Persons(AP).
While the primary purpose of commodity brokers is to place trades on behalf of a client, many people also rely on the expertise of their brokers for trading recommendations and advice. This is particularly true for individuals who are new to trading commodities. The commodity market can be somewhat complex to understand at first.
Finding Commodity Brokers
Once you’ve decided to begin trading commodity futures, the next step is to find a broker. This is where reviewing a commodity brokers list can prove to be helfpful. Today, there are approximately 1,500 commodity broker firms operating in the U.S. and many others operating on a global scale.
Many commodity brokerage firms are based in Chicago and New York. It is important to note that most stockbrokers do not posses the appropriate license to deal in commodities. For this reason, it is important to find someone who has a commodity broker license.
It is always best to meet with commodity brokers prior to opening a new account. When possible, meeting in person is a good idea, although the concept of online commodity brokers has made it possible to work with commodity broker firms from around the world.
Understanding the Commodity Broker License
All commodity brokers must receive a commodity broker license through the National Futures Association, which requires passing the Series-3 exam. Prior to choosing to work with commodity brokers, it’s a good idea to research the firm using the National Futures Association website to ensure the broker is actually registered and has obtained the appropriate commodity broker license. This type of research also presents the opportunity to check the record for commodity brokers, including any arbitration cases or regulatory actions.
Steps to Obtaining a Commodity Broker License
Obtaining a commodity broker license requires fulfilling a number of regulatory steps. In order to obtain a license, commodity brokers must take and pass the Series 3 exam, which should not be confused with the Series 7 exam, the examination used for stockbrokers. The series 3 exam is comprised of two parts, the first of which relates to questions on the general futures market. Rules and regulations are covered in the second part of the test.
Prospective commodity brokers must also complete an 8-R form with the National Futures Association. On this form, the candidate must provide a lengthy employment history and criminal history. Additionally, applicants must go through an FBI background check before they are issued a temporary commodity broker license.
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Choosing Commodity Brokerage Firms
Image Source: Trading with Commodity Brokers
When choosing commodity brokers with whom to work, take the time to ensure the firm will supply you with all the necessary documentation and forms to open your account. If there is anything you do not understand, it should be explained in a clear manner. Make a point of retaining a record of all trades. If there is ever a problem in the future, you can then report it to the commodity broker firm or the National Futures Association.
Prior to committing to working with specific commodity brokerage firms, you should also research their experience, services, commission structure, and trading platforms. This is particularly important when reviewing online commodity brokers. Also, determine whether the broker’s personality and trading style are compatible to your own. For instance, if you are new to commodity trading, discount online commodity brokers might not be the best choice, as you may not receive the guidance you need.
It should be understood that the commodities futures market can be quite volatile. When trading in these markets, you should expect there to be a tremendous amount of leverage and risk. This makes doing your homework and understanding the risks and regulations even more important when reviewing a commodity brokers list, whether you are looking for a traditional commodity brokerage firm or online commodity brokers.
What Is the Difference Between an Introducing Broker and a Futures Commission Merchant?
There are often tremendous misconceptions regarding the differences between an Introducing Broker and a Futures Commission Merchant. The Chicago Mercantile Exchange states that a Futures Commission Merchant is an individual, partnership, association, trust, or corporation that accepts or solicits orders for the execution of a commodity transaction according to the rules of a future contract market and accepts payment from or extends credit to clients. Basically, this means that Futures Commission Merchants are commodity brokerage firms that accepts money on behalf of clients to hold as a margin for trading activities.
By comparison, an Introducing Broker is a person or firm engaged in accepting or soliciting and handling orders for the sale or purchase of futures contracts, according to the rules of a futures exchange; however, an IB does not accept money to margin for contracts or trades. An Introducing Broker must be licensed by the Commodities Futures Trading Commission.
This makes an Introducing Broker similar to mini futures commodity broker firms. An Introducing Broker brings or introduces clients to a Futures Commission Merchant, who is then responsible for executing trades on behalf of the client. The Introducing Broker does not accept money. Instead, all funds are sent directly to the Futures Commission Merchant, who deposits funds into a separate fund held by the firm’s bank.
The responsibilities of an Introducing Broker include clearing trades with the exchange, platform maintenance, and issuing statements. An experienced Introducing Broker will also be able to assist clients with day-t0-day activities. In many ways, an Introducing Broker functions as a point of contact between the client and commodity broker firms.
It should also be understood that a futures broker may establish arrangements with multiple commodity broker firms and can choose to add or withdraw from a Futures Commission Merchant. If an Introducing Broker does elect to cease doing business with a firm, a client’s account will continue to follow the broker to the new firm, unless the client specifically objects.
There is a myth that an Introducing Broker cannot offer competitive rates. In essence, an Introducing Brokers serves as a middle man between the Futures Commission Broker and the client. Even so, this does not mean that an Introducing Broker is not able to offer lower transaction costs. It’s important to conduct careful research into commission structures when researching commodity brokerage firms.
In determining which commodity broker firms might be the right choice for your needs, it’s important to understand the difference between various types of brokerages on a commodity brokers list. This includes online commodity brokers.
The use of online commodity brokers has become increasingly popular in the last few years. Among the advantages offered by online commodity brokerage firms are faster transactions, a variety of options, greater flexibility, low broker commissions, and the opportunity to personally plan your trading strategy.
Commodity Brokers List
Below, we present a commodity brokers list to familiarize you with some of the biggest commodity brokerage firms in the world.
Louis Dreyfus Group is a French firm involved in a variety of markets, including oil, metal, agriculture, energy, and commodities, along with international shipping. In addition to owning and managing a hedge fund, the firm is also involved in real estate development. Louis Dreyfus is considered one of the four commodity broker firms dominating world agricultural commodity trading, alongside Bunge, Archer Daniels Midland, and Cargill.
As the largest cotton and rice trader in the world, Louis Dreyfus comprises about 10 percent of the global agricultural product trade flows. They are also heavily involved in the global sugar market. With a presence in more than 90 countries, Louis Dreyfus is actually headquartered in Amsterdam. The firm also has major offices in London, Geneva, Beijing, Buenos Aires, Singapore, Paris, Connecticut, and New York.
This commodity brokerage firm is responsible for managing a portfolio of global supply chains that include energy and industrial products. Headquartered in Singapore, the firm operates from 60 locations around the world while facilitating processing, marketing, transportation, and financing of raw materials. Noble Group Limited was ranked number 76 in the 2014 Fortune global 500.
This global agribusiness and food company is headquartered in White Plains, New York. The firm is also involved in grain trading. Operating in 40 countries, Bunge Limited’s main competitors are Archer Daniels Midland and Cargill, Inc.
This American commodity broker firm is privately held and based in Minnetonka, Minnesota. Originally founded in 1865, this commodity brokerage firm has now become the largest privately held corporation in the U.S. in terms of revenue. Along with trading grain, this firm is also involved in trading other agricultural commodities, including palm oil, as well as trading steel, energy, and transport. In addition, Cargill operates a financial services arm that is responsible for managing financial risks in the commodity market.
The Archer Daniels Midland Company is an American commodities trading corporation. Operating almost 300 plants around the world, the company is headquarterd in Chicago, Illinois. Archer Danields Midland also operates ADM Investor Services, which is a registered futures commission merchant and a member of commodity brokers exchanges and clearing houses in Europe and Asia.
This privately-held Swiss international commodity broker firm covers a broad array of global energy markets, suchs as natural gas, crude oil, coal, carbon emissions, and refined petroleum products. Mercuria Energy Trading purchased the commodities trading arm formerly owned by J.P. Morgan for a reported purchase price of $800 million. Today, Mercuria Energy Trading is one of the five largest independent energy traders in the world. The firm is headquartered in Geneva, Switzerland, and has office locations around the world. Mercuria Energy Trading’s primary competitors are Vitol, Cargill, Glencore, and Noble Group.
This global energy and commodity brokerage firm was originally founded in 1966 in Rotterdam. The firm’s core businesses include physical trading, distribution, and logistings, although Vitol is also involved in terminals, shipping, refining, power generation, exploration and production, and mining. Vitol has office locations around the world, including Houston, Singapore, London, and Geneva. In 2014, the firm had revenues of $270 billion, making it the largest independent energy trader in the world.
This Swiss multinational commodity brokerage firm is headquartered in Baar, Switzerland, and also has a registered office in Saint Helier, New Jersey. In 2015, Glencore was ranked tenth on the Fortune Global 500 list for the world’s largest companies.
Online Commodity Brokers
If you are considering using online commodity brokers, you may wish to consider one of the following commodity broker firms:
Offering more than 200 futures products and a combination of advanced trading tools, E*TRADE has become well-known for its flat, low commissions and no-fee trading platform. Clients are provided with a live order status from order placement through confirmation along with a 50% day trading margin for indexes, treasuries, and currencies. The firm’s website also provide educational content and research tools.
Clients are provided with an integrated set of tools for trading futures, stocks, fixed assets, options, and an extensive array of investing products. Futures trading fees with TD Ameritrade are only $2.25 per contract, in addition to exchange and regulatory fees. The firm also provides helpful apps, such as Mobile Trader, that allow clients to trade future directly from their wireless device. Free educational seminars and resources are available along with 24/7 customer service support.
Making the decision to become involved in commodities trading is an important one which should not be taken lightly. Taking the time to conduct ample research regarding commodity brokers and commodity brokerage firms is an excellent way to determine whether commodity trading is the right choice for your investment goals. Researching a commodity brokers list, including online commodity brokers, can also help you to find the biggest and most reputable firms.
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