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3 Risks of Using a Discount Futures Broker

August 11, 2010 by Matt Vitiello| Tips & Strategies

Are you considering working with a discount futures broker to reduce commission costs? If so, it’s important to understand there are additional factors, beyond commission, that can significantly impact the “cost” of your trading. And regardless of your trading experience, the online futures broker that boasts the lowest commission rates may not be the most appropriate option for you. In this article, I’ll discuss three of the main risks you assume when choosing to trade with a discount futures broker.

Risk 1: Insufficient Customer Service and Support

Frustrated Customer with Head on Desk

While you may find a discount futures broker that offers an extremely low commission rate, it’s prudent to learn more about the customer service and support you can expect to receive with that rate. Generally speaking, a discount futures broker will provide you with a low commission rate, an online trading platform, and not much else. Human interaction with this type of broker is typically minimal and the trade desk support staff has little or no vested interest in the individual account. Salaried employees who lack incentive to provide additional help to clients beyond simply executing orders usually run these trade desks. Help and individual attention will likely not be available when it’s needed most.

In contrast, at a full-service brokerage, the brokers in charge of individual accounts make their livings off of the commissions on their clients’ trading. Therefore, a full-service broker has a vested interest in helping his or her clients, as the clients’ long-term success in the markets is directly correlated to the broker’s success.

Before choosing to open your account with a discount futures broker, consider the following questions:

  • What happens if the discount broker’s website goes down and you can’t access your account or trading resources?
  • Worse yet, what happens if the platform is down and you can’t place or exit a trade?
  • What if the trade desk isn’t answering the phone?
  • Do you have a dedicated contact you can call for assistance? Probably not.

Like many things in life, with futures brokerage, you often get what you pay for. And, there is likely a lot more money to be lost on the actual transaction than is being saved on commission costs.

Risk 2: Insufficient Futures Trading Resources and Education

Again, a discount brokerage usually provides its customers with only a low commission rate and an online trading platform. Key futures market research and news are normally not part of this package. This type of information can potentially help traders earn big returns or prevent them from entering into positions of extreme risk. When trading futures, it’s vitally important that you are aware of the events that may impact the markets.

With a full-service futures broker, this research is usually provided free of charge to all clients with open and funded accounts. Additionally, a full-service broker often provides futures trading education as an added value to working with them. Webinars on trading techniques and market opportunities, daily market research, and video tutorials are just a few examples of educational resources one will often find with a full-service broker but not with a discount futures broker.

Risk 3: Insufficient Peace of Mind

Finally, consider your peace of mind before opening an account with a discount futures broker. Paying a slightly higher commission rate can essentially buy an extra set of eyes to watch one’s account. For instance, having a longer-term position on and being away from the computer for a period time, one may not be aware of a sharp spike in the market. A full-service futures broker will generally call his or her client in this type of situation, potentially earning or saving him a substantial amount of money, where a discount broker would likely not. What if you have a memory-lapse or an unexpected family issue that diverts your attention from trading? Is the commission saved worth missing out on an opportunity or incurring a loss that may have been avoided?  Using a full-service futures broker may cost slightly more in commission, but the comfort gained from having an advocate watching your account can be worth much more.

Whether you’re new to futures trading or an experienced trader, you should seriously consider these three risks prior to open a trading account with any futures broker, especially a discount futures broker. A few dollars saved in commission may ultimately cost you much more when it comes to your bottom line.

Filed Under: Tips & Strategies

About Matt Vitiello

After receiving a BA from the University of Illinois, Matt entered the banking industry as a mortgage loan officer. With close family members involved in the futures markets, Matt always kept a close eye on the markets throughout his involvement in the banking industry. Although successful at the bank, the allure of the markets pulled at Matt, and he ultimately made the leap and joined Daniels Trading.

As a senior broker, his emphasis is getting online and broker assisted traders comfortable with trading software. In addition, Matt has a strong interest in the seasonality of the commodity markets and relays trading ideas and opportunities on a daily basis to his clients. Matt also likes to leverage shared desktop technology to show his customers the ropes one-on-one through online meetings.

Matt prides himself on his ability to match his client’s and prospect’s assets with available opportunities at Daniels Trading. Whether its executing an order or simply sending an email, it is always done with precision and accuracy.

Outside of the office, Matt enjoys traveling and following his hometown sports teams — the Chicago Bulls and Chicago Bears.

Risk Disclosure

THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES; HOWEVER, DANIELS TRADING DOES NOT MAINTAIN A RESEARCH DEPARTMENT AS DEFINED IN CFTC RULE 1.71. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

TRADE RECOMMENDATIONS AND PROFIT/LOSS CALCULATIONS MAY NOT INCLUDE COMMISSIONS AND FEES. PLEASE CONSULT YOUR BROKER FOR DETAILS BASED ON YOUR TRADING ARRANGEMENT AND COMMISSION SETUP.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE "RISK DISCLOSURE" WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICE.

GLOBAL ASSET ADVISORS, LLC (“GAA”) (DBA: DANIELS TRADING, TOP THIRD AG MARKETING AND FUTURES ONLINE) IS AN INTRODUCING BROKER TO GAIN CAPITAL GROUP, LLC (GCG) A FUTURES COMMISSION MERCHANT AND RETAIL FOREIGN EXCHANGE DEALER. GAA AND GCG ARE WHOLLY OWNED SUBSIDIARIES OF STONEX GROUP INC. (NASDAQ:SNEX) THE ULTIMATE PARENT COMPANY.

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Risk Disclosure

THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES; HOWEVER, DANIELS TRADING DOES NOT MAINTAIN A RESEARCH DEPARTMENT AS DEFINED IN CFTC RULE 1.71. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

TRADE RECOMMENDATIONS AND PROFIT/LOSS CALCULATIONS MAY NOT INCLUDE COMMISSIONS AND FEES. PLEASE CONSULT YOUR BROKER FOR DETAILS BASED ON YOUR TRADING ARRANGEMENT AND COMMISSION SETUP.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE "RISK DISCLOSURE" WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICE.

GLOBAL ASSET ADVISORS, LLC (“GAA”) (DBA: DANIELS TRADING, TOP THIRD AG MARKETING AND FUTURES ONLINE) IS AN INTRODUCING BROKER TO GAIN CAPITAL GROUP, LLC (GCG) A FUTURES COMMISSION MERCHANT AND RETAIL FOREIGN EXCHANGE DEALER. GAA AND GCG ARE WHOLLY OWNED SUBSIDIARIES OF STONEX GROUP INC. (NASDAQ:SNEX) THE ULTIMATE PARENT COMPANY.

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