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
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.