Aside from real estate, equities, and debt instruments, commodities are a prime asset class for active traders. Whether you’re interested in hedging risk exposure or want to speculate on future pricing fluctuations, commodity futures offer access to some of the most popular markets in the world.
A commodity is a raw material or agricultural product that is harvested or cultivated. Crude oil, gold, cattle, and soybeans are a few examples. Commodities are typically purchased on cash markets or traded in derivative form on standardized futures exchanges. To participate in derivatives trading, such as offered by the Chicago Mercantile Exchange (CME), a trader must first secure the services of a commodities broker.
What Is a Commodities Broker?
The primary function of a commodities broker is to buy and sell futures contracts on behalf of a client. In return, the broker is paid a commission for facilitating trading operations. Although regulatory bodies such as the U.S. Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) serve as industry watchdogs, it’s important for traders to perform the proper due diligence when selecting a brokerage.
Unfortunately, all brokers are not created equal. Incompetence, insufficient resources, and unethical business practices are elements that periodically plague the industry. However, by conducting a little research, it’s possible to find a reliable broker who can help you achieve your market-related goals.
Five Characteristics of a Solid Commodity Broker
Securing the services of a rock-solid commodities broker is the first step on your journey into the marketplace. While firms come in all shapes and sizes, trustworthy brokerages have five common attributes:
- Licensed: According to the Commodity Exchange Act (CEA) of 1936, the CFTC is commissioned with regulating the commodity futures markets. Under its statutes, brokers are required to be licensed with the NFA. In addition, account executives must pass the Series-3 exam administered by the Financial Industry Regulatory Authority (FINRA).
- Reputable: As in many industries, an individual or firm’s reputation can provide valuable insights into the inner workings of an organization. Being in business for a long time with a limited complaint history is a strong sign of a reputable firm. In addition, simple items such as maintaining a physical address and current contact information are signals that a firm is on the up and up.
- In good standing: Firms that are subject to ongoing litigation or recent judgments may be in danger of falling out of favor with the CFTC and NFA. Running a Background Affiliation Status Information Center (BASIC) search through the NFA database is a great way to quickly find out a commodity broker’s current standing within the industry.
- Competent: It’s essential for a commodities broker to exhibit several core competencies. A strong market-specific knowledge base, industry experience, and attention to detail are crucial to performance. In addition, the willingness and ability to answer any questions that a client may have is a big part of providing top-notch customer service.
- Technologically savvy: Commodity futures are traded in an almost exclusively digital capacity. The days of the open-outcry auction format are over, having been replaced by servers and remote exchange connectivity. Advanced software trading platform options, order hosting/routing, and robust exchange connectivity are a few items that ensure a broker is able to compete in the modern futures marketplace.
Getting Started With Commodity Futures
Alongside building a comprehensive trading plan, selecting a broker is a vital part of ensuring a positive venture into the futures markets. It’s imperative that a commodities broker be knowledgeable, technologically proficient, and reputable. If these characteristics are lacking, then it’s time to extend your search.
With more than 20 years in the futures industry, Daniels Trading offers aspiring participants an objective and reliable window to the markets. Featuring a team of seasoned market professionals with a second-to-none reputation, Daniels Trading is a great place to begin your excursion into the arena of commodity futures.