Commodity broker
Encyclopedia
A commodity broker is a firm or individual who executes orders to buy or sell commodity contracts on behalf of clients and charges them a commission
. A firm or individual who trades for his own account is called a trader
. Commodity contracts include futures
, options
, and similar financial derivatives. Clients who trade commodity contracts are either hedgers
using the derivatives markets to manage risk, or speculators who are willing to assume that risk from hedgers in hopes of a profit.
, stock indexes, equities, bonds
, currencies, and an ever growing list of other underlying assets. Ever since the 1980s, the majority of commodity contracts traded are financial derivatives with financial underlying assets such as stock indexes and currencies.
Floor Broker/Trader: an individual who trades commodity contracts on the floor of a commodities exchange
. When executing trades on behalf of a client in exchange for a commission he is acting in the role of a broker. When trading on behalf of his own account, or for the account of his employer, he is acting in the role of a trader. Floor trading
is conducted in the pits of a commodity exchange via open outcry
.
Futures Commission Merchant (FCM): a firm or individual that solicits or accepts orders for commodity contracts traded on an exchange and holds client funds to margin
, similar to a securities broker-dealer
. Most individual traders do not work directly with a FCM, but rather through an IB or CTA.
Introducing Broker (IB): a firm or individual that solicits or accepts orders for commodity contracts traded on an exchange. IBs do not actually hold customer funds to margin. Client funds to margin are held by a FCM associated with the IB.
Foreign Introducing Broker (FIB): a firm or individual outside of the United States who is not required to register with the CFTC as long as they only do business for clients outside of the United States. Foreign Introducing Brokers establish relationships with U.S. Introducing Brokers or Futures Commission Merchants in order to execute trades on exchanges within the United States.
Commodity Trading Advisor (CTA): a firm or individual that, for compensation or profit, advises others, on the trading of commodity contracts. They advise commodity pools and offer managed futures
accounts. Like an IB, a CTA does not hold customer funds to margin; they are held at a FCM. CTAs exercise discretion over their clients' accounts, meaning that they have power of attorney to trade the clients account on his behalf according to the client's trading objectives. A CTA is generally the commodity equivalent to a financial advisor or mutual fund
manager.
Commodity Pool Operator (CPO): a firm or individual that operates commodity pools advised by a CTA. A commodity pool is essentially the commodity equivalent to a mutual fund.
Registered Commodity Representative (RCR)/Associated Person (AP): an employee, partner or officer of a FCM, IB, CTA, or CPO, duly registered and licensed to conduct the activities of a FCM, IB, CTA, or CPO. This is the commodity equivalent to a registered representative
.
In the United States, an individual working in any of the above roles must pass the Series 3 National Commodity Futures Examination administered by the Financial Industry Regulatory Authority
(FINRA). With few exceptions, most individuals who act as a FCM, IB, CTA, and CPO, as well as their RCR/APs, are required to register with the Commodity Futures Trading Commission
(CFTC), and be members of the National Futures Association
(NFA). Floor brokers/traders who are members or employees of a commodity exchange generally do not need to be members of the NFA, as they are regulated by the exchange.
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
. A firm or individual who trades for his own account is called a trader
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
. Commodity contracts include futures
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
, options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
, and similar financial derivatives. Clients who trade commodity contracts are either hedgers
Hedge (finance)
A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...
using the derivatives markets to manage risk, or speculators who are willing to assume that risk from hedgers in hopes of a profit.
History
While historically commodity brokers traded grain and livestock futures contracts, today commodity brokers trade a wide variety of financial derivatives based on not only grain and livestock, but also derivatives based on foods/softs, metals, energyEnergy
In physics, energy is an indirectly observed quantity. It is often understood as the ability a physical system has to do work on other physical systems...
, stock indexes, equities, bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, currencies, and an ever growing list of other underlying assets. Ever since the 1980s, the majority of commodity contracts traded are financial derivatives with financial underlying assets such as stock indexes and currencies.
Types
Firms and individuals who are often collectively called commodity brokers include:Floor Broker/Trader: an individual who trades commodity contracts on the floor of a commodities exchange
Commodities exchange
A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials and contracts based on them...
. When executing trades on behalf of a client in exchange for a commission he is acting in the role of a broker. When trading on behalf of his own account, or for the account of his employer, he is acting in the role of a trader. Floor trading
Floor trading
Floor trading is where traders or stock brokers meet at a specific venue referred to as a trading floor or pit to buy and sell financial instruments using open outcry method to communicate which each other. These venues are typically stock exchanges or futures exchanges and transactions are...
is conducted in the pits of a commodity exchange via open outcry
Open outcry
Open outcry is the name of a method of communication between professionals on a stock exchange or futures exchange. It involves shouting and the use of hand signals to transfer information primarily about buy and sell orders...
.
Futures Commission Merchant (FCM): a firm or individual that solicits or accepts orders for commodity contracts traded on an exchange and holds client funds to margin
Margin (finance)
In finance, a margin is collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk of their counterparty...
, similar to a securities broker-dealer
Broker-dealer
A broker-dealer is a term used in United States financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers....
. Most individual traders do not work directly with a FCM, but rather through an IB or CTA.
Introducing Broker (IB): a firm or individual that solicits or accepts orders for commodity contracts traded on an exchange. IBs do not actually hold customer funds to margin. Client funds to margin are held by a FCM associated with the IB.
Foreign Introducing Broker (FIB): a firm or individual outside of the United States who is not required to register with the CFTC as long as they only do business for clients outside of the United States. Foreign Introducing Brokers establish relationships with U.S. Introducing Brokers or Futures Commission Merchants in order to execute trades on exchanges within the United States.
Commodity Trading Advisor (CTA): a firm or individual that, for compensation or profit, advises others, on the trading of commodity contracts. They advise commodity pools and offer managed futures
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
accounts. Like an IB, a CTA does not hold customer funds to margin; they are held at a FCM. CTAs exercise discretion over their clients' accounts, meaning that they have power of attorney to trade the clients account on his behalf according to the client's trading objectives. A CTA is generally the commodity equivalent to a financial advisor or mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
manager.
Commodity Pool Operator (CPO): a firm or individual that operates commodity pools advised by a CTA. A commodity pool is essentially the commodity equivalent to a mutual fund.
Registered Commodity Representative (RCR)/Associated Person (AP): an employee, partner or officer of a FCM, IB, CTA, or CPO, duly registered and licensed to conduct the activities of a FCM, IB, CTA, or CPO. This is the commodity equivalent to a registered representative
Registered Representative
A Registered Representative, also called a General Securities Representative, a Stock Broker, or an Account Executive, is an individual who is licensed to sell securities and has the legal power of an agent....
.
Regulation
A single firm or individual may be registered and act in more than one capacity.In the United States, an individual working in any of the above roles must pass the Series 3 National Commodity Futures Examination administered by the Financial Industry Regulatory Authority
Financial Industry Regulatory Authority
In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization . FINRA is the successor to the National Association of Securities Dealers, Inc. ...
(FINRA). With few exceptions, most individuals who act as a FCM, IB, CTA, and CPO, as well as their RCR/APs, are required to register with the Commodity Futures Trading Commission
Commodity Futures Trading Commission
The U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....
(CFTC), and be members of the National Futures Association
National Futures Association
The National Futures Association is an independent self-regulatory organization and watchdog of the commodities and futures industry in the United States. The NFA oversees and protects investors from fraudulent commodities and futures activities. The NFA also provides mediation and arbitration...
(NFA). Floor brokers/traders who are members or employees of a commodity exchange generally do not need to be members of the NFA, as they are regulated by the exchange.
See also
- BrokerBrokerA broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
- CommodityCommodityIn economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
- Commodity ExchangeCommodity exchangeCommodity exchange may refer to:* Commodities exchange, any exchange where various commodities and derivatives products are traded.* Commodity markets, for the markets trading on commodities in general....
- Financial Derivative
- Futures contractFutures contractIn finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
- Hedge fundHedge fundA hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
- Hedger
- Option (finance)Option (finance)In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
- Speculator
Regulators In The United States
- Commodity Futures Trading CommissionCommodity Futures Trading CommissionThe U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....
- National Futures AssociationNational Futures AssociationThe National Futures Association is an independent self-regulatory organization and watchdog of the commodities and futures industry in the United States. The NFA oversees and protects investors from fraudulent commodities and futures activities. The NFA also provides mediation and arbitration...
Commodity Exchanges
- CME GroupCME GroupThe CME Group bases prices for US gasoline on Brent Crude rather than West Texas Intermediate Crude , which many believe is responsible for artificially high gas prices for US consumers...
- Kansas City Board of TradeKansas City Board of TradeThe Kansas City Board of Trade , is an American commodity futures and options exchange regulated by the Commodity Futures Trading Commission...
- Liffe
- New York Board of TradeNew York Board of TradeThe New York Board of Trade , renamed ICE Futures US in September of 2007, is a wholly owned subsidiary of IntercontinentalExchange . It is a physical commodity futures exchange located in New York City. It originated in 1870 as the New York Cotton Exchange...