How to Start a Commodity Brokerage Firm

Starting a commodity brokerage firm might seem like a lofty task, but knowing the proper steps and what's required before you embark on such a venture can save you a lot of time and headaches.

Commodity brokerage firms are known as "introducing brokers" (IB) in the futures sector. There are many IBs registered with the National Futures Association (NFA). Some firms may have only one person, while others have many people and branch offices. Chicago is the hub for commodity brokerage firms, while Florida, Texas, California and New York are other busy places for IBs.

Registration Requirements

To become an IB, the first thing you must do is sit for and pass the Series 3 Exam if you are not a current broker and registered as an IB with the NFA. There must be at least one associated person (AP, usually a broker) listed with the firm. If you plan on being a one-person entity, you must become an AP. There are costs you must pay to register, along with regulatory paperwork to complete.

One vital step in the process of opening a firm is going into an agreement with a futures commission merchant (FCM). There must be a signed agreement between an IB and an FCM before you can register and do business with the public. An FCM will execute and clear the trades, handle client funds, provide back-office support, and in many cases, guarantee your firm, which is why will be choosy when it comes to forming an agreement with any IB.

IB Business Plan

A business plan is crucial to any start-up firm. You will need to have an office opened and ready to conduct business. You must decide on how you plan on bringing clients on to earn enough money to sustain the business. Initial earnings provide a base to build upon. A plan to raise equity and pursue clients is the most vital aspect of starting your business. Some common routes are to pay for advertising, conduct seminars, and approach friends and family for business and support.

Before you land your first client, you need to be educated in trading in the commodity futures markets. Some brokers focus on one market or one sector of the market, but successful brokers can make trades in every market on the futures exchanges around the U.S.

Some clients make their own trading choices, while others will rely solely on your advice. The more skilled you become at commodities trading, the more likely you will retain clients and grow your brokerage. If you lose money trading commodities, and your clients rely on your advice, you will be fighting an uphill battle to succeed and might want to look for another venture.

To summarize, to open an IB firm, you will need to pass the Series 3 Exam and arrange for all proper registrations with the NFA. You will need to choose and agree to terms with an FCM for clearing trades and handling the accounting and client statements. You will need to prepare a clear business plan that includes projected costs and earnings. Spell out how you plan on opening new accounts and growing your firm. If you plan on making trading recommendations for your clients, make sure you have a solid trading plan and a good track record in trading before you venture into managing money for clients.

Final Thought on Starting Your Own IB Firm

Starting an IB firm can be a lucrative venture. Still, it takes years to learn the trading business and the ins and outs of each commodity futures contract listed on U.S. exchanges. At times, it is best to work with another IB with more experience. You may be able to work as an apprentice before starting out on your own. There is always a risk when you start a new venture; without it, there can be little reward. The best commodities traders know risk vs. reward better than many others because of the high volatility of the raw material markets. Starting an IB firm is the first risk of many that you will have to take.