Not all commodity brokerage firms are equal. Actually, there are huge differences in the way in which they train and employ their brokers. Choosing the right brokerage firm is vital to your success as a commodity broker.
Good Commodity Brokerage Firms
A good commodity brokerage firm will have a solid training program for new brokers. They will place an emphasis on learning how to trade properly and making money for clients. Sales skills will also be a focus, as you will need new accounts in order to trade in the first place. Whether you like it or not, sales are a vital part of any brokerage firm, but a good firm will not use high pressure and intimidation on their brokers to generate business.The firm will have seasoned commodity brokers who have been at the firm, or at least in the business, for a number of years. There will also be brokers, analysts or traders at the firm who are successful traders and have a great knowledge of the commodity markets. That may be difficult to determine if you have little experience with commodities, but there are signs to look for.
First of all, you want to see a firm that has clients who have been actively trading there for several years. If possible, ask to see examples of accounts that have consistently made money. Find out what type of analysis is done before trades are recommended. What type of risk management do they use in their trading. Do the brokers and principals of the firm trade their own money? Better yet, do they make the same trades that they recommend to their clients? Principals of a good firm will not hesitate to discuss their performance and they should give you a general outline of their trading philosophies.
Bad Commodity Brokerage Firms
It is fairly easy to spot a bad brokerage firm in a relatively short period of time. All of the people at the firm won’t have a clue how to trade commodities properly. The whole focus will be on sales and generating commissions from clients. They normally use high-pressure sales techniques to open accounts and in soliciting trades from clients. Usually, they will focus on a specific commodity market to hype to potential clients in order to open accounts.
There will be an absence of internal research at a bad commodity brokerage firm. They won’t have pre-determined exit points on trades they recommend. Normally, they will recommend that their clients close positions as soon as they are profitable so they can place new trades. Sometimes, it makes sense to take quick profits if the markets or your trading strategy dictates, but you want to look for signs that this is the norm.
These brokerage firms normally have a high turnover of brokers. They also have an even higher turnover of clients. That is why the main emphasis is on sales, because they have to keep replenishing accounts. These firms also spend a great deal on advertising to generate leads for their brokers.
Signs of Caution
- The firm does no market analysis and you cannot find any successful or knowledgeable traders at the firm.
- There are a lot of “rah-rah” sales meetings and generally they have a young group of brokers who just don’t know any better.
- A high turnover of clients is a huge caution flag.
- High commission rates (above $70 R/T) and a focus on buying a lot of futures options and option spreads for new clients.
- The principals and brokers of the firm have several disciplinary actions from the CFTC or National Futures Association.
- South Florida is notorious for problem commodity brokers. There are some good firms there, but be especially careful with firms in this area.
- If you are dropped at a cubicle and given a pile of old leads to call on day one, with no training, you may want to think twice about this firm.
Overall, you should use common sense when you are trying to decide if you are dealing with a reputable commodity brokerage firm. The place should be professional, with an emphasis on analyzing the commodity markets and returns for clients. Sales will be stressed at any commodity broker, but if you consistently make money for clients, the commissions and referral accounts will take care of themselves.
