An introducing broker, which is typically just called a broker, may or may not make trading decisions for a client. A CTA is more of a money manager than a broker. They can manage individual accounts for each client, making specific trading recommendations tailored to each one. They can also create a pool where they add all the funds of each client together and make trading decisions for the whole fund as one entity.
A commodity trading advisor focuses on trading speculative accounts for clients and helping them make money. Many CTAs have incentives where they keep a percentage of the profits they make for the clients. That figure is usually around 20 percent of the profits. They can also charge a management fee and they will also charge brokerage commissions.
The profit incentive is what really drives a CTA. The same can be said for hedge fund managers. This is what makes up the bulk of their earnings. If they can’t make money for their clients, they don’t make money. They can sometimes survive off the management fees and commissions, but most have to make profits in order to survive for more than a couple years.
A CTA is often a more skilled commodity trader than a traditional commodity broker. A CTA will ordinarily focus on researching and trading the markets all day. The sales end of the business is usually done by separate sales people at the company. A commodity broker might have to handle the role of trader and salesperson.
A commodity trading advisor can also advise customers on trading decisions for pay without actually placing any trades for the customer. These advisors will have some type of pay service where they charge customers for trading advice and the customers place their own trades online. Some advisors setup trading rooms and discuss their trading strategies throughout the day.
A CTA has to be registered with the National Futures Association and you can check their background for complaints at their website. A CTA will also have to release a disclosure document to prospective clients if they will be managing a commodity pool.
Whether you are looking to do business with a CTA or a commodity broker, the same care needs to be taken with due diligence. A CTA often publishes a track record, where you can see past trading results. Make sure that they are actual returns and not hypothetical returns. Many CTAs create trading programs for which they will trade a fund. Since the programs haven’t been traded in the real world for clients, they are hypothetical results. Nothing is real in this world unless real money is earned or lost.
It is important to get a good comfort level before you place any money with a CTA. Look at any possible track records. Some will have them and some may not if they trade individual accounts. They cannot publish track records, as there is no standard of reference for a wide range of clients. Some clients might want less risk and others might want high risk with different objectives.
Most CTAs will openly discuss their trading styles and how they can help make you money. It is important to go over your objectives with the CTA. Some are flexible and others use the same style for all their clients.