is a firm or an individual who executes orders to buy or sellcommodity contractson behalf of the clients and charges them acommission. A firm or individual who trades for his own account is called atrader. Commodity contracts includefuturesoptions, and similarfinancial derivatives. Clients who trade commodity contracts are eitherhedgersusing the derivatives markets to manage risk, orspeculatorswho are willing to assume that risk from hedgers in hopes of a profit.
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,metalsenergystock indexesequitiesbondscurrencies, 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.2Post the implementation of the Volcker rule in 2014, the number of commodity trading houses and individual brokers have dwindled.3
Firms and individuals who are often collectively called commodity brokers include:
Floor Broker/Trader:an individual who trades commodity contracts on the floor of acommodities 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 tradingis conducted in the pits of a commodity exchange viaopen outcry. A floor broker is different than a floor trader he or she also works on the floor of the exchange, makes trades as a principal for his or her own account.4
Futures Commission Merchant (FCM):a firm or individual that solicits or accepts orders for commodity contracts traded on an exchange and holds client funds tomargin, similar to a securitiesbroker-dealer. Most individual traders do not work directly with a FCM, but rather through an IB or CTA.5
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.6
Commodity Trading Advisor (CTA):a firm or individual that, for compensation or profit, advises others, on the trading of commodity contracts. They advisecommodity poolsand offermanaged futuresaccounts. 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 clients trading objectives. A CTA is generally the commodity equivalent to afinancial advisorormutual fundmanager.7
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.8
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 aregistered representative.9
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 theFinancial 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 theCommodity Futures Trading Commission(CFTC), and be members of theNational 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.
Commodity brokers can trade commodities on various exchanges, which specialize in trading a certain commodity type. The common commodity exchanges include theNew York Mercantile Exchange(NYMEX) that trades in a variety of commodities,Chicago Board of Trade(CBOT) that trades in wheat, rice, soybeans, oats, corn, silver, gold, and ethanol, and theIntercontinental Exchange(ICE) that trades in crude oil, electricity, and natural gas. Others include theCME GroupKansas City Board of TradeLondon International Financial Futures and Options Exchange, and theNew York Board of Trade.
Commodity Brokers: Should You Trade Online or Use a Broker?.
Why Commodity Traders are Fleeing the Business?
Floor Broker Definition & Example InvestingAnswers.
Staff, Investopedia (2004-12-12).Registered Representative – RR.
Articles needing additional references from October 2018
This page was last edited on 4 March 2019, at 00:29