What Is Commodity Broker?
Commodity markets trade in natural resources, which are agriculture, energy and food products. Some of these resources are wheat, corn, soybeans, pork-bellies, gold, silver, heating oil and lumber. A commodity broker is a person who deals in the futures contracts on these products by buying and selling them for his or her client. The client might be someone who uses these products as an end user, such as Starbucks for coffee or an airline for oil, or merely someone who is speculating on the price of these products in order to make money, such as a hedge fund.
Other People Are Reading
-
What a Commodities Broker Does
-
A commodity broker is similar to a stock broker, but belongs to a more elite group. While there are 660,000 registered stock brokers in the United States, there are only 53,000 commodity brokers. Commodity brokers are responsible for advising on commodities, but their main job is to execute the orders to buy or sell the futures contracts for their clients. They then charge a commission. The broker makes a living from these commissions as well as from opening new accounts. Although commodity brokers used to only deal in agricultural products such as wheat, corn and hogs, they now deal in everything from energy and stock indexes to currencies and metals.
Becoming a Commodity Broker
-
If you're good you can make a lot of money as a commodity broker so it is competitive to become one. You must be a good sales person and must enjoy dealing with people. You also should possess an interest in futures and how they are traded. You will then need to become licensed by the National Futures Association (NFA). You will have to pass the Series 3 examination, which covers futures contracts and strategies involved in using them.
Commodity brokers have to file, with the NFA, a 8-R form, which provides your employment and residential history as well as details about your life. You will then go through an FBI background check. The requirements to become a commodity broker are so stringent because you will be dealing with tens or hundreds of millions of dollars. If there is even the slightest chance of fraud, it could be disastrous for both the company that hires you as well as the industry. -
Types of Commodity Brokers
-
There are three main types of commodity brokers. There are floor traders, who trades on the floor of places like the Chicago Mercantile Exchange. Those are the people you see yelling on the financial channels while waving their hands around. They are either executing trades on behalf of their clients or themselves. Then there is the commodity trading adviser. These are the equivalent of a financial adviser for the stock markets and will give trading advice to clients and may execute trades on their behalf. Finally, there is the commodity pool operator. This is essentially the equivalent of a mutual fund, but with commodities, whereby the CPO will pool investors money into a collective in order to invest it for them.
Changes in the Industry
-
With the Internet, having a person to execute trades has become less important. Online brokers have taken the place of actual brokers and companies such as TradeStation and Interactive Brokers have been thriving. Part of the advantage in using an online broker is that the transaction costs are much lower. For instance, it might cost $50 or more per contract to execute a trade with a real broker. While an online broker would cost about $1 to $2 per contract. The disadvantage, of course, is that you do not get any advice from an online broker, whereas a full-service broker can advise you on trends and changes in the market. So an online broker is really for a self-directed trader who already has a good understanding of the market.
Where to go to become a Commodity Broker
-
If you are interested in becoming a commodity broker, there is no better place than Chicago. Chicago is to commodities what New York is to the stock market. It is the epicenter. This is where the Chicago Board of Trade and the Chicago Mercantile Exchange, the two biggest futures trading organizations, are located.
-
Resources
- Photo Credit FreeFoto.com
