What is a Commodity Broker ?
A commodity broker is a firm or individual who fulfills orders to buy or sell commodity contracts on behalf of customers and charges them a fee. A firm or individual who deals for his own account is named a trader. Commodity contracts include futures, options, and synonymous financial derivatives. Clients who trade commodity contracts are either hedgers using the derivatives markets to handle risk, or speculators who are willing to take up that risk from hedgers in hopes of a profit.
While historically commodity brokers swapped grain and livestock futures contracts, today commodity brokers deal a wide variety of financial derivatives based on not only grain and livestock, but also derivative instruments based on foods/softs, metals, energy, stock indexes, equities, bonds, currencies, and an ever rising list of other fundamental assets. Ever since the 1980s, the majority of commodity contracts swapped are financial derivatives with financial underlying assets such as stock indexes and currencies.
Firms and people who are frequently collectively named commodity brokers take on:
Floor Broker/Trader: an person who trades commodity contracts on the floor of a commodity exchange. When trades on behalf of a customer in exchange for a commission he is acting in the role of a broker. When trading on behalf of his personal account, or for the account of his employer, he is working in the function of a trader. Floor trading is carried on in the pits of a commodity exchange via public outcry.
Futures Commission Merchant (FCM): a firm or person that solicits or accepts orders for commodity contracts dealt in on an exchange and delays client funds to margin, synonymous to a securities broker-dealer. Most person traders do not work immediately with a FCM, but rather through an IB or CTA.
Introducing Broker (IB): a firm or someone that solicits or takes on orders for commodity contracts swapped in in on an exchange. IBs do not really hold customer monetary resources to margin. Client funds to margin are carried by a FCM associated with the IB.
Commodity Trading Advisor (CTA): a firm or someone that, for compensation or benefit, notifies others, on the trading of commodity contracts. They advise commodity pools and offer managed futures accounts. Like an IB, a CTA does not hold customer funds to margin; they are held at a FCM. CTAs exercise discernment over their Clients’ accounts, meaning that they have power of attorney to deal the Customers account on his behalf corresponding to the client’s trading targets. A CTA is in general the commodity tantamount to a financial advisor or mutual fund manager.
Commodity Pool Operator (CPO): a firm or person that runs commodity pools advised by a CTA. A commodity pool is essentially the commodity equivalent to a mutual fund.
Registered Commodity Representative (RCR)/Associated Person (AP): an employee, or officer of a FCM, IB, CTA, or CPO, duly documented and licensed to conduct the activities of a FCM, IB, CTA, or CPO. This is the commodity equivalent to a certified representative.
A firm or someone may be registered and act in more than one capacity. In the United States, an person working in any of the above functions must pass the Series 3 National Commodity Futures Examination administrated by the Financial 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 essential to record with the Commodity Futures Trading Commission (CFTC), and be members of the National Futures Association (NFA). Floor brokers/traders who are members or employees of a commodity exchange mostly do not need to be members of the NFA, as they are regularized by the exchange.
Author: www.CommodityBrokerPlus.com
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