Full-Service Brokerage or Online Futures Trading?
The decision to trade online or through a full-service commodity broker will undoubtedly make a large impact on your bottom line. However, the impact may or may not be what you had in mind. If you aren’t ready to begin placing your orders online on your own, despite saving money on commission it may be the most costly mistake that you ever make.
While commission is baggage, a slightly higher rate it may be worth every penny assuming that your futures broker is truly giving you what you are paying for…reliable and efficient execution along with quality guidance in strategy and analysis.
Hopefully this article will open your eyes to the realities of transaction costs. While experienced traders should look for low rates with quality service, novice traders will benefit greatly from the hand-holding of a good commodity broker, making commission paid an investment rather than an expense.
If a futures broker guarantees that you will make money trading with him I suggest you hang up the phone. There are no guarantees in options in futures trading; however, an ethical broker will provide exceptional service at a reasonable price in order to ensure that you are provided the best odds of success. Additionally, it is important to realize that in many circumstances the amount of commission paid, or not paid, doesn’t normally have an impact on whether you are profitable or not in the long run. Generally speaking, the money made or lost in your trading account is at the hands of your trading decisions. Even those that rack up a substantial commission bill, can attribute that expense to their decision to trade high quantities not necessarily the commission rate itself. Further, trading in high quantities is, more often than not, a poor decision.
Discount Online Trading Makes Sense for the Right Trader, at the Right Futures Brokerage
If you are an experienced trader, there is no reason for you to pay hefty commissions for a service that you don’t necessarily need. Placing self-directed trades online is economical and efficient; if ready, you should take advantage of every opportunity to do so.
With that said, there are times in which online traders will need the help of a full-service commodity broker. Clearly there will be times in which you are away from your computer or are experiencing technical difficulties and will need assistance in placing your trade. A quality futures brokerage firm will allow you to place your trade through a broker or trade desk during such times with little or no financial consequences. Some deep discount futures brokers offer cheap online trading, but if you happen to need to place a trade by phone, it will cost you tremendously. I’ve seen rates has high as $60 round turn for such a service!
Keep in mind, if your firm offers complimentary trade desk service to it’s online trading customers, they are relying on good faith by their clients to utilize the services as needed, rather than as a primary means of order entry. If you are a habitual offender you have just increased your service level, reduced your risk, and aren’t compensating your broker for their efforts. Accordingly, be aware of your brokerage arrangement and respect your broker.
Another aspect to keep in mind is whether or not your online brokerage service is capable of accessing your account and trading platform. If your commodity broker has quick and easy access to cancel, or place, orders on your behalf within the same platform you are accustomed to using, your trading experience will be enhanced immensely. This is because brokers typically have additional permissions for order placement. It isn’t necessarily uncommon for option spreads, or strategies, to be inadvertently rejected by a trading platform due to miscalculations in margin or premium (remember, computer software is only as good as their inputs, and inputs are subject to human error). An efficient online brokerage service will be able to manually place your trade in the blink of an eye at no additional cost to you. I can’t say the same for some deep discount brokers.
Full Service Futures and Commodity Options Brokerage doesn’t have to be Expensive
People tend to assume that full-service brokerage service is synonymous with expensive. While this is sometimes true, it doesn’t have to be. There are commodity brokerage firms out there that charge excessive commissions and fees; however, a good brokerage firm understands that higher transaction costs deter from the client’s ability to profit and in turn prevents them from being a long term customer.
You should be weary of a firm that offers set commission rates to all clients regardless of size, experience, volume and account size. Doing so results in a scenario in which certain types of clients are indirectly subsiding the trading practices of others. This logic can be compared to an insurance company that collects the same life insurance premium for a sixty year old smoker as a twenty one year old athlete. Just as insurance firms realize that this type of practice isn’t equitable to its policy holders, I believe that brokerage firms should adopt a similar policy. A quality futures brokerage firm understands that the needs of each client differ, and their cost of trading should reflect these discrepancies. Additionally, those that are offering blanket commission schedules are likely cutting corners in other places too.
Only you can decide how much commission is too much to pay. However, you can’t argue with the bottom line. If you are racking up a large commission bill and your account isn’t making progress you may question whether or not it is worth it. However, you must also be aware of how much of your account drawdown is due to commission and how much can be attributed to trading losses sustained by your hand. Be honest with yourself as to whether the trading may have been better or worse without the help of your broker. This is difficult to do. By nature we are always looking for someone or something to blame for poor trading results and your broker is an easy target.
Is your commodity broker working for you or for your commission?
Regardless of whether you are trading online, or with the assistance of a full-service commodity broker, there is a big difference between a futures broker that works for you, and one that is simply looking to collect a transaction cost.
If you feel as though your commodity broker is putting his best interests ahead of yours, don’t be afraid to confront him. It is your money and you should be completely comfortable in how you, and your account, are being handled.
Unfortunately, because the brokerage industry thrives on commission it can be easy for account executives to succumb to the pressures of generating income “now”. After all, they have bills to pay too. However, your broker’s financial stability shouldn’t have an effect on the trading in your account. I would like to think that brokers with this type of mentality are the exception rather than the rule, but it is important that you fully understand the potential motivations behind the industry in order to avoid a compromising situation.
You might be thinking that self-directed online traders are immune to the aforementioned risk of a futures broker seeking excessive commission through the trading activity, but this is a fallacy. Although an online trader is the sole decision maker and trade executor of an online account, the broker is influencing behaviors. For instance, a broker offering ultra-low day trading margins combined with deeply discounted commission rates is indirectly encouraging clients to trade massive quantities.
Why using broker assistance may be a good idea
Avoid Over-Trading and Panic Liquidation
Working with a futures and options broker may mean having someone to “bounce” ideas off of and hold your hand through good times and bad. Under most conditions, the trading decisions made in your account should be yours, but you can’t deny that your broker will have an influence. If you are with the right account executive, it should be a positive influence.
A second opinion from a seasoned professional can be “priceless”. They have the luxury of keeping fear and greed out of the decision making process, and hopefully have the market experience that you are paying for through commissions to aid in their advice.
Shifting Risk of Order Placement
You have likely heard the old adage, “Don’t trip over dollars chasing pennies”. This is the best way that I can explain the idea of a new trader pushing himself to trade online without the help of a commodity broker before being truly ready. One of the biggest benefits of using a broker is to shift the risk of error in trade placement from yourself to your brokerage firm, or more specifically your broker.
If you contact your futures broker to request she buy a July corn at the market, and she inadvertently sells a contract, she is responsible for making your account “whole” again. In other words, your broker must liquidate the accidental position and execute your order properly as well as compensate you for any additional damages including the commission charged on the mistaken trade. Naturally, if you tell your commodity broker to buy July corn at the market and she does, the rest is left to your ability to speculate, the timing of your exit, and fate.
If you aren’t completely comfortable in your knowledge of the markets and placing trades, it isn’t wise to do so. Mistakes can be costly. I have seen online traders loses hundreds or thousands of dollars simply because they were unprepared for online trading but insisted on saving a few dollars in commission. Examples of common mistakes are unknowingly executing trades in extremely thinly traded markets, buying or selling the incorrect number of contracts, selling instead of buying or vice versa, placing a stop order when it should have been a limit, etc.
Many of the mistakes made by inexperienced online traders stem from a lack of emotional stability. Whether looking to get out of a trade gone bad or to take a profit on well speculated position, exiting a market can be psychologically challenging. A good futures broker can’t save you from yourself, but he may be able to eliminate some of the risk by being aware of your positions.
Margin Call Management
While most retail traders don't fully understand SPAN, or Standard Portfolio Analysis of Risk, a seasoned commodity option broker should. It is difficult to put a monetary value on the ability to alleviate a margin call without wiring money, or completely liquidating positions. Working with a commodity broker opens the door to possible margin adjustments such as buying or selling options as a hedge against current positions, or trading futures contracts that counter the risk of your current option portfolio. These types of moves, if done correctly, will not only appease the margin department, but they will generally reduce the volatility of your positions. If you are unaware of the mechanics of SPAN working with a broker, or at least having one as a back-up to your online trading ventures, will be well worth the commission paid should you ever get into a tight margin situation.
This may sound corny but many traders find that the people that they are closest to either have no interest or have no knowledge of the trading world. Thus it can be hard to have a full blown conversation with friends and family about trading, but your full service broker will always be there for you.
Ensure Trading Account Efficiency
The goal of a broker should be to ensure clients have little, to no, stress outside of their trading decisions.
A full-service commodity broker will work hard to make sure that everything is running smoothly. This means you are receiving statements by email from the FCM, you have access to your end-of-year tax information, you have ample market access (properly functioning trading platform, quotes, charts, etc), and you have the means of executing orders via phone 24 hours per day.
Further, technology has changed the way brokers communicate with clients. High service brokers might accept orders from clients during trading hours via instant message, text message, or email. Of course, there are certain obstacles with this such as server errors, but in such an instance it is always possible to simply pick up the phone.
Saving money in commission may actually be more expensive in the long run than paying a full-service broker. This is because there is a substantial amount of risk involved in trade execution. If you aren't comfortable with your knowledge of the markets and trading platforms, or are capable of exercising psychological stability when it comes to trading, you and your account may be an accident waiting to happen. However, if you are an experienced and well informed trader, you should be looking to trade online at a reasonable rate as there is no reason to pay for service that won't help you reach your goals.