Futures Brokers are Getting Rich!

Don Dawson

This is what you hear a lot of times from losing traders.  They are always complaining the broker is getting rich while they are losing money.  Most of the time the losing trader turns out to be a gambler and is looking for somebody to blame other than themselves.

I have held a Series 3 Commodity Brokers license, not because I wanted to be a broker, but because I was a self-taught trader and wanted to learn what the markets are all about.  By studying for the exam and passing it, I learned a great deal about the Futures markets mechanics.  Mind you, this was back in the 80’s before we had trading schools to attend or internet to research information on.

Free Trading WorkshopA Futures broker takes on a lot of personal risk when they open an account for a client.  For example, a Futures broker is personally responsible for a client’s losses he/she cannot cover.  This is why there is so much scrutiny when you open a Futures trading account.  This is also why a trader is required to deposit at least US $5,000 cash into an account before they can trade.  This money will be used for margin (collateral while in an open futures trade against any losses the trader may incur).

The broker will also make sure your positions are closed out before First Notice Day (FND) so you are not assigned delivery of the cash product you are trading.  For example, 1,000 barrels of oil, 5,000 bushels of corn, etc.

Then the broker will have day to day responsibilities involving customer relations, cultivating new clients, servicing existing client’s needs and, of course, keeping an eye on markets that his clients have positions in.

Assuming you had these responsibilities you would probably want to be compensated at a very high rate.  A brokerage firm might show an ad for commission cost and show $1.29 per side plus fees.  Each trade has two sides – an entry and an exit transaction.  The futures broker themselves only gets a small percentage of this $1.29.

You are probably wondering why these numbers seem so low, but your commissions are probably around $5.00 round turn.  Round turn includes both transactions –entry and exit.

What is a futures broker?The price you pay as a retail customer has built in fees other than just the brokerage commission.

Here is an example of a typical discount brokerage fee breakdown:

Exchange Fee (Clearing Fee and Globex Fee)  $2.34

National Futures Association Fee  (NFA Fee)    $ .03

Brokerage Commission                                         $2.58

$4.95 round turn per contract Cost to Customer

The Exchange the product trades on charges customers a fee for each contract the customer trades.  This is a variable from market to market.  For example, the mini S&P has a different Exchange fee than the Corn market will.

You can see the CMEGroup Exchange fees per contract on this page page by clicking on the Exchange your product trades on.  There will be an Excel spreadsheet download.  Inside the Excel spreadsheet you will look down the left side of the page for “Customers of Member Firms (Non-Members)”.

Looking to your right you will see three columns listed – Clearing Fee, CME Globex Fee and a third column you can ignore.  Find the product you are trading and add the two columns prices together.  This is a per side fee.  Now you double that number.  This becomes your Exchange fee for the right to trade their product.

The National Futures Association (NFA) fee is an amount we pay for each trade we make to subsidize the operational cost of this association.  The NFA is a regulatory agency that makes sure anybody who can come in contact with public money is registered and monitored so our money is safe.

The brokerage fee is as we explained previously, a fixed amount your broker charges you for each contract you trade regardless of the market you are trading.

When you add them all up you get the total cost for your commission you pay as a trader.

I hope this helps you appreciate your futures broker a little bit more, and not assume that because you had a losing trade he/she is getting rich.  Remember, in trading we make our own decisions to buy or sell and we have to personally accept the outcome win or lose.

“Your life doesn’t get better by chance.  It gets better by choice.”

Don Dawson

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.