Lessons from the Pros


Futures Brokers Commissions

Trading the Futures markets requires a trader to open a Futures account with a brokerage firm. The brokerage office will handle all of the documentation needed to open the account. Once the account is funded, usually with a minimum of $5,000 USD, the trader is allowed to place orders in the Futures markets. These funds are kept in a segregated account in your name through a Futures Commission Merchant (FCM). For example, you may have a trading account with TradeStation, but your funds are kept at RJ O’Brien, an FCM.

Free WorkshopYou are then assigned a broker who will assist you with your questions and any support you need understanding the platform for entering your orders. If you should ever need assistance with a reporting error on your trading statements your broker will help you to resolve this. If for some reason your account has insufficient funds to maintain an open Futures position, then your broker will contact you with a margin call requesting you send cash to replenish your low balance account or the broker will be required to liquidate your position if you cannot obtain the funds needed. In some instances your broker might offer more services, like making trade recommendations or perhaps he has your power of attorney allowing him to make trades in your personal account.

For all of the above services there comes a cost. How much it will cost you depends on how much support you need as a trader. Futures brokers work on commissions charged to you each time you trade a Futures contract on a Futures Exchange. Remember, in the Futures markets you pay a commission on “each” contract you trade. If you are trading 3 E-mini S&P contracts at once you will be charged 3 separate commissions.

If you are a new trader and will need more assistance to place your trades, then expect to pay a little more in commissions than a more experienced trader who can place their own orders without any assistance or support for making trading decisions. When a trader places their own orders and makes their own buy/sell decisions they are called self-directed accounts. Commissions for these traders are typically much lower and are called discounted commissions.

If you allow your broker to do research for you and make trade recommendations then expect to pay a little more in commissions. After all, time is money.

Some brokers will place the trades they have researched for you, without having to disturb you prior to the trade. This is known as a full service broker and you can expect to pay much more in commissions. These brokers are also required to have a power of attorney from you before they can trade your account.

How much you pay for each trade is determined by which of the above mentioned services are provided by your broker. Keep in mind that cheap commissions don’t always make for the best broker. For example, if you are placing Futures trades as a new trader and accidently place a market order in a contract month that is in delivery you could possibly be assigned a Futures contract of whatever market you are trading. For example, corn would be 5,000 bushels sitting in your driveway while crude oil could have you stacking 1,000 barrels of oil. All of this because you decided to take the cheaper route and pay $3.00 less per trade.

The industry standard for discounted commissions is approximately $5.00.

For $5.00 your trade is covered for both sides of the entry and the exit, unlike in the Equities market where you pay a commission to enter the trade and to exit the trade. This is referred to as a round turn (R/T) commission.

As I wrote earlier, you will also pay this $5.00 for each contract you trade. If you trade just one contract expect a commission of $5.00. If you are trading 3 contracts expect to pay $15.00 in commissions.

Your broker does not get this entire $5.00. I am sure they would like to have it, but they only get a very small percentage. Inside this $5.00 are other fees that make up your total commission charge: the first one is the National Futures Association fee which typically is between .10 and .35 per trade, the other fee is the Exchange fee where the Futures Exchange charges you for the right to trade that Futures contract on their platform and can be as high as $2.25 per contract.

A discount broker only gets about .50 to 1.00 per contract you trade. Obviously, this varies from broker to broker depending on the deal they reach with their head office.
While these numbers I gave you do not add up to $5.00, you can get a feel for where your commission dollars go.

“People rarely succeed unless they have fun in what they are doing.” Dale Carnegie

– Don Dawson

DISCLAIMER 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.