Commodity Brokers and Commission Rates
One of the first matters of concern for a prospective client when it comes to a commodity broker is the level of commissions. It is a valid concern, but one must make sure they fully understand the answer before making a decision on choosing a commodity broker based on just the level of trading commissions.
Comparing Commission Rates
In the electronic age, commission rates on trading commodities have declined dramatically.
In the 1990’s, many commodity brokers were charging in excess of $150 per round-turn, meaning for a buy and sell transaction. Since about 2005, full-service rates have typically declined to between $30 and $80 per round-turn.
Remember, commission rates on futures contracts are paid per contract, not per order. Therefore, a transaction of 100 contracts is 100 times more expensive than a transaction of 1 contract. Electronic brokers leave all the decisions and execution to you and they offer the lowest rates when it comes to brokerage commissions.
It is important to make sure that you always compare commissions based on a round-turn rate. A round-turn rate covers both the buy and sell sides of a trade. A half-turn rate only covers the buy or sell side of a trade.
The trading style of a full-service commodity broker plays a major part in the commission you that the broker charges. If the broker desires to make trade recommendations each day, a customer should expect a commission rate somewhere near the low end of the range.
If the broker only plans on making one trade every month or two, you should expect commission rates on the higher end of the spectrum.
A commodity broker is in business to make money, but one must make sure they are paying for solid advice and recommendations and not for just the sake of paying commissions.
It is highly unlikely your account will be profitable if you are a very active trader paying $80 per round-turn in commissions.
Negotiating Commission Rates
Many new traders will choose a commodity broker based on commission rates. There is a lot more to the commodities futures business than just the rate of compensation paid to the broker. The main reasons for choosing a commodity broker should be whether you believe the broker will enhance the profitability of your account and if you feel the broker will be a valuable partner when it comes to helping achieve trading goals and objectives in the futures markets.
A commodity brokerage firm can pay about $10 - $15 to clear their trades with their FCM. Your commodity broker normally gets paid around 50% of the commissions charged to clients. Often, the clearing fee is subtracted right off the top of their payout. So, if you expect to get a $30 commission rate from your broker, the broker is likely earning less than $10 per trade.
One must be reasonable when hiring a full-service commodity broker to execute and make recommendations. It would be unfair to expect the broker to devote half of the day to someone who only executes one trade each month that earns the broker $20 in commission.
However, an active trader who pays a substantial amount in commissions on a monthly basis should make sure that the broker is prepared to devote the time required to service the account in a proper fashion.
Most commodity brokers are willing to negotiate commission rates, especially when it comes to their established and active clients. If you are not able to negotiate lower rates when you open an account, you may be able to negotiate later as the relationship with your broker evolves.
If you have not been making money with your commodity broker because of their recommendations, you can always negotiate for a break in commissions. However, if you are consistently losing money with a broker, it may be time to look someone else.
If your broker is making you a good return on your investment you may not want to rock the boat as in the world of commodity brokers, one often gets what they pay for.
Good commodity brokers are hard to find. It is always better to pay higher commissions to those who consistently make money rather than taking a chance with an unproven and untested commodity broker.