How to Become a Commodity Broker
You probably want to know the answers to two questions about becoming a commodities broker:
- How much money can you make?
- Will you enjoy working in the futures industry?
Commodities brokers make a very good living. Brokers with less than three years of experience made a base salary of between $100,000 and $150,000 as of 2013. Those with five or more years of experience made an average base salary of between $200,00 and $350,000, but you have to be willing to put in the time and effort to become good at it, and you need to pass a tough licensing application process.
You will enjoy working as a commodity broker if you have a strong interest in trading commodities and you have sales skills. Sales are an important consideration as you will have to open accounts and build a book of business.
Commodities brokers operate in a more specialized field than stockbrokers or registered securities representatives, and there are far fewer of them.
Becoming a Licensed Commodity Broker
Every commodity broker must be licensed and registered with the National Futures Association (NFA) as an "associated person."
To get that license, the applicant must pass a test called the Series 3 examination. The outline form for the test can be found on the NFA website.
The exam has one section that tests general futures market knowledge and a second covering the rules and regulations. Do not take this part of the test lightly. It deals with “treating the customer properly” issues.
If you're already working for a brokerage firm, it should be able to provide study manuals. There are several online study courses available. Whatever source you use, make sure it's up to date. The rules and regulations change frequently.
An applicant also is required to fill out an 8-R form with the NFA. This form covers the applicant's employment history for the last 10 years and residential history for the last five years. Any criminal history must be reported as well as any disciplinary actions imposed in other financial professions.
Then the applicant has to get fingerprinted, usually at a local police station, and the prints and the 8-R form are sent to the FBI for a background check before the applicant can be approved for a temporary license.
Where to Work as a Commodity Broker
Before starting the process to become a licensed commodities broker, the applicant must already be working in the field. Most stock brokerage firms do not trade commodities, so you should look for a firm that specializes in commodities. These are typically called Introducing Brokers or just IBs.
You can also work directly for an FCM, or Futures Commission Merchant. Most FCMs are located in Chicago or New York.
Getting to Work
Working as a commodity broker combines sales skills with the analytical ability to research commodity markets and the skill to trade commodities. Many commodity brokerage firms have research departments that do much of the analysis and make trade recommendations. That means sales skills are the most important attribute.
Chicago is the place to be for trading commodities. It is home to the CME Group, one of the biggest commodities exchanges in the world, among others. Most other major cities have only a handful of commodity brokerage firms.
You'll probably have to look for a firm that specializes in commodities. The big financial companies like Morgan Stanley don't often hire candidates exclusively for trading commodities.
Bull and Bear
The commodities market is a highly cyclical business. During bull markets there tend to be lots of interest from an ever-expanding investor community and jobs available for new brokers breaking into the business. During bear markets, the business contracts.
From 2003 to 2012, there was an active bull market in commodities and prices moved progressively higher, attracting a wave of investor interest. Commodities moved from alternative investment vehicles into the mainstream.
Then, from 2012 into early 2016, bear market conditions caused interest in commodities to decline, and opportunities for brokers decreased along with prices. Later still, increased volatility in many commodities markets resulted in strong volumes of buying and selling.