How to Become a Commodity Broker
Commodities brokers operate in a more specialized field than stockbrokers or registered securities representatives. As of the date that this article was originally published, there were more than 663,000 registered securities representatives and only around 53,000 registered commodity brokers. Most everyone today knows how to buy stocks and mutual funds online, but most people do not have a clue on how to trade commodities. I believe there will always be a need for the role of the commodity broker.
As with most other professions, you probably want to know the answers to two questions when it comes to becoming a commodities broker:
One can make a very good living in the world of commodities brokerage, but you have to be willing to put in the time and effort to become educated and proficient in the business. You will most likely enjoy working as a commodity broker if you have a strong interest in trading commodities and you possess sales skills. Sales are an important consideration as since you will have to open accounts and build a book of business.
Process for Becoming a Licensed Commodity Broker
You will be required to take and pass the Series 3 examination. Do not confuse this with the Series 7, which is required for Stock Brokers. The exam has two sections The first consists of questions that will test you on general futures market knowledge, hedging, futures contracts, orders, options and most everything involved in trading. The outline from for the test can be found on the NFA website.
The second part of the test will cover rules and regulations. Do not take this part of the test lightly. It deals with the “treating the customer properly” issues. Your brokerage firm should have study manuals for you and there are several online study courses available. The rules and regulations are always changing so be sure to have the latest study guide that will cover the latest regulatory reforms and issues.
Next, you will need to fill out an 8-R form with the NFA. This basically provides the NFA with your life history. It includes your employment history for the last 10 years and your residential history for the last 5 years. It also covers your criminal history and well as any disciplinary actions if you have been licensed in other financial professions.
The reason for the in-depth profile is that you are required to go through a background check with the FBI before you are given a temporary license. You will also need to get fingerprinted, usually at your local police office, and the card will be sent to the NFA along with your 8-R.
Where to Work as a Commodity Broker
Prior to starting the process to become a commodities broker and getting a license, you need to have a place to work. 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. However, most FCMs are located in Chicago or New York. As far as the number of firms, there were about 1,500 Introducing Brokers and about 150 FCMs at the time of this original piece.
Being a commodity broker is a combination of being a salesperson with the analytical ability to research commodity markets as well the skill to trade commodities. Many commodity brokerage firms have research departments that do a lot of the analysis for you and make trade recommendations, therefore, sales skills could be the most important attribute.
Chicago is definitely the place to be for trading commodities. It is home to the CME Group - which is now one of the two biggest commodities exchanges in the world. It may be the best place to learn and get a start. Most other major cities will have a handful of commodity brokerage firms. You probably will have to look at a firm that specializes in commodities as the large wirehouses like Merrill and Morgan Stanley most likely will not hire candidates exclusively for trading commodities.
Commodities brokerage can be a very rewarding profession and many who last more than a couple years are hooked and remain in the industry for a lifetime.
Good luck and study hard for the test!
The Commodities Business is Always Evolving
The commodities market is a highly cyclical business. During bull markets there tend to be lots of interest from the ever expanding investor community. During these times, there are many jobs available for new brokers breaking into the business. However, during bear markets, the business tends to contract as volumes and interest dry up.
From 2003-2011/2012, there was an active bull market in commodities and prices moved progressively higher, attracting a great deal of investor interest as commodities moved from alternative investment vehicles into the mainstream. However, from 2012-early 2016, bear market conditions caused interest in the sector to decline, and opportunities for brokers decreased alongside prices. There had been signs that the commodities markets started to pick up again in the spring of 2016. Prices bounced off lows, and the commodity brokerage business started to look better as it is a function of volume and price action.
Since then, increased volatility in many commodities markets has resulted in strong volumes of buying and selling transactions.
Another area to consider, if you want to enter the fast moving and exciting world of commodities, is in the traditional equity markets. The advent of ETF and ETN products has made commodity exposure available to investors, traders, and speculators in their traditional stock accounts. This type of brokerage requires the traditional SEC license, the Series 7 as opposed to the Series 3 requirement.