How To Start a Commodity Brokerage Firm
Opening a commodity brokerage firm might seem like a daunting task, but knowing the proper steps and requirements beforehand can save you a lot of time and headaches.
Commodity brokerage firms are known as Introducing Brokers in the futures industry. There are many Introducing Brokers registered with the National Futures Association (NFA). Some firms operate with only one person, while others have many employees and branch offices. Chicago is the hub for commodity brokerage firms, while Florida, Texas, California and New York are other popular locations for Introducing Brokers.
The first thing to be done is to sit for and pass the Series 3 Exam if you are not a current broker and registered as an Introducing Broker with the NFA. There must be at least one Associated Person (AP, commonly called a broker) listed with the firm. If you plan on being a one person entity, you must become an AP. There are expenses involved in registration as well as regulatory paperwork.
A critical step in the initial process of opening a firm is entering into an agreement with a Futures Commission Merchant (FCM). There must be a signed agreement between an Introducing Broker and an FCM before someone can register and do business with the public. An FCM will execute and clear the trades, handle client funds, provide back-office support and in many cases, guarantee your firm. Therefore, the FCM will be selective when it comes to entering an agreement with any Introducing Broker.
IB Business Plan
A business plan is crucial to any startup business. You will need to have an office opened and ready to conduct business. You must decide on how you plan on obtaining clients to earn enough revenue to sustain the business. Initial revenue provides a base to build upon. A plan to raise equity and pursue customers is the most important aspect of starting your business. Many common routes are to pay for advertising, conduct seminars and approach friends and family for business and support.
Before you land your first client, you need to be totally educated in trading in the commodity futures markets. Some brokers concentrate on one market or one sector of the market, but successful brokers have the ability to trade every market on the futures exchanges around the United States. Some clients make their own trading decisions, while others will rely solely on your advice. The more skilled you become at successful commodities trading, the more likely you will retain clients and grow your brokerage business.
If you consistently lose money trading commodities and your clients rely on your advice, you will be fighting an uphill battle to succeed and should probably look for another business.
To summarize the process of opening an Introducing Commodity Brokerage firm, you will need to pass the Series 3 Exam and arrange for all proper registrations with the NFA. You will need to choose and negotiate an agreement with an FCM for clearing of trades and handling of accounting and client statements. Remember to prepare a clear business plan that includes projected costs and revenues. Spell out how you plan on opening new accounts and growing your business. If you plan on making trading recommendations for your clients, make sure you have a solid trading plan and a successful track record in trading before you venture into managing money for customers.
Final thought on starting your own IB business
Starting a brokerage firm can be a lucrative venture. However, it takes years to learn the trading business and the ins and outs of each commodity futures contract listed on U.S. exchanges. Sometimes, it is best to work with another experienced Introducing Broker as an apprentice before starting your own business. There is always a risk in a new business. Without those risks, there can be little reward. The best commodities traders understand risk-reward better than many others because of the high volatility of the raw material markets.
Starting an IB is the first risk of many you will have to take.