What is a Commodity Broker?

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A commodity broker typically refers to the person who places commodity trades on behalf of his clients. The term commodity broker is also synonymous with the brokerage firm that handles commodity trades. For registration purposes, the brokerage firms are designated as Introducing Brokers(IB) or Futures Commission Merchants(FCM). The individuals are designated as Associated Persons (AP).

The Work of Commodity Brokers

Commodity brokers facilitate trading in the commodity markets for the average investor.
Aside from owning a seat on an exchange and trading in the commodity pits, most people have to trade commodities through a broker.

Commodity brokers have the traders on the floor to execute your trades or they have a trading platform that places and executes trades electronically at the exchanges. The exchanges rely on brokers to bring business to the exchanges and they have their own rules to govern how the brokers conduct business. It is much easier to conduct business with a couple dozen brokerage firms than it is to let hundreds of thousands of individuals place trades directly with an exchange.

Many individuals also rely on commodity brokers for trading advice and recommendations. In essence, commodity brokers make it easier for individuals to begin trading commodities. The commodity markets can be difficult to understand initially and many people probably would never trade commodities without the help of a broker.

Online Broker vs. Full Service

Commodities were exclusively traded in the commodity pits on exchanges until the 1990’s. Most of the orders were placed by phone through a full service broker. The typical order went something like this:

A client would call his broker (IB) with a trade he wanted to place. The broker would take the order and timestamp it. He would then immediately call the clearing firm (FCM) that handled their orders and relay the same trade that his client called in. This call typically goes to a phone bank on the exchange floor where a clerk takes the order. From there, the clerk writes a ticket for a floor broker in the pits to execute or she hand signals the order to the pit. Once the floor broker fills the order in the pit, he gives the ticket to a runner or signals back to the clerk. The clerk then tells or calls the broker back with the trade confirmation. Once the broker has the information, he calls his client back with the fill price.

That will sound a bit archaic, as we now step into online trading:

When placing a commodity trade online, the client will log into his trading platform that is furnished by the broker. He will select the market he wants to trade, along with the type of order, price, quantity, etc. This is all done with a couple clicks of the mouse. Once the order looks good, the trader will hit the Buy or Sell button which sends the order through. The order is routed instantly to the exchange’s trading platform and matched with other like orders. A market order is typically filled instantly and the trader typically has a confirmation or his computer within a second or two.

As you can see, the commodity broker is accomplishing the same task with pit trading as online trading. However, online trading is much quicker, efficient and cheaper. Individuals still have the opportunity to use a full service broker where they can discuss trading opportunities. Many brokers have a mix between the two, where a trader can talk with a broker and place his own trades online.

In reality, a commodity broker is the go between for individual traders and the exchanges. They make the process more orderly through technology, experience and monitoring regulations.

Commodity brokers also help bring in customers to trading the commodity markets. Without commodity brokers, there would be substantially less business being done in the commodity markets and people would be much less educated on the commodity markets.