What is a commodity broker and how do they work

What is a commodity broker and how do they work

A commodity broker refers to an individual broker or brokerage firm that manages commodity trades for its clients.

Commodities can be understood as tangible goods which are sold and traded around the world such as agricultural products, industrial metals, and energy sources like crude oil. Besides being a part of the direct trading market, investors can purchase and sell these products as futures, options, and various other financial derivatives. Derivatives refer to financial contracts using which investors can buy or sell the underlying asset or security at a predetermined rate on a predefined date in the future. Commodity brokers can manage futures and options as well as financial products. Visit multibank group

Several people depend on commodity brokers for trading advice and suggestions. Since commodity markets could seem challenging, several investors feel apprehensive to trade without involving a broker. Brokers could be of great help to amateur traders. 

Commodity Brokers

Commodity brokers are an important part of the trading process, irrespective of whether the trades happen online or over the phone. The term “commodity broker” is used to address a person/firm responsible for placing commodity trades on behalf of their clients. 

Let’s take the instance of an auto manufacturer that requires aluminum for production. The company could carry out a futures contract for how much aluminum is to be delivered at a future date. The commodity broker would execute the trade by quoting the price and processing the contract. They would also demand a fee or a commission for their service.

Irrespective of how the prices of aluminum move in the future, the manufacturer is going to get the raw material at the fixed contract price by the contract’s settlement date.

How Commodity Brokers Work

Commodity brokers help investors carry out trades in the commodity markets. Besides getting a seat on an exchange and trading in the commodity pits, a majority of people need to trade via a broker. 

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Commodity brokers work with traders who operate from the floor and help in carrying out trades on your behalf. They could even have a trading platform that allows one to place and execute trades electronically. The exchanges depend on brokers for more business and have their set of rules to guide the way they run their business. It’s easier to work with some brokerage firms rather than having thousands of investors place direct trades. 

Full-Service Brokers

Commodities were exclusively traded on exchanges until the 1990s. A full service-broker would take the orders received over a phone call and the whole process could look like this: 

A customer would reach out to their introducing broker (IB) over the phone, with a trade they’d like to place. On receiving the order, a broker would time-stamp it. They would reach out to the futures commissions merchant (FCM) which takes care of the IB’s orders and then pass on the same trade called in by their customer which would further be forwarded to a phone bank on the exchange floor, where a clerk made note of the order.

The clerk would then write a ticket for a floor broker in the pits to carry out the trade or they would need to send it to the pit using a hand signal. As soon as the floor broker filled the order in the pit, the ticket would be handed to a runner or signal back to the clerk. The clerk would have to call back the broker to confirm the trade who would further reconnect with the customer with the price and financial details of the transaction.

Online Commodity Trading 

Someone who trades online would log into their broker’s trading platform. They would choose the market they’d like to trade and pick their order type, price as well as quantity. The process could be completed in a few clicks and once all the details become clear, clicking on the “Buy” or “Sell” button would pass on the order. The order is immediately directed to the exchange’s trading platform and aligned with similar orders. A market order typically is filled immediately so a trader can get a confirmation on their systems in seconds. 

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Online trading is not just fast but also cost-effective. You could also choose to opt for a full-service broker, who would let you discuss trading opportunities and test out different options. Several brokers bring you a combination of two: you’d be able to interact with your broker and trade online. 

Brokers and Commission Rates

Commission rates on trading commodities have reduced drastically as most people have shifted to online trading. Several discount brokers had been charging more than $50 per round turn at the beginning of the 2000s which came down to less than $10 per round turn with online trading. 

Commissions on Futures

Futures contract rates are paid on individual contracts and not per order. A transaction involving 100 contracts would be a lot more pricier than a single contract. With electronic brokers who charge low commissions, you are the decision maker and you remain in control of what you’d be ultimately trading. 

Full-Service Broker Commission

The way a full-service broker trades becomes a key factor in deciding how much commission they could charge. You must anticipate a rate on the lower side of the range should the broker be inclined to make trade recommendations daily. Should the recommendations come only once or twice a month, the rates would be higher. 

Remember that a broker’s goal is to make money, that’s why they’re in business. Thus, it is for you to make sure that your money is being put to good use and that you’re getting some good advice from your broker. Know more materials primas

Active vs. Seldom Trader Commissions

Be realistic and reasonable while working with a full-service broker to execute trades and offer recommendations. It would not be fair to them if you’d want them to spend most of their day making recommendations for you when you’re not an active trader but someone who trades only once a month. That trade would not earn them enough commission to keep things running. Instead, they should be focusing on a trader who interacts with them much more regularly. 

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