A commodity broker is a firm or an individual who executes orders to buy or sell commodity contracts on behalf of the clients and charges them a

commission In-Commission or commissioning may refer to: Business and contracting * Commission (remuneration), a form of payment to an agent for services rendered ** Commission (art), the purchase or the creation of a piece of art most often on behalf of anot ...

. A firm or individual who trades for his own account is called a trader. Commodity contracts include futures, options, and similar

financial derivatives In finance, a derivative is a contract between a buyer and a seller. The derivative can take various forms, depending on the transaction, but every derivative has the following four elements: # an item (the "underlier") that can or must be bou ...

. Clients who trade commodity contracts are either hedgers using the derivatives markets to manage risk, or speculators who are willing to assume that risk from hedgers in hopes of a profit.

History

Historically, commodity brokers traded grain and livestock futures contracts. Today, commodity brokers trade a wide variety of financial derivatives based on not only grain and livestock, but also derivatives based on foods/softs,

metals A metal () is a material that, when polished or fractured, shows a lustrous appearance, and conducts electricity and heat relatively well. These properties are all associated with having electrons available at the Fermi level, as against no ...

energy Energy () is the physical quantity, quantitative physical property, property that is transferred to a physical body, body or to a physical system, recognizable in the performance of Work (thermodynamics), work and in the form of heat and l ...

stock indexes In finance, a stock index, or stock market index, is an Index (economics), index that measures the performance of a stock market, or of a subset of a stock market. It helps investors compare current stock price levels with past prices to calcul ...

equities Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporation in proportion t ...

, bonds,

currencies A currency is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use wi ...

, and an ever growing list of other underlying assets. Ever since the 1980s, the majority of commodity contracts traded are financial derivatives with financial underlying assets such as stock indexes and currencies. Post the implementation of the Volcker rule in 2014, the number of commodity trading houses and individual brokers have dwindled.

Types

Firms and individuals who are often collectively called commodity brokers include: Floor Broker/Trader: an individual who trades commodity contracts on the floor of a

commodities exchange A commodities exchange is an exchange, or market, where various commodities are traded. Most commodity markets around the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, ...

. When executing trades on behalf of a client in exchange for a commission he is acting in the role of a broker. When trading on behalf of his own account, or for the account of his employer, he is acting in the role of a trader. Floor trading is conducted in the pits of a commodity exchange via

open outcry Open outcry is a method of communication between professionals on a stock exchange or futures exchange, typically on a trading floor. It involves shouting and the use of Hand signaling (stock market), hand signals to transfer information pri ...

. A floor broker is different from a "floor trader". The floor trader also works on the floor of the exchange but makes trades as a principal for his or her own account or for the floor trader's firm. Futures Commission Merchant (FCM): a firm or individual that solicits or accepts orders for commodity contracts traded on an exchange and holds client funds to

margin Margin may refer to: Physical or graphical edges *Margin (typography), the white space that surrounds the content of a page * Continental margin, the zone of the ocean floor that separates the thin oceanic crust from thick continental crust *Leaf ...

, similar to a securities

broker-dealer In financial services, a broker-dealer is a natural person, company or other organization that engages in the business of trading securities for its own account or on behalf of its customers. Broker-dealers are at the heart of the securities and ...

. Most individual traders do not work directly with a FCM, but rather through an IB or CTA. Introducing Broker (IB): a firm or individual that solicits or accepts orders for commodity contracts traded on an exchange. IBs do not actually hold customer funds to margin. Client funds to margin are held by a FCM associated with the IB. Commodity Trading Advisor (CTA): a firm or individual that, for compensation or profit, advises others, on the trading of commodity contracts. They advise

commodity pools A commodity pool is an investment structure where many individual investors combine their moneys and trade in futures contracts as a single entity in order to gain leverage. They are analogous to mutual funds wherein a fund is similarly set up expre ...

and offer managed futures accounts. Like an IB, a CTA does not hold customer funds to margin; they are held at a FCM. CTAs exercise discretion over their clients' accounts, meaning that they have power of attorney to trade the clients account on his behalf according to the client's trading objectives. A CTA is generally the commodity equivalent to a

financial advisor A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory ...

mutual fund A mutual fund is an investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in ...

manager. Commodity Pool Operator (CPO): a firm or individual that operates commodity pools advised by a CTA. A commodity pool is essentially the commodity equivalent to a mutual fund. Registered Commodity Representative (RCR)/Associated Person (AP): an employee, partner or officer of a FCM, IB, CTA, or CPO, duly registered and licensed to conduct the activities of a FCM, IB, CTA, or CPO. This is the commodity equivalent to a

registered representative A registered representative, also called a general securities representative, a stockbroker, or an account executive, is an individual who is licensed to sell securities and has the legal power of an agent in the United States. Registered repre ...

Regulation

A single firm or individual may be registered and act in more than one capacity. In the United States, an individual working in any of the above roles must pass the Series 3 National Commodity Futures Examination administered by the

Financial Industry Regulatory Authority The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) that regulates member brokerage firms and exchange markets. FINRA is the successor to the National Associati ...

(FINRA). With few exceptions, most individuals who act as a FCM, IB, CTA, and CPO, as well as their RCR/APs, are required to register with the

Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is an Independent agencies of the United States government, independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures contract, fut ...

(CFTC), and be members of the

National Futures Association The National Futures Association (NFA) is the self-regulatory organization (SRO) for the U.S. derivatives industry, including on-exchange traded futures, retail off-exchange foreign currency (forex) and OTC derivatives ( swaps). NFA is headqu ...

(NFA). Floor brokers/traders who are members or employees of a commodity exchange generally do not need to be members of the NFA, as they are regulated by the exchange.

Exchanges

Commodity brokers can trade commodities on various exchanges, which specialize in trading a certain commodity type. The common commodity exchanges include the

New York Mercantile Exchange The New York Mercantile Exchange (NYMEX) is a commodity futures exchange owned and operated by CME Group of Chicago. NYMEX is located at One North End Avenue in Brookfield Place in the Battery Park City section of Manhattan, New York City. ...

(NYMEX) that trades in a variety of commodities,

Chicago Board of Trade The Chicago Board of Trade (CBOT), is an American futures exchange, futures and options exchange that was founded in 1848. On July 12, 2007, the CBOT merged with the Chicago Mercantile Exchange (CME) to form CME Group. CBOT and three other excha ...

(CBOT) that trades in wheat, rice, soybeans, oats, corn, silver, gold, and ethanol, and the

Intercontinental Exchange Intercontinental Exchange, Inc. (ICE) is an American multinational financial services company formed in 2000 that operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. Listed on the ...

(ICE) that trades in crude oil, electricity, and natural gas. Others include the

CME Group CME Group Inc. is an American financial services company based in Chicago that operates financial derivatives exchanges including the Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, and the Commodity Exchange. ...

, Kansas City Board of Trade,

London International Financial Futures and Options Exchange The London International Financial Futures and Options Exchange (LIFFE, pronounced 'life') was a futures exchange based in London. In 2014, following a series of takeovers, LIFFE became part of Intercontinental Exchange, and was renamed IC ...

, and the

New York Board of Trade ICE Futures U.S.—known as the New York Board of Trade (NYBOT) until September, 2007— is a physical commodity futures exchange located in New York City. It is a wholly owned subsidiary of Intercontinental Exchange (ICE). History It origi ...

References

{{DEFAULTSORT:Commodity Broker Commodity markets Commodities used as an investment Brokerage firms

History

Types

Regulation

Exchanges

See also

References