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Items you need to improve and protect your FCM or IB...

1.   Very important and useful forms and letters for different applications for the FCM and the Introducing Broker.  Visit our "forms" page.

SHOULD I DO FUTURES TRADING BUSINESS
WITH THE VOICE ON THE PHONE?

You are at work in the afternoon or at home in the evening, and you get a call from a commodity representative. You've considered trading futures contracts and you have the risk capital available, so when you get the call you are interested in what the rep has to say. You listen as the rep goes through the pitch. After the call, ask yourself some questions and do your "due diligence" before making the commitment. After all, this is your money and losing it in the market is one thing, but losing it to high commissions or over trading is another. So the first question is, "did you really listen?"

Did you feel pressured to "act now" or an opportunity would be missed? If so, don't do business with the caller no matter how wonderful the rest of the information sounds. In futures trading, there is always an opportunity to trade, or one will be along in a few minutes or a couple of days. Did the solicitor warn you of the risks and tell you that trading in commodity futures is not for everyone? No matter how experienced you are at trading, the NFA requires the representative to alert you to the extreme risks of trading, and to inform you that such trading may not be for you. Was the discussion of these risks "minimized" in any way? Remember, if you BUY options you have pre-determined risk. If you trade futures or SHORT options, you are taking on unlimited or open-ended risk. This unlimited risk also applies to the trading of spreads. Although spreads can be less risky, they can also be devastating to your portfolio.

Did the solicitor ask you if you had risk capital available to trade, or did they simply go into their pitch, and TELL you how much money you would have to trade? This is a common tactic used to intimidate you and rush you into a decision. If the caller did this, or if he or she told you that you should take all the money from your savings account, or cash in your retirement fund, or borrow against the house to open your account... HANG UP! Before an account executive discusses opening an account with anyone they must first qualify the prospect. This includes, among other things, determining whether or not the prospect has the financial ability to accept the risks involved. Then with the help of the prospect, the representative must determine the amount of capital that would be right to trade.

Did the solicitor talk about how successful he or she was when it comes to trading? Or did they tell you how you shoulda' been in this last trade cause if you woulda', you coulda' made this much money? ... HANG UP! This too is a method to get you to act at once.

One or perhaps two phone calls will start you on the right track to properly performing the necessary due diligence. Call the National Futures Association. The NFA is the "watch-dog" of the futures industry. Call them at 800-621-3570 and ask about the representative that solicited you. They will report to you whether or not that person is registered. Ask further, and the NFA will tell you if there are any complaints or reparations against your rep. Be sure to also ask about the company the rep works for. All companies and representatives must be registered with the NFA and the Commodity Futures Trading Commission (CFTC) to do business in futures. Then call the CFTC at 202-418-5250 for the same information. If there are any complaints or reparations, the NFA and CFTC will send you a copy of them, along with the action taken against them. The most important things to watch for are customer complaints or Business Conduct Committee (BCC) actions against the company for things involving "misuse of customer funds", "under capitalization", or "defrauding the customer". Most futures firms, and security firms for that matter, have complaints against them. In a business dealing with money you are bound to, but although complaints are normal, the above actions can be a hint of real problems.

What about commissions? How much is too much, and how much is fair? This is a very subjective matter. The range for commission charges is very broad. If you are a seasoned trader, have a sizable account, do several trades in a month, and require no assistance from a representative, you should have a low commission rate. This rate through a "discount desk" may be as low as $15 or as high as $30 per contract traded. Shop around and negotiate with the person you are dealing with. On the other end of the spectrum is the beginning trader. This trader has a small account which may do a few trades a month. This trader spends a lot of time on the phone with the representative. The trader relies on the representative for daily fax copies of charts and recommendations. The trader is being educated by the representative in the ways of futures trading. In this example, our trader may pay commissions of $60 to $100 per contract traded. If the representative tells you the commissions are over $100 or that the company charges a percentage of the amount of the purchase price, again... HANG UP! No company and no representative is worth or should even ask for more than $100 per contract. Keep in mind that, in most cases, you get paid more the harder you work, and it is no different in the futures industry. Feel free to negotiate with your representative concerning commissions, but remember, you don't want to be cheated, and neither does your rep. In this business, as in any other, you have to pay for what you get, but by all means, insist on getting what you pay for.... or change reps!

Stay in touch with your representative, and insist they stay in touch with you. Don't get the feeling that you are "being a pest" if you contact your rep often. Remember... it's your money being traded! You will not feel cheated or mistreated if you are involved with your trading. Don't be afraid to ask why about a trade. If you are new to trading futures, you can rightfully expect your representative to "educate" you by explaining methodology and details about the markets.

So, should you do business with the voice on the phone? Sometimes yes, and sometimes no. Futures trading is a global event that continues 24 hours a day. Where you trade from, and who you trade with makes no difference. If you like the personality on the other end of the phone, and you have done your homework in verifying the veracity of the representative and the company, then by all means set up an account and trade with that person. Remember, should you choose to trade with a local company just because they are local, that in itself is no assurance you will be treated any more professionally or properly.

Just a couple of small notes.

1. I don't like anybody talking about "investing" in futures trading. Futures trading is not an investment, it is a risk venture. I may be picking nits here, but when I hear "investment" I think of a place for me to put my money for the intermediate or long term. To survive futures trading you must love it for the excitement, and the fast action. You must do your best to prepare for each trade and when it is over, win, lose, or draw, you must simply move ahead with your next trade.

2. Find out what commodity or commodities the representative works with. If the rep says that he follows and trades all commodities by himself, find out what method (technical or fundamental) the rep uses. A technician using computer generated signals may be able to follow several contracts, but the fundamentalist, because of all the flood of reports and information that must be considered will usually specialize in one or two groups (grains, financials, softs, etc.) of contracts. I personally am concerned when I speak with a rep who tells me they follow all contracts.

3. Ask how long the caller has been registered with their current firm and in the futures business. That information can be verified with the NFA. This question is not asked so as to rule out a new representative, but to establish the basic honesty of the caller. Sometimes the new representative is the best representative. If the rep can convince you that he has the proper support from his firm, and that he uses good advisors in and out of his company, then he may be more attentive to your needs, and more deliberate in his trade recommendations to you. If they lie about their experience, what will they lie about next, and how much will it cost you?

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THERE IS RISK OF LOSS IN TRADING FUTURES...  LOTS OF IT!!

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Last modified: April 05, 2008