Everything You Ever Wanted to Know About Choosing a Broker But Were Afraid to Ask

06/29/01 03:33:58 PM

by Joe Fitzgerald

Here are some steps to follow and questions to ask when thinking about choosing a futures broker.

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In today's investing society everybody is consumed with money-making and anticipating the next big trade. New and veteran investors alike seem to overlook the importance of choosing a good broker. My main goals in writing this article are to help you take the proper steps, ask the right questions, and make the correct decision when selecting the broker or brokerage that is most appropriate for your style of trading. I hope that after you read this you are able to talk confidently and intelligently to a broker. As you will learn later on, communication is your best tool.

First, you need to determine what type of services you are going to need: A full service broker, a discount account just to execute trades, or something inbetween. The services that a broker/brokerage provides should be based on what you are expecting from them in return. You don't want to be paying too much for services that you will never use. If it seems that a broker is charging you too little, make sure that what they're offering will fill your needs. Shop around, see what other firms are charging, and use those fees as a guide for further reference. Remember, the price that you pay for commissions should be in accordance to the type of services that your trading style employs. If a broker wants to give you a deal, step back and ask yourself, "Is this too good to be true?" You don't want to pay too much for services you don't need, or conversely, too little, only to find out they don't have something you need.

One of the best places to find brokers and firms is the Internet. Using a major search engine should call up more than enough sites. Which one are you going to choose?! A word to the wise, don't depend on the looks and functionality of the website alone. In my personal experience, many small firms spend a fortune on sophisticated web pages and do not have the resources to support their customer base. On the other hand, some of the biggest firms have the simplest websites. Take the time with the techniques in the next section to investigate and learn more about who you are dealing with.

Another good source is trade magazines. Look through the advertisements for likely companies. You are more likely to find reputable firms within these periodicals.

You may also come across a few firms that run television ads. There are not that many firms that take this route, but you may occasionally see a few on CNBC and other channels or programs associated with futures investing. One of the better routes is to call a major exchange or regulatory agency like the CBOT, CME or NFA and ask for references for good brokerage services and firms. This route allows you to take into consideration the unbiased opinion of an industry professional.

Finally, you can get references from knowledgeable friends or relatives. But don't go completely by hearsay. Take the time to do your homework and learn as much as you can before committing yourself to anything. Finally, after choosing the brokers and firms you wish to contact, have your questions ready and let these individuals know that they are dealing with an informed client.

At the very top of the pyramid are the individuals who hold exchange memberships at any respective exchange; they have the right to trade in the exchange pits. Relatively few are able to utilize this privilege. They are able to trade at the epicenter of the market. The next level down is also a relatively small number, consisting of the future commission merchants. FCMs are bridging the gap between the markets (via the exchanges) and the public. They basically supply the infrastructure for individuals to trade. FCMs provide for the clearing and execution of trades, handling of the customers' money, providing account statements, and research for their clients among many other duties. IBs, introducing brokers, form the lower base of the above illustration. They are firms or individuals that solicit or accept orders to buy or sell futures contracts or commodity options, but do not accept money or other assets from customers to support such orders. IBs are middlemen in the industry. There are many good and reputable IB's, but unfortunately there are some bad brokers that give others in the industry a bad reputation. All FCMs are highly regulated by governmental and self-regulatory agencies, so you don't have to worry about them folding up and losing your money. Another reason investors go through FCMs is because of the resources that they offer to their clients.

Now I'm going to go over the list of question that you should ask your potential brokers.

-Are they an introducing broker (IB)?

- If so, are they guaranteed? A guaranteed IB is monetarily backed by their representing FCM to some point. It gives them a little more credibility than a firm or individual who is not guaranteed.

- Who do they clear through? This will tell you who they are a customer of, and in turn they will give you the name of the FCM that they do business through. Retain this information for future use. The best idea is to call the specific FCM's customer service department and ask if they are in good standing with the company.

- If they are not an IB, are they a futures commission merchant (FCM)?

- If so, are they a clearing or non-clearing firm? This really does not make a big difference for you, but it establishes your credentials as an intelligent investor.

- Ask them for their NFA ID number. This allows you to call the NFA and see if they are in good standing in the industry. It is a safety precaution that can only benefit you in the future.

If you are satisfied with their responses so far, then start asking them about the programs they run. The first few questions are to filter what kind of firm you will possibly be doing business with, additional questions should delve into what they can offer you and the quality of their customer service.

You should have a trading style that you want to practice before you call or contact any firm. For example, are you brand new to trading and needing additional help? Or, will you need a broker just to execute trades? Are there any special programs such as paper trading or managed account services that you need your broker to do for you? These are all factors that can influence whom and where you decide to go. I advise you to truly plan out what you are expecting from yourself and from your broker, that way you have some type of road map in your search for the right services for you needs.

For additional information, visit my website at: www.youraveragejoey.com

Joe Fitzgerald

Registered A.P & Founder of youraveragejoey.com

Title:	Registered A.P
Company:	Alaron Trading
Address:	822 W. Washington
	Chicago, IL 60607
Phone # for sales:	800-542-1022
Fax:	312-563-8588
Website:	www.youraveragejoey.com
E-mail address:	papertrade@alaron.com
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Everything You Ever Wanted to Know About Choosing a Broker But Were Afraid to Ask

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