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Brokers and commissions

Although margin isn't a true cost (you get it back at the end of the trade, plus any profits or minus any losses), commissions are. Commissions are your broker's fees for his services, and they range across the board and by broker. The two major types of commission firms are the discounter and full service.

Commissions, while important, should not be your only consideration when choosing a broker. Low commissions do not always mean the best service. My firm is a full-service firm, and although our commissions are competitive for full service, they are generally a bit higher than discounters. I'm not trying to say there isn't a place for discount brokers. My firm also offers online trading at reduced rates for self-directed traders. If you are relatively sophisticated, know exactly what you want to do in the marketplace, do not require advice or additional services, and only need order execution (especially in the electronic markets where execution does not vary from broker to broker), then you should certainly consider using a discount or online futures broker. However, you need to evaluate what you're receiving. With some firms, discount commissions equal cheaper service, particularly when you have a problem. All firms use brokers in the open outcry pits to execute trades. Some use company brokers, but most use independents, which are members of the Exchange who fill 'paper,' or public orders.

Not all independents are equally talented. Larger firms with bigger orders tend to attract the bigger (and better) floor brokers because the floor brokers are paid a small fee per contract executed. If a floor broker is a bit louder, more aggressive, or is known to hold a large deck of orders, he tends to do a better job than the novice floor broker with a smaller deck. At my firm, we pay floor brokers who do an outstanding job an additional or higher-than-standard fee per contract executed. I do not believe any discount brokers do this. We do this because when a floor broker can be a bit faster, he can at times buy the bid for us or sell the offer and get us a slightly better price fill for our customers, and this means more money in for our customer and can be more important than a low commission. The bottom line? Whichever broker you ultimately choose, you should evaluate how accurate and proficient your price fills are. You also need to see how fast your broker gets back to you with price fills. Additionally, you need to evaluate how much help your broker is providing you with versus how much help you require. A knowledgeable full-service broker who provides you with profitable recommendations is worth many times the commissions charged. Just as important, is your broker helping you to control your risks properly on the bad trades? Is he helping you to avoid the classic mistakes such as overtrading? These are factors you'll need to evaluate. A brokerage relationship is extremely personal, and whom you trade with can mean the difference between profit and loss.

One last thought about commissions. When talking commodity futures, the fee per contract traded is low when compared with many other types of investments. The fee can be one-half of a percentage point of the total contract value. It is a higher percentage when compared to the margin deposit, but it's still small. The other side of the coin is that futures traders are much more active than more traditional investors, and total commission costs for an active trader can run up substantially over time.

One last thought about brokers: There are brokers who do both securities (stocks) and commodities business. I'm sure there must be some of these dual types who excel at both, but I've personally never met one. Many of our clients who previously had troubles in commodities seem to have drifted to us from brokers, in many cases from a major wire houses, who were these "'Jacks of all trades." On the other side of the spectrum are those traders who know what they're doing and trade only electronic markets, for example, the S&P "E-minis." Price fills (the quality of order execution) are generally uniform for the electronic markets. However, if you need help, remember that commodity trading is an intense, full-time business, and you should go with a specialist.

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