Comparing Broker Commission Rates
Commission rates on trading commodities have declined a great deal in the age of electronics. Many discount brokers were charging in excess of $50 per round-turn—a buy and then sell transaction—in the early 2000s. Discount brokers began offering commissions under $10 per round-turn with the move to electronic trading.
Commissions on Futures
Rates on futures contracts are paid per contract, not per order. A transaction of 100 contracts is 100 times more costly than one of one contract. Electronic brokers leave all the decisions and execution to you. They offer the lowest rates when it comes to commissions.
Full-Service Broker Commission
The trading style of a full-service broker plays a major part in the commission the broker charges. You should expect a rate near the low end of the range if the broker wants to make trade recommendations each day. You should expect rates on the higher end of the spectrum if the broker only plans on making one trade every month or two. A broker is in business to make money, but make sure that you’re paying for solid advice and not for just the sake of paying commissions. It’s highly unlikely that you’ll make a profit if you’re a very active trader paying $80 per round-turn.
Negotiating Commission Rates
Many new traders will choose a broker based on rates. But there’s a lot more to the commodities futures business than just the rate paid to the broker. The main reason for choosing a broker should be whether you believe they’ll enhance the profitability of your account. You should feel that the broker will be a solid partner when it comes to helping you reach your trading goals in the futures markets. A brokerage firm must pay fees to clear their trades with their Futures Commission Merchant (FCM). Your broker gets paid a percentage of the commissions charged to clients. The clearing fee is often taken right off the top of their payout. So the broker is likely earning less than $10 per trade if you expect to get a $30 rate.
Active vs. Seldom Trader Commissions
You should be reasonable when you’re hiring a full-service broker to execute and make recommendations. It would be unfair to expect them to devote half their day to someone who only executes one trade each month and that trade earns them $20 in commission. But an active trader who pays a hefty amount in commissions on a monthly basis should make sure that the broker is prepared to devote the time to service the account in a proper fashion.
The Time to Change Brokers
You can always negotiate for a break in commissions if you haven’t been making money with your broker due to their recommendations. But it may be time to look at someone else if you’re losing money. You may not want to rock the boat if your broker is making you a good return on your investment. You often get what you pay for. Good brokers are hard to find. It’s always better to pay higher commissions to those who make you money rather than take a chance with an unproven and untested broker.
