Starting a commodity brokerage firm may seem like a daunting task, but knowing the right steps and what is required before you start such a project can save you a lot of time and headaches.
Registration Requirements
To become an Introducing Broker (IB), the first thing you need to do is sit for the Series 3 exam if you are not already a registered broker and IB with the National Futures Association (NFA). There must be at least one associated person (AP, usually a broker) listed with the firm. If you plan to operate as a sole entity, you must become an AP. There are fees you need to pay for registration, in addition to organizational paperwork that needs to be completed.
Business Plan for the Introducing Broker
A business plan is crucial for any startup. You will need to open an office and be ready to conduct business. You must decide how you plan to bring in clients to earn enough money to support the business. Initial profits provide a base to build upon. A plan for fundraising and client follow-up is the most important aspect of starting your business. Some common methods include paying for advertising, conducting seminars, and reaching out to friends and family for business and support.
Commodity Trading in the Futures Markets
Before you get your first client, you must educate yourself in trading commodities in the futures markets. Some brokers focus on one market or sector of the market, but successful brokers can make trades in every market on futures exchanges across the United States.
Some clients make their own trading decisions, while others rely solely on your advice. The more skillful you become at trading commodities, the more likely you are to retain clients and grow your brokerage. If you lose money in commodity trading, and your clients rely on your advice, you will face a tough battle to achieve success and may want to look for another venture.
In summary, to start an introducing brokerage firm, you will need to pass the Series 3 exam and arrange all necessary registrations with the National Futures Association. You will need to choose and agree upon terms with a futures trader to execute trades and handle accounts and customer data. You will need to set up a clear business plan that includes costs and projected profits. Define how you plan to open new accounts and grow your company. If you plan to make trading recommendations for your clients, ensure that you have a strong trading plan and a good track record in trading before you delve into managing client funds.
Final Considerations on Starting Your Own Business
Starting an introducing broker firm can be a profitable venture. However, it takes years to learn the trading business and the details of every commodity contract listed on U.S. exchanges. Sometimes, it is better to work with another, more experienced broker. You may be able to work as an intern before you start on your own. There is always risk involved when starting a new venture; without it, there may be little reward. The best commodity traders know risk versus return better than others because of the high volatility in commodity markets. Starting an introducing brokerage firm is the first of many risks you will have to undertake.
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Sources:
- CME Group. “The Complete IB Handbook,” Page 3.
- National Futures Association. “Proficiency Requirements.”
- National Futures Association. “Registration Rules,” Rule 204.
- National Futures Association. “Guaranteed IB Requirements.”
Source: https://www.thebalancemoney.com/how-to-open-a-commodity-brokerage-firm-808999
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