A commodities broker is an individual or brokerage firm that deals in commodity transactions on behalf of its clients. The commodities broker acts as an intermediary between individual traders and exchanges to facilitate the trading of commodities such as oil and wheat. Traders benefit from a commodities broker as they enhance the trading process through technology, expertise, and regulatory oversight. Investors typically need a commodities broker to trade futures contracts, options, and other financial derivatives related to commodities. Commodities brokers also bring in new clients; without them, there would be significantly less trading in commodity markets.
Definition and Example of a Commodities Broker
Commodities are tangible goods that are bought and traded globally; these products include agricultural products, industrial metals, and energy sources like crude oil. In addition to the direct commercial market, these products are bought and sold by investors in the form of futures contracts, options, and other financial derivatives. Derivatives are financial contracts that allow investors to buy or sell underlying assets or securities at a specified price for a specified settlement date. Commodities brokers also deal with futures and options in financial products such as U.S. Treasury bonds or T-bills.
How Does a Commodities Broker Work?
Commodities brokers facilitate trading in commodity markets for the average investor. Instead of owning a seat on the exchange and trading in the pits, most people need to trade through a broker.
Commodities brokers have floor traders to execute your orders, or they may have a trading platform that places and executes orders electronically. Exchanges rely on brokers to bring business to them. They have their own rules for governing how brokers conduct business.
It is much easier to conduct business with a few brokerage firms rather than allowing hundreds of thousands of individuals to place trades directly with the exchange.
Full-Service Brokers
Commodities were only traded in commodity pits on exchanges until the 1990s. Most orders were placed via telephone through a full-service broker. A typical order was processed as follows:
The client calls their introducing broker (IB) with a trade they want to execute. The broker takes the order and timestamps it. They immediately contact a futures commission merchant (FCM) that handles IB orders; then they report the same trade they were contacted about to a telephone booth on the exchange floor, where a writer takes the order.
From there, the writer writes a ticket for a floor broker to execute the trade, or may have sent the order to the pit by hand signal. When a pit trader fills the order in the pit, they give the ticket to a clerk or signal the writer. The writer then calls the broker back to confirm the trade, and the broker calls the client with the full price and financial details of the trade.
Online Commodity Trading
A client trading online will log into their broker’s trading platform. They will select the market they wish to trade in, as well as the type of order, price, and quantity. The process can be completed with a few clicks of the mouse. When everything looks good, the trader will click the “buy” or “sell” button to send the order. The order is immediately directed to the trading platform on the exchange and matched with other similar orders. The market order is filled instantly in most cases, and the trader receives confirmation on their computer within a second or two.
Online trading is much faster, cheaper, and more efficient, but you can still choose a full-service broker, which allows you to discuss trading opportunities and explore your options. Many brokers offer a combination of both — where you can talk to a broker and place your orders online.
Source:
https://www.thebalancemoney.com/what-is-a-commodity-broker-809120
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