2014issue C1055
Selecting a futures broker as an execution-architecture problem
Retail futures traders who are not exchange members must associate with a futures commission merchant, either directly or through an introducing broker, before orders can be executed. Editorial: treat that association as order-routing and commission-analysis, not as a brand substitute for implementation-cost design.
- Retail futures traders who are not exchange members must be associated with a futures commission merchant, either directly or through an introducing broker, before their orders can be executed.
- An introducing broker may accept orders but cannot hold client margin and is not an exchange member, so statements are issued in the merchant's name and also identify the introducing broker.
- Routing directly to a futures commission merchant does not automatically lower implementation cost, because introducing-broker account managers often receive a larger commission share when fewer parties split the fee.
- A guaranteed introducing broker may introduce clients to only one merchant, which typically means fewer platform choices, less customizable service, and a firm set up for one type of trader.
The path before an order can be executed
Retail futures traders who are not exchange members must be associated with a futures commission merchant, either directly or through an introducing broker, before their orders can be executed. Order-routing is the path an executable futures order takes from the client through a merchant or introducing intermediary to exchange matching. Commission-analysis is a comparison of how execution fees are split along that path, used to test whether removing an intermediary actually lowers implementation cost.
What the futures commission merchant may do
A futures commission merchant accepts margin deposits, routes client orders to the exchange for execution, and later issues statements showing the transactions and account balance. In this historical workflow, that merchant is the party that may hold client funds for margin and send the executable order to exchange matching.
What the introducing broker may do
An introducing broker may solicit business and accept orders for commodity execution but cannot accept client funds for margin and is not an exchange member. It must clear through a futures commission merchant. Clients who trade through an introducing broker receive statements issued in the name of the futures commission merchant, and those statements also identify the introducing broker.
Commission splits and implementation cost
Routing orders directly to a futures commission merchant does not automatically lower trading cost relative to using an introducing broker, because introducing-broker account managers often receive a larger percentage commission payout when fewer parties share the fee. Removing the introducing broker from the routing path can reduce customization of service even when it does not reduce cost. Implementation-cost is the all-in cost of getting an order executed, including commission splits and any loss of platform or service customization when the routing path is shortened.
When the introducing broker is guaranteed
A guaranteed introducing broker may introduce clients to only one futures commission merchant, which posts the capital requirement and acts as compliance director. Because a guaranteed introducing broker clears exclusively through one merchant, clients typically face fewer online platform choices and less customizable service, and the firm is often set up for one type of trader rather than many.
All readings on this track · 30 readings
- 1988Why instant basket routing overwhelms specialist liquidity
- 2004Retail forex tickets as implementation-cost contracts
- 2005A two-gate liquidity filter for futures order routing
- 2006Manual after-hours routing and open-outcry fill risk
- 2010A futures brokerage quote is an execution specification
- 2011Smart order routing, maker-taker, and midpoint execution costs
- 2012Compare equivalent listings before routing
- 2012Rebate-aware routing and execution cost
- 2012Platform routing, fees, and server-side stops
- 2013Compare equivalent listings, then route the order
- 2013Confirm routing, margin, and fill cost before a live forex order
- 2013Brokerage choice as an execution-cost and routing filter
- 2014Order routing, pass-through rebates, and liquidity choice
- 2014Comparing exchange venues before routing the order
- 2014Selecting a futures broker as an execution-architecture problem
- 2014Commission shopping is the wrong first filter for a futures order
- 2015Routing orders when equivalent products trade on multiple venues
- 2015Forex venue checks for speed, margin, and implementation cost
- 2015Backup venues and symbol splits in futures routing
- 2016Route orders across competing exchange venues
- 2016Filter exchange venues before routing orders
- 2017Venue choice as an order-routing filter
- 2017Venue routing for equivalent listed contracts
- 2017Forex broker checks for fill speed, quote honor, and margin
- 2017Brokerage choice as an execution-speed and commission filter
- 2018Routing equivalent contracts across competing venues
- 2018Forex venue selection by fill speed, margin terms, and price honor
- 2019Forex execution filters for routing, cost, and liquidity
- 2020Routing equivalent listings across competing exchanges
- 2020Brokerage filters for routing, commissions, and liquidity