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Brokers vs Direct

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  #1 (permalink)
HarryNguyen
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Hello guys, I'm just getting back into the market. I know what platform I will be using but the only thing is brokers. Usually, if I want to create an account with say Amp Futures, they have Dorman which they clear from. The thing is why would I use a middleman when I could go direct? I'm not saying brokers are bad, I just don't want to go through a 3rd party when I could go direct and the commission structures and fees are the same.

I remember when I was working at a job, I went through a staffing/temp agency, they paid a $1 more than going direct but no full benefits. Also, a lot of people say if you're going to book a flight, always go direct and not through a 3rd party. But its odd, cause I went through a broker for my car insurance, they're actually cheaper than going direct and even if I did go direct I wouldn't get the same price nor will they insure me due to geographic so that helped me as the broker connect me with them.

My question to you guys is does it matter whether you go through a broker or direct like dormantrading?
I'm picky when it comes to these things. So far the cheapest commission rates I seen are $0.20 per side commissions on the micros. If the commissions are cheap, does that affect the performance of a broker? Why do some offer higher commission rates/margin/fees? I just want to know how this all works.

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  #2 (permalink)
 bobwest 
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HarryNguyen View Post
Hello guys, I'm just getting back into the market. I know what platform I will be using but the only thing is brokers. Usually, if I want to create an account with say Amp Futures, they have Dorman which they clear from. The thing is why would I use a middleman when I could go direct? I'm not saying brokers are bad, I just don't want to go through a 3rd party when I could go direct and the commission structures and fees are the same.

...

My question to you guys is does it matter whether you go through a broker or direct like dormantrading?
I'm picky when it comes to these things. So far the cheapest commission rates I seen are $0.20 per side commissions on the micros. If the commissions are cheap, does that affect the performance of a broker? Why do some offer higher commission rates/margin/fees? I just want to know how this all works.

Hi @HarryNguyen. This comes up now and then. Perhaps we should just write up something to refer people to, since it's a natural question.

To start, the term "broker" has more meanings than the way you are using it. There are:

1. "Introducing Brokers" ("IB's") this looks like the group you mean when you write "broker." IB's are intermediaries between customers and "FCM's", the next category.
2. "FCM's", or "Futures Commission Merchants", which are the firms that actually hold your money. They also have a relationship with an order-routing firm, such as Rithmic or CQG, which is the actual firm that sends your orders to the exchange and reports back the results. Dorman, which you mention, is an FCM.
3. A separate category of "Clearing Brokers," which is not the same as FCM's (although some FCM's are clearing brokers and some are not. Yes, it gets confusing, and for this discussion, the distinction is not directly relevant so I will skip them. Dorman is also a Clearing Broker, by the way.)

These may all be called "brokers," and are. Which to use, then? Well, you must have an FCM, or you won't be doing any trading. You don't have to have an IB. But whether you should is one of those things that have the answer that "it depends."

The IB's can sometimes provide significant value; for instance, NinjaTrader Brokerage is an IB, which used to use either Phillip Capital or Dorman Trading as FCM's (NinjaTrader now owns its own FCM, NinjaTrader Clearing.) So before that change, when you signed up with NT Brokerage, you would choose between either a Dorman or a Phillip account. But the value added by NTBrokerage is that NT owns the NinjaTrader trading platform, and you're not going to get to use it unless you have an account with them (or a very, very small number of others they have business relations with). Is this worth it? Well it depends, obviously, on what you think about the NT platform, compared to the others that are available, and on what matters to you.

So although you have posed a general question, and a good one, there is no good general answer. You will have to see what a particular IB is offering, and see what is important to you. You can choose between IB's, or between an IB and an FCM, or between FCM's, based on their services. Some may be valuable to you and some may not.

There have been a few threads that discuss these questions. I dug up a quote from one of them, and it may help to fill in the picture:


bobwest View Post
If the question is whether you need an introducing broker to trade futures, the answer is "No."

To sum up, because this thread did wander around in discussing the topic, and I want to be sure that @mrizzo and anyone else has their questions satisfied, at least to a reasonable extent:

1. Introducing brokers don't add anything essential to futures trading, speaking generically about the group. They find customers for FCM's, and receive compensation from the income stream generated by commissions for the trades the FCM's process.

2. In order to differentiate themselves in the marketplace, some will build in additional services and products in order to attract trader interest. These may be of value or they may not, and are individual characteristics of particular IB's, not characteristics of the general class of firms that are introducing brokers.

3. Sometimes these additional services are worth it. But to know whether they are or not, the trader must look at what they are and evaluate them for him/her self. This is highly individualized and cannot be speicified generally. It may be something like a superior charting/trading platform, or customer service, or some technical tools or training or support services -- basically, anything related to trading, other than getting the trades done, which is the job of the FCM. (FCM's may do everything that IB's do as well... it depends on the firms in question.)

But nothing supplied by an introducing broker is essential to trading.

Many traders do not have an IB. I do not, and never have. Think of them as additional players in the market for trader services, and see if you find one that gives you something extra that you can put to use. But if they do, it will be on top of the basics required to simply get your trades executed, which is supplied by an FCM.

I hope you have found your answer now.

If you have more questions, just ask.

Bob.

--------------------------

Edit: changed the text on 1/17/23 after @NinjaTrader reminded me that NT Brokerage no longer uses its old FCM's, but that Ninja now has its own, NinjaTrader Clearing (and has for some time, actually.)

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  #3 (permalink)
HarryNguyen
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Thank you for that, if you don't mind me asking. Who are you with? I think I'm going to go with Dorman directly.

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  #4 (permalink)
 bobwest 
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Hi @HarryNguyen,

I'll keep my details private, but I'm sure that Dorman will be fine. All of the major (and, I guess, minor) brokers (both IB's and FCM's) have had to survive in the marketplace, and if they are still here, they have probably done well enough for their customers.

This does not mean they are all the same, just that, unless one happens to stand out for you due to its particular offerings, they should all work relatively well. There will be both positive and negative opinions, of course, but those may also be a matter of a good fit or a bad fit, or a good or bad experience, for individual traders.

If you've done your due diligence enough that you feel you are getting what you want, then it is reasonable to just go with the one that checks your particular boxes. The major factors for a trader's success are all due to the trader in any case, not to the broker, so go with who seems right. You might change your mind at some point, and then you can look around, but if you just take what makes the most sense to you now, whatever the reason, that probably is the best decision to make now.

Good luck.

Bob.

When one door closes, another opens.
-- Cervantes, Don Quixote
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  #5 (permalink)
 bobwest 
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Let me add just a little bit to the last post, and I apologize for the added complexity it may add.

@HarryNguyen mentioned AMP and Dorman, writing that AMP has Dorman, "which they clear from." The premise of the post is that the clearing function is more "direct" and is therefore preferable for the customer. I mentioned the Introducing Broker and FCM distinction, and decided to skip over the clearing firm designation, just to keep things more clear.

But in fact, AMP is an FCM, which has many IB's that "introduce" customers to them (are IB's for AMP). The customers then have accounts with AMP as their FCM, which then holds their money and has a fiduciary relationship to them. But AMP is not a "clearing broker," which is yet another thing, so it will also have a clearing broker for its trades. This can get insanely confusing if you let the terminology get you tangled up.

I wasn't going to go into the "clearing broker" layer, but here is a quick view:

There are firms that have a particular responsibility within the futures market on the CME. They are responsible for clearing of all trades that take place within or between FCM's. All clearing brokers must be FCM's, but not all FCM's are clearing brokers. So if your FCM is not itself a "clearing broker," (and AMP is not), it will use another FCM that is, because that's how trades are actually made. https://www.cmegroup.com/company/membership/clearing/cme.html :


Quoting 
CME Clearing conducts business only with its clearing members, not with their customers, individual members, or corporate member firms of the Exchange. Customers, members, and member firms must have a relationship with a CME clearing member to be able to trade CME products.


Here is the list of them: https://www.cmegroup.com/clearing/financial-and-regulatory-surveillance/clearing-firms.html

Quite a few FCM's are not clearing brokers, and some are (Dorman is, for example, and AMP is not.) Is being a clearing broker "more direct" than being just an FCM? Well, in a way, you could say so -- but does it matter to a customer? Not necessarily. Just as with the IB/FCM distinction, the FCM/Clearing firm distinction gets down to, for the customer, "what is available from this particular firm?"

But if one means to ask by that, "are commissions less with a clearing firm?" -- not necessarily. Or, "do trades get settled faster or better if your FCM is a clearing firm?" No. Trades are transmitted to the exchange for settlement by routing firms, not the clearing firms. At the exchange, the exchange servers do the matching of buys to sells, and then the routing firms report back the results.

Does Dorman, for example, have better commissions than AMP? I have no idea. Go to their web sites and see. Does Dorman give faster or better trade settlements than AMP? Not at all -- trade routing is though separate firms that have the infrastructure and software for it, such as Rithmic and CQG, and their competitors. Clearing brokers have nothing to do with it. Does Dorman have other services or costs that are better than AMP? Again, go to their web sites and see. They might, and they might not.

If this side trip into what is a "clearing broker" has just made things more confusing, I am sorry. In some markets -- other than futures -- everything is tightly consolidated into the brokerage firms, and all this complexity is basically out of view. There is a front office that deals with customers and a back office that does everything related to the accounts, including sending the trades to the exchange, and that is that. In the futures world, this complexity is all out in the open, and is often implemented by totally different firms.

The bottom line answer is still the same after adding in all of this, however: look to what is offered by the different firms, including (but not only) the cost, and decide what fits you best.

Bob.

When one door closes, another opens.
-- Cervantes, Don Quixote
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  #6 (permalink)
HarryNguyen
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I guess there's no right or wrong answer but a preference. So, I guess my thing is with the commission and fees. How does this work? Let's say I start off with $500, how much would it cost for me to trade CL? What is the total fee RT and exchange fees, taxes, everything included that I should be aware of? What should I look for and how do I go about looking for these things when it comes to trading?

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 bobwest 
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HarryNguyen View Post
I guess there's no right or wrong answer but a preference. So, I guess my thing is with the commission and fees. How does this work? Let's say I start off with $500, how much would it cost for me to trade CL? What is the total fee RT and exchange fees, taxes, everything included that I should be aware of? What should I look for and how do I go about looking for these things when it comes to trading?

To be honest, I think this is where your own due diligence research needs to take over. Firms generally will post their commissions and fees on their websites, and a little checking will quickly give you the answer for a particular firm, and you can comparison shop. Particularly since cost is your main concern, this is something for you to personally look into.

However, as a start, I found this list of commissions and fees for NinjaTrader, to give you an idea: https://ninjatrader.com/PDF/ninjatrader_futures_commissions.pdf

I am not suggesting you should consider NinjaTrader in particular. It's just a prominent name that came to mind as I was looking at Google, and I wasn't going to look at a bunch of them. I would definitely check a number of firms, or ask Google to give you some to plow through. (You've already mentioned AMP and Dorman, so they could be on your list. )

But just looking at Ninja, I see that their all-in fees for CL, which includes leasing the NT platform and commissions, exchange fees and other fees, is $2.66 per contract (second page of the linked pdf, under NYMEX). This sounds reasonable to me -- I'd generally expect to see under 3 bucks a contract, and they are generally a bit lower. There will be others that are higher, and perhaps some that are less. That's where the legwork comes in.

You want to see the "all-in" costs per round turn. Sometimes firms will use the cost per side, so make sure you know how they are quoting it. You'd double a per side quote, obviously.

Firms with higher numbers will naturally say that something they offer justifies their levels, for example customer service or something, and they may well be right. This is where individual differences may matter, and one size does not fit all. Researching these things would take a lot more legwork than pure price would, of course. You can look on this forum for broker recommendations as a start.

As to the $500 account size, many firms will open an account for that size, but you should understand how very small that is in terms of risk, and should think in terms of the account's ability to absorb losses, which in futures can come very quickly. A small account is not going to be able to withstand much in the way of losses, and CL is notoriously fast-moving and quick to reverse. But your personal risk tolerance is also a matter for your own assessment.

I hope this can help get you started.

Bob.

When one door closes, another opens.
-- Cervantes, Don Quixote
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HarryNguyen
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Thank you Bob, I understand it now. I also decided to go with Dormantrading. Unfortunately their email support sucks, better to call I guess but IB that clear with them are responsive at times but we know why. Anyway, I also decided to use NT for sim, its actually really good. But I will be using Sierra Chart for live trading once I go live.

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bobwest View Post

The IB's can sometimes provide significant value; for instance, NinjaTrader Brokerage is an IM, using Dorman as its FCM. So when you sign up with NT Brokerage, you are going to end up with a Dorman account. But the value added by NTBrokerage is that the owns the NinjaTrader trading platform, and you're not going to get to use it unless you have an account with them (or a very, very small number of others they have business relations with). Is this worth it? Well it depends, obviously, on what you think about the NT platform, compared to the others that are available, and on what matters to you.

Bob,

Just to clarify...While NinjaTrader Brokerage is technically an IB, accounts are introduced to NinjaTrader Clearing which is an FCM. Both regulated operating entities are sister companies owned by NinjaTrader Group.

Ray

Disclosure: This communication is sent to you by NinjaTrader, LLC, a software development company which owns and supports all proprietary technology relating to and including the NinjaTrader trading platform.
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 bobwest 
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NinjaTrader View Post
Bob,

Just to clarify...While NinjaTrader Brokerage is technically an IB, accounts are introduced to NinjaTrader Clearing which is an FCM. Both regulated operating entities are sister companies owned by NinjaTrader Group.

Ray

Thanks Ray.

You're right of course. For some reason I forgot for a moment how things ended up after NT Brokerage switched from Phillip and Dorman to NT Clearing, which was some time ago now.

Glad to be corrected.

Bob.

-----------------------

Edit: fixed my former post to reflect the relationship to NinjaTrader Clearing as NT Brokerage's FCM.

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-- Cervantes, Don Quixote
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