Earlier this summer, I spent some time on the East Coast with my wife’s family, and I got the inevitable question: ‘So, _____ said you started your own business. How’s it going?’
After trying and failing to adequately explain what I do for the fourth or fifth time, I decided to just write it all out and send them the link to this article. This way I can hopefully gain 4-5 more monthly subscribers and maybe my mom will stop thinking I’m ‘sort of’ a stockbroker.
Using August’s article as a starting point, I broadly stated that the FCM looks to the IB (introducing broker – in our case, MetroTrade) to:
- Acquire new clients
- Educate and support their client base
- Facilitate account opening and collect all the necessary forms and signatures
- Ensure customers are in regulatory compliance
- Be the primary point of contact for their customers and resolve all aspects of customer service
Starting at the top (and to directly answer the question posed), I did not simply start my own business. MetroTrade is a Delaware-registered LLC owned by a partnership, of which I am a very minority partner. More importantly, MetroTrade was created by a group of like-minded people who are passionate about customer service and the future of the futures business, have a clear vision for what that future looks like, the knowledge necessary to see it through, and the patience and capital required to be successful over the long term.
How’s it going? Well, do you want the short answer or the really long and involved answer? The short answer is, it’s going as expected. Some things have been easier (yes, an LEI(1) is quite easy to obtain, thank you very much), and some have proven more difficult (why does it take up to 30 days to get a DUNS(2) number?!, the IRS will issue an EIN virtually immediately). But anything that is worth doing is usually difficult, involved, and extremely detailed.
Following up on my previous newsletter (this is another plug to go back and read it), traditional clients of futures markets were those looking to hedge – producers and consumers of commodities, and those looking to speculate – hedge funds, proprietary trading groups, etc. Today, with more products available and more outlets offering access, the demographic has widened to include individuals who want to gain a greater education in the markets, have the risk capital available, and are interested in speculation in futures because of the near 24-hr market access, the ability to seamlessly short (sell), the diverse range of products (soybean crush spread, anyone?), and the leverage offered (as an example in the micro e-mini S&P 500 contract, $1441 in initial margin(3) provides a trader access to a contract with a notional value of ~$28,000)(4).
Client Acquisition
If you had asked me twenty years ago how we acquire clients, I would have said, ‘Primarily through referrals.’ The business was smaller then, and simpler. The company I worked for at the time was one of the few brokers offering direct electronic access to the CME and as such customers found us, and then referred their friends and colleagues to us. We didn’t have a marketing plan, or a marketing budget, just one salesperson and the rest of us supporting the clients and the platforms.
Today, the playing field is more crowded, and the business of selling access to commodity futures has become more commoditized. When we offer our products and services to clients (via any number of distribution channels), we know what we are really selling is access to a global product, but through us.
So, in an industry that has had its share of mishaps (did you know that Enron traded A LOT of futures? So did Lehman Brothers, and let’s not even mention MF Global or Peregrine Financial Group), how do you gain a prospective customer’s attention, trust, and loyalty? We are intending this by being genuine in our interactions, and honest and transparent with fees and commissions; by providing a platform that exceeds the needs and requirements of most individual traders; and by providing informational and educational content via various media that is logical, direct, easy to understand, and relevant no matter where a potential client is on their trading journey.
Educate and Support the Client Base
Historically, education and support of the client base was a one-directional model, with brokers responding to clients’ questions via phone, email, or chat on a one-to-one, traditional customer service basis. Client interactions ran the gamut from ‘how do I…’ to ‘these commissions and fees are incorrect.’
Today, clients generally want to resolve issues and find answers themselves, so the content provided by the broker needs to be accessible, easy to understand and navigate, and topical to the client base. Furthermore, it needs to be easily visible to the client and accessible via media of the client’s choice.
Our goal at MetroTrade is to make this process as seamless and friction free as possible with the integration of new technologies, customized interfaces, and easily consumable content. I’m not saying we will be 100% there at launch, but that is our BHAG and our focus.
Similarly, client education needs to be topical, comprehensible, and clear. Futures are an advanced financial product and some of the concepts (contango anyone?) are difficult to explain without some context. Our primary educational goal is to provide layers of knowledge that can be digested at the client’s pace. Our secondary (maybe it should be primary?) educational goal is to get clients’ comfortable enough with futures so that they know they can trade them successfully without needing to know what contango is.
For those of you looking for more industry education (after going through our catalog of course) and are unsure where to start – this is a combination rant/public service announcement – do not under any circumstances pay for it! The industry has many free resources available – exhaust them before even contemplating paying for anything further. Here is a list to get you started:
- CFTC Learning Resources
- CME Group Education
- CBOE Options Institute
- Futures Fundamentals
- ICE Education
Facilitate Account Opening
The simple fact is, account opening paperwork for the futures industry is universally confusing. In most cases FCM’s developed their applications to satisfy the needs of the widest possible client base, be machine-readable, and compliant with all the regulatory agencies the FCM must report to, but not necessarily to be customer-friendly and easy to complete.
Brokers assist clients by cutting through all the noise and helping clients complete the portions of the application relevant and applicable to their account type.
Brokers also gather all the requisite documentation and paperwork from the client that is pertinent to their account application, and complete KYC (Know-Your-Customer)/AML (Anti-Money Laundering) due diligence in coordination with the FCM.
All NFA/CFTC-registered brokers must have Customer Information Program (CIP)/Customer Due Diligence (CDD) procedures in place, must complete AML training yearly, and other industry-specific coursework periodically, but not more than every three years.
In this space, FCMs rely on brokers to know their customers and be the first line of defense against potential fraud.
Additionally, as part of the account opening process and in adherence to their KYC responsibilities, brokers usually make an initial risk assessment of the client based on their stated goals and risk tolerance.
Ensure Customers are in Regulatory Compliance
The Commodity Exchange Act(5) requires that customer accounts be properly margined at all times, and that if a client has insufficient collateral in their account to meet the margin requirement, that a margin call be issued.
Traditionally, it is the role of the broker to contact the client to collect the margin call, or ensure the clients’ account is not on call within the requisite window of time required by the FCM.
Today, retail futures clients generally do not get issued margin calls (unless they are for some reason hedging a grain elevator full of softs), but it is still the duty of the broker to monitor client accounts and ensure clients are aware of what is going on in their accounts as it pertains to risk. All futures trading accounts have some level of leverage applied (it’s the nature of the business, after all) so it is imperative for the broker to be watching their customer accounts and ensuring compliance and risk management.
Brokers are also expected to conduct periodic due diligence on their customer accounts as part of their KYC responsibilities:
Is the customer suddenly trading a lot more or a lot less?
Has the customer been requesting more withdrawals or making more deposits than average?
Is the customer trading different products than normal?
Have their circumstances changed?
Be the Primary Point of Contact for Their Customers
As I said before, non-bank FCMs are set up to service the broadest range of customers they can. This is done for a variety of reasons:
1) Customers with a wide variety of positions lower the FCM’s overall risk profile.
2) Scale lowers fixed costs.
3) A more diverse customer base equals more diverse opportunities for revenue. Grain clients may trade when fixed income is quiet, for example.
4) More segregated funds(6) on deposit generally means more revenue for the FCM.
Given this structure, there is still room in the pool for the Introducing Broker(7). Today, there are 913 introducing brokers registered with the NFA. Every one of these is a specialist, with some focusing more broadly on all agricultural products and others focused only on precious metals, or lumber, or sugar, or cocoa (that one has been a wild ride of late).
Because of their specialty focus they are able to better service their customers by being more knowledgeable and being more in tune to their specific needs. This is not to say that brokers are omniscient (I learn something new every day), but these markets are complex and they move quickly, so having an extra pair of eyes and hands to answer day-to-day questions and head off potential issues benefits both the customer and the FCM.
Some Last Words On “What We Do”
As highlighted repeatedly throughout the article, it is the broker’s responsibility to know their customer. Customers should also know their broker. Before working with a firm or individual, do some due diligence. The NFA maintains a database of anyone who is currently or was previously registered as a salesperson or broker – NFA BASIC.
Take the time to research both the individual and the firm they are associated with and check out their history. If the firm or individual has been fined or has something on their BASIC record, ask them about it. Ask questions about their background and experience, and make sure the answers received make sense for what you are planning to do in the market, and just make sense given your experience level and industry knowledge. As said previously, these markets are complex and move fast – make sure you understand what your broker is saying, and that they understand you.
This is what we do, and that is why we did that.
(1) https://www.gleif.org/en/about-lei/introducing-the-legal-entity-identifier-lei
(3) https://www.cmegroup.com/markets/equities/sp/micro-e-mini-sandp-500.margins.html
(4) https://www.cmegroup.com/markets/equities/sp/micro-e-mini-sandp-500.contractSpecs.html ($5 * S&P500 index)
(5) https://www.law.cornell.edu/cfr/text/17/chapter-I
(6) https://www.cftc.gov/IndustryOversight/Intermediaries/FCMs/fcmsegregationfunds.html