Commodity option broker
Contract specifications can sometimes be changed by the exchange, and is usually done to keep the contract viable. To stand in a trading pit, a trader needs to buy an exchange membership, pay annual dues, and register with various regulatory agencies. Naturally, few people would trade futures if it required that they stand in the trading pit.
To solve this problem, in steps the futures broker. A futures broker acts as a communication link between the trading pit and the trader, taking orders from the customer, and executing them in the futures pit. By law, futures brokers do not have the authority to take customer funds and hold them in deposit.
Only an FCM can do this. For this reason, a futures broker needs to team up with an FCM in order to provide order execution services to its customers.
In a literal sense, it stands as a buyer to every seller and a seller to every buyer. That means that a futures trader does not have to worry about any default of a futures counterparty. What happens if that person cannot pay? Does A sacrifice her profit? The answer is "NO". The clearing corporation guarantees the transaction. The clearing corporation's elimination of such counterparty credit risk provides a great benefit to the futures and options markets.
One may wonder how the clearing corporation does this. The answer lies in the margin deposit that every other futures trader must make before trading any contract. This margin is available to the clearing corporation and, together with other reserve cash and various protection funds, are used to cover any customer default. A clearing corporation is composed of clearing members, most of which are large FCM's.
Ever since the s, the majority of commodity contracts traded are financial derivatives with financial underlying assets such as stock indexes and currencies. When executing trades on behalf of a client in exchange for a commission he is acting in the role of a broker. When trading on behalf of his own account, or for the account of his employer, he is acting in the role of a trader. Floor trading is conducted in the pits of a commodity exchange via open outcry.
A floor broker is different than a "floor trader" he or she also works on the floor of the exchange, makes trades as a principal for his or her own account.
IBs do not actually hold customer funds to margin. They advise commodity pools and offer managed futures accounts. CTAs exercise discretion over their clients' accounts, meaning that they have power of attorney to trade the clients account on his behalf according to the client's trading objectives.
A CTA is generally the commodity equivalent to a financial advisor or mutual fund manager. A commodity pool is essentially the commodity equivalent to a mutual fund.