Commodities are goods that are exchangeable with other goods of the same type. They are mainly agricultural products such as coffee, cocoa, maize, etc, and natural resources such as crude oil, metals etc, that are bought and sold by investors in commodity trading. They can be sold in the form of options, futures, or derivatives.
A commodity broker is an individual or a company involved with trading commodities for clients. A company or firm broker is also referred to as an Introducing Broker (IB) or Futures Commission Merchant (FCM), while an individual commodity broker is referred to as Associated Persons (AP). They buy physical commodities from producers or sellers and sell them to their clients, private or commercial, on charges.
The main objective of a commodity broker in commodity trading is to make a profit for a client. Therefore, a commodity broker charges a certain commission on every trade made, so profit-making is a priority.
The Role of a Commodity Broker
Commodity brokers are usually experienced and skilled in commodity trading. Commodity markets are facilitated by commodity brokers for a commodity investor who does not know how to trade or is too busy to do so. The trader invests in a commodity of interest while the Commodity broker manages the exchanges to profit from the commodity market. They have electronic platforms that execute trades for clients and other employed traders. It is safer and easier to involve Introducing Brokers or Futures Commission Merchants than an Associated Person.
The functions of a commodity broker for a commodity investor include:
- Reviews trade media to monitor international market performance
- Sources and investigates new commodity products in the commodity markets
- Negotiates prices of the futures or options, as well as the delivery information
- Interprets market reports
- Provides investment advice and commodity market advice to clients
- Devises commodity marketing strategies
- Liaises with the insurance, shipping, and transport companies
- Communicates with or visits international suppliers
- Takes over the commodity trading responsibility of a commodity investor (client) on a specified commission.
How Commodity Brokers Work
Usually, the work of a commodity broker in commodity trading can be carried out in two methods: pit trading and electronic trading.
- Pit trading
Trading through pit is the old form of trading carried out through open outcry. In this method, an investor interested in a commodity or a seller of a contract derivative would call a commodity broker who relays the order to a clerk’s desk on the floor. The clerk conveys the order to a floor broker in the pit where the particular commodity trades. Then, on behalf of the investor or the seller, the broker informs the clerk, who informs the commodity broker, who then informs the client.
- Electronic trading
Using the electronic trading method, commodity brokers enter their clients’ orders on the trading platform where the commodity exchange occurs. The majority of commodity trading is conducted using electronic trading. Electronic trading is simpler, requires less cost, and is transparent.