The futures exchange is where futures orders are received, and buy and sell orders are matched, to create “the market.” Futures exchanges have the objective to provide fast and accurate order execution, and to maintain an orderly market.
Brokerages play an important role in the futures markets, as they are the link between the trader and the futures exchange. Brokers have many functions, including their primary functions to provide a software platform to place orders, managing client deposits and connect traders to the exchange.
Since individual traders cannot interact directly with the exchange, they need to rely on a broker who can send the orders they place to the exchange and manage the flow of money between the exchange and the trader’s accounts.
When selecting a broker there are a few things you should consider: technology, cost and trading permissions.
In the past, orders were telephoned in to a broker who would place the order with the exchange. Now that trading is fully electronic, the technology available to individual traders is the same as institutional traders; orders are placed directly through a broker’s online platform.
The technology of a broker’s platform will allow traders to place orders, perform analytics and create systems that can trade automatically, based on predefined conditions.
Much like order execution software, features are varied from broker to broker, ranging from basic to more complex, incorporating many features. You can choose to trade with a broker who offers the features that best suit your needs.
Traders pay fees for the orders they place and the software they use. There are typically three fees that a trader will pay: Commissions, platform fees and Data feed fees.
Each time an order is executed, you will pay a fee to your broker, called commission. Commissions have two components, a fee to the broker and a fee to the exchange.
Depending on the brokerage, the fee might be per contract, or a flat fee per trade in addition to the fee per contract.
Some brokers charge a monthly platform fee which covers the use of trading software. Depending on the account size and number of trades executed each month, this fee may be reduced or waived.
Fees may also be charged for deposits, withdrawals and other services - which will be listed in the brokerage agreement.
Another cost you might have to pay is a data feed fee, which is charged by the exchange to provide real-time and historical price data that traders require for their charts.
Depending on the brokerage, these fees might be built in to overall costs or might be charged per item.
Brokers may have different restrictions and requirements which you should be aware of as they may affect what and how you trade.
These restrictions may include:
Each broker will set an initial deposit that is required to open an account. This amount varies from broker to broker.
Margin requirements, an important aspect of the futures market, are set by the exchange.
There is a rate set for normal trading hours and a higher rate set if traders hold the trades overnight into the next trading day.
Each broker will set the amount of margin they are willing to give to traders and this will vary from broker to broker.
The overnight session in the futures market is treated differently than the day session.
Some brokers will require higher minimum deposits or special permissions to allow traders to hold futures trades overnight.
There are many futures contracts available to trade, each with their own risk profile. Some futures contracts are more volatile and have large dollar values per tick, which is why some contracts will require larger accounts with special permissions to trade.
For example, E-Mini S&P 500 futures (ES) is one of the first contracts enabled for traders. Whereas contracts such as Natural Gas may need to be requested to trade.
Since individual traders need a broker to transact orders they wish to place, and each broker provides slightly different set-ups, costs and permissions to trade, you can find a broker that best suits your needs.