Commodity trading may not be as widespread as equity, index, or Forex trading, but it continues to gain traction. It serves as an excellent portfolio diversification tool, provides portfolio managers with hedging opportunities, and remains a favorite alternative to currency trading. Trading commodities with a multi-asset broker generally consists of a derivative product with contracts for differences (CFDs), the most traded one. Trading with commodity brokers grants traders access and exposure to options and futures trading, but more established multi-asset brokers also support those. Commodities fall into two distinct sub-categories: hard and soft commodities. The former includes everything that is mined or extracted, for example, oil and gold. Several sub-categories exist and structure the sector. Some of the most traded ones include industrial metals, precious metals, and energy. The latter consists of items that are grown or harvested and generally used for personal consumption. Wheat, corn, soy, sugar, cattle, and orange juice remain heavily traded across global exchanges. The highest consumption of hard commodities is in industry, while personal consumption is the demand driver behind agricultural commodities. The financial sector uses precious metals for value storage and as a hedging tool. All present excellent trading possibilities and online commodity brokers cater to the rise in demand.
A commodity broker is an individual or company that places trades on exchanges on behalf of clients. They own a seat at commodity exchanges, have traders on the floor for open-outcry pit trading, and the majority provide an online trading platform. Options and futures trading are the two primary order types. The former offers traders the right, but not an obligation, to buy the commodity. The latter is an obligation to purchase and deliver on the agreed upon date. The three main classifications of commodity brokers are introducing brokers (IBs), futures commission merchants (FCMs) and individuals as associated persons (APs). Commodity trading takes place on distinct commodity exchanges, and the London Metal Exchange (LME) has the most choices of futures contracts in metal trading. Other notable ones include the Chicago Mercantile Exchange (CME), Dutch Climax, the Dubai Mercantile Exchange (DME), the Zhengzhou Commodity Exchange (ZCE), and the Tokyo Commodity Exchange (TOCOM). Commodities remain quoted in US dollars, but the trend is slowly changing. Some are priced in alternative currencies, while a push to price all of them in currency baskets gains traction, especially from BRICS and ASEAN countries, together with other emerging and frontier markets.
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Types of Commodity Brokers
Depending on the investment or trading strategy, the needs of clients and required services will differ. Several types of commodity brokers cater to the growing needs of market participants. They form the backbone of the commodity trading sector. Some maintain a floor presence in commodity exchanges, and almost all became online commodity brokers to satisfy the needs of simple order placement and fast execution times. Trading with the right commodity broker can increase the profitability of traders. It also ensures access to the required assets and trading tools.
Types of Commodity Brokers:
- Floor Broker (FB) - A floor broker is an independent member of an exchange and can act as a broker for other members if they need assistance in processing their order flow. After receiving an order, a floor broker proceeds to the corresponding trading post. The order placement takes place against other brokers and the specialist in the traded asset. Following a filled order, the floor broker confirms it with the client. A floor broker is not the same as a floor trader, who trades accounts on behalf of the firm that employs them or for individual purposes.
- Futures Commission Merchant (FCM) - An FCM solicits orders for clients and receives a commission for services rendered. An FCM also carries the responsibility of collecting the required margin from traders. One of the most important obligations is the delivery of assets per the agreed contract. Each FCM must maintain registration with the relevant supervising authority.
- Introducing Broker (IB) - An IB has a direct relationship with the client and can offer trading advice. All other tasks, like trade execution and back-office management, are delegated to affiliated brokers. Most IBs usually have a working relationship with an FCM, either as an independent partner or a direct operating subsidiary of the FCM. Traders can get superior customer service and trading tools, the primary goal of IBs, which often have local representation.
- Commodity Trading Advisor (CTA) - The three types of CTAs consist of technical, fundamental, and quantitative. Financial firms, like hedge funds, HFTs, banks, mutual funds, or individual traders, hire CTAs to provide investment advice and trading-related services. They can act as an asset manager within the firm and trade portfolios based on their expertise.
- Commodity Pool Operator (CPO) - A CPO solicits investments from companies and accredited investors for trading on exchanges using various strategies, products and leverage. CPOs often work together with CTAs, either as an independent operation or part of funds including hedge funds, private equity funds, mutual funds and exchange-traded funds.
- Associated Person (AP) - An AP is an employee of a broker, floor broker, FCM, CTA, or CPO. The responsibility of an AP is the facilitation and supervision of sales. APs have an insight of order flow unavailable to the public and cannot personally benefit from the available information. Administrative employees of companies are not considered APs.
Types of Commodities Available for Trading
The two main classifications are hard commodities and soft commodities, but each consists of sub-categories. The most traded ones are precious metals and energies, which are offered by all top commodity brokers. Industrial metals and agriculture also enjoy increasing demand from traders seeking to diversify. There are 57 core futures contracts traded globally, with multiple options contracts on each. The quote currency for most of them is the US dollar, with few exceptions. The commodity market enjoys a close relationship or inverse relationship to the Forex market. The Canadian dollar, Australian dollar, New Zealand dollar, Swiss franc, Brazilian real, and South African rand are known as commodity currencies, and commodity trading brokers offer advice on how markets remain interconnected. Traders must understand the relationship between commodities and currency pairs. It is as defining to a strategy as supply, demand, and the weather.
Factors to Consider When Choosing Brokers for Trading Commodities
Trading with the right commodity broker is as important as a trading strategy. While each trader must define what a top commodity broker must offer, I recommend the below aspects as a requirement to ensure a competitive and secure trading environment.
- Established & Reliable Brokers - A minimum of five years of operational experience and a clean regulatory track record will provide traders with sufficient evidence of a well-managed commodity broker.
- World-Leading Brokers - Taking it one step further are world-leading brokers with established operating subsidiaries in primary markets. They generally provide a superior asset selection, trading platforms, value-added services, and 24/7 multilingual customer service.
- Commissions & Fees - This remains one of the most defining aspects of trading. I recommend raw spreads with a competitive commission of no more than $7 per lot plus a volume-based rebate program.
- Funding & Withdrawal Methods - The best commodity brokers will provide multiple funding and withdrawal methods, including a low-cost online payment processor. Traders should avoid those who support bank wires and credit cards only.
- Customer Support - Most clients never require customer support, especially after the account opening at well-established brokers. Since emergencies can occur, traders should ensure 24/5 customer support with swift access and quick response times.
- Broad Trader Resources Offering - This separates the best brokers from the good ones. I recommend selecting an online commodity broker with full support for automated trading solutions, including VPS hosting. In-depth research and market commentary showing the broker's commitment to a competitive trading environment and other trading tools that provide fundamental insights should equally be available.
- Regulation - Traders should avoid unregulated brokers, regardless of how attractive an offer to sign up exists. It carries unnecessary and avoidable risks.
- Account Type - Many brokers provide an identical account type to all clients without enticing more significant deposits for superior services. Traders should read the fine print on each account type, if multiple options exist, and select the one that suits their trading style.
- Instruments & Products - Asset selection fulfills an essential role in a well-diversified portfolio. Traders must assess the product portfolio to determine if it suits their trading requirements.
- Leverage & Margin - This will have a direct impact on the profitability of portfolios. I recommend selecting an online broker with a competitive leverage offering. It offers flexibility, but traders must implement strict risk management rules.
- Platform Features - Various trading platforms support different functionalities. Automated trading, excellent charts, technical indicators plus drawing tools, intuitive order placement, multi-chart support, and a clean user-interface are requirements traders should seek.
- Mobile App - Traders who prefer to check their portfolios on the move should ensure the mobile app provides the desired features.
What does a commodity broker do?
A commodity broker facilitates orders on behalf of clients. Some also provide trading recommendations and other related services.
Are commodities riskier than stocks?
The risks are similar and directly related to the knowledge of traders. Therefore, no asset is more or less risky than another one.
Which are the top 5 commodities?
The top 5 commodities are crude oil, coffee, natural gas, gold, and Brent crude.
Which broker is best for commodity trading?
The best broker for commodity trading will offer broad asset choices, a competitive cost structure, high leverage, an excellent trading platform and transparency.
How do commodity brokers make money?
Commodity brokers derive most of their revenues from commissions.