“Why Are There So Many Different Fees When Trading Futures?”
“What the Heck is an FCM?!”
Let’s answer those questions today…
Maybe you’re new to the world of Futures…
And you’re wondering…
Why are there many different fees to pay when trading the regulated Futures market?
Well, the clue is in the regulation.
These different fees when added up are very small, and I’m glad to pay them.
Because without the different entities we pay, we wouldn’t be able to trade!
In this email, I’ll tell you why.
But first, let’s talk about the alternative – trading CFDs.
When you trade an S&P 500 CFD, e.g. the US500, you jump on your broker’s website, submit an order, and pay a single spread fee.
Sounds good right?
They bait you in with “one fee” and end up increasing the spread once you are inside a trade, depending on the time of day.
So you never really know how much you will pay to get out of the trade.
Most likely it will end up costing more than trading with a regulated Futures broker.
On top of this, CFDs are Over The Counter (OTC).
That means they’re unregulated and the broker will sell your order flow.
The result of that is that the prices you see are manipulated to take your stop out.
It’s pretty sneaky when you think about it.
Compare this to placing a trade in the wonderful Futures Market.
Everything needs to be above board and have many checks and balances.
When you send an order from your trading platform, you pay a small fee to a routing service.
Common order routing services include Rithmic, CQG, and Sierra Chart’s Teton.
This requires a business relationship between the router and the trading software company.
The routers communicate your orders to your Futures Commission Merchant – also known as your broker.
Your FCM is a member of the exchange you want to trade on (when trading the S&P500 that’s the Chicago Mercantile Exchange).
The FCM holds your money in a segregated bank account and checks to see if you have enough margin on your account.
Once the order is good to go the router puts your order onto the exchange so it can get matched.
Back in the ol’ days, these routers would be the “Pit Runners.”
They would run into the center of the Pit after a broker gave them an order to transmit and make sure it got filled by a member in the middle of the room…
But now… we can pay a few cents for a “digital runner!”
And “he” can do the task in a split second. 😉
When orders get matched at the exchange there needs to be one long contract for every short contract traded.
Once the trade is entered, the router sends the result of your order back to your FCM (broker).
And they register the update on your trading account.
The digital router then takes this info back to you sitting at your trading desk so you know what happened without your broker needing to phone you.
As you can see, a lot of technology and effort goes into this service.
It’s what enables us to trade seamlessly on a centralized exchange where you know everything that you see is what everybody else sees.
That’s the pinnacle of the trading experience,
Where everyone is on an equal playing field.
And to the victor, go the spoils…
Alright, hope you found this one educational.
Have a great weekend,