What Is a Futures Broker? What They Do and How They Work
A futures broker provides traders with access to trade the futures and futures options markets, but the brokerage relationship involves much more than simply opening a trading platform and placing an order.
Behind every futures account is an infrastructure that connects the trader and their futures broker with trading platforms, order-routing systems, futures exchanges and the clearing process.
Understanding how this structure works can help traders better understand who is involved in their account, where their orders go and what role their futures broker actually plays.
Key Takeaways
- A futures broker provides access to regulated futures and futures options markets.
- Futures brokerage can involve both an Introducing Broker (IB) and a Futures Commission Merchant (FCM).
- The broker, trading platform, futures exchange and clearing system each perform different functions.
- Futures brokers may offer self-directed trading, full-service brokerage or a combination of both.
- Order routing, trading technology, account support and margin policies are all part of the futures brokerage relationship.
What Is a Futures Broker?
A futures broker is a regulated brokerage firm or financial professional that provides clients with access to trade the futures and futures options markets.
The broker serves as the connection between the trader and the futures marketplace. Depending on the brokerage firm and account structure, the broker may provide trading technology, order routing, market data, account support, educational resources and access to futures exchanges.
Futures Broker Definition
A futures broker provides access to the futures and futures options markets and provides the brokerage services, technology, support and market connectivity needed to maintain and trade a futures account.
Futures brokers can serve individual traders, professional traders, commercial hedgers and other market participants. Brokerage services may range from technology-focused self-directed accounts to full-service relationships that provide direct access to an experienced futures broker.
How Does the Futures Brokerage System Work?
A futures trade involves several different parties and systems. Although a trader may simply see an order-entry screen in their futures trading platform, a number of steps take place behind the scenes.
A typical futures trade involves the following process:
The Trader
The futures trader decides to place a futures or futures options order through their futures trading platform.
The Broker
The futures trading platform provided by the futures broker transmits the order to the clearing firm.
Clearing Firm
The clearing firm processes and validates the order, then routes it to the appropriate futures exchange.
Futures Exchange
The futures exchange receives the order and matches it with an opposing order in the appropriate market.
Each part of this trade process serves a different purpose. The futures broker provides access and services to the client, while the exchange operates the marketplace and the clearing system manages the financial obligations associated with completed transactions.
Insignia Futures & Options provides CME exchange-direct order routing for clients trading CME Group futures markets.
Important Order-Routing Note: The order-routing examples described on this page are based on futures and futures options trades placed on the CME Group futures exchange. Orders placed on other futures exchanges may follow different routing and processing procedures and may pass through a third party clearing FCM or clearing firm as part of the order-routing process.
What Is an Introducing Broker?
An Introducing Broker (IB) is a futures brokerage firm that works directly with clients and introduces customer accounts to a Futures Commission Merchant (FCM) / clearing firm.
The Introducing Broker handles much of the day-to-day brokerage relationship with the futures trader.
Depending on the firm, an IB may provide:
- Futures trading platforms
- Order-entry and market-access technology
- Broker assistance
- Trade Desk support
- Educational resources
- Market information
- Account-related assistance
Some Introducing Brokers primarily serve self-directed traders, while others provide full-service futures brokerage services such as trade recommendations.
What Is a Futures Commission Merchant?
A Futures Commission Merchant (FCM) performs a different role within the futures brokerage system.
The FCM carries customer futures accounts and performs functions associated with the processing and clearing of futures transactions.
Customer funds associated with futures accounts are also subject to regulatory requirements governing how those funds are held and segregated.
Traders who open an account through an Introducing Broker therefore may have a brokerage relationship involving both an IB and the FCM.
Introducing Broker (IB)
Typically works directly with clients and provides brokerage services, trading technology and account support.
Futures Commission Merchant (FCM)
Carries the futures account and performs functions associated with clearing, processing transactions and handling customer funds.
How Futures Exchanges Work
Futures exchanges provide the regulated marketplaces where futures and futures options contracts are traded.
Exchanges such as CME Group and ICE Exchange establish standardized futures contract specifications for the futures products listed on their markets. These specifications typically include contract size, tick value, trading hours, expiration procedures and settlement terms.
Futures exchanges also establish Initial and Maintenance margin requirements for the contracts they list.
The futures broker provides the trader with access to these exchange-listed markets through approved trading platforms and order-routing systems.
How a Futures Trading Platform Connects You to the Markets
The futures trading platform is the software interface a trader uses to view markets, analyze prices, monitor account information and submit orders.
Depending on the trading platform, features may include:
- Real-time futures market data
- Charting and technical-analysis tools
- Depth-of-market (DOM) displays
- Market, Limit, Stop and other order types
- Position and account monitoring
- Automated trading capabilities
- Desktop, browser or mobile access
The trading platform and the futures broker are not necessarily the same company. A futures broker may provide its own proprietary platform, support third-party trading platforms or offer both.
Insignia Futures & Options offers its proprietary InsigniaTrader platform along with access to other major futures trading platforms including TradingView, Sierra Chart, Rithmic and CQG.
Self-Directed vs. Full-Service Futures Brokerage
Futures brokers can also differ in the level of assistance and service they provide to clients.
Self-Directed Futures Brokerage
Self-Directed traders generally make their own trading decisions and use the brokerage primarily for market access, trading technology and order execution.
Full-Service Futures Brokerage
A Full-Service futures brokerage firm typically provides additional access to experienced futures brokers, personalized assistance, trade recommendations and educational support.
Some futures brokerage firms provide only one model, while others offer both self-directed and full-service account options.
Insignia Futures & Options provides futures traders with both self-directed trading capabilities and access to full-service futures brokerage support.
How Do Futures Brokers Make Money?
Futures brokers primarily earn revenue by charging commissions on futures and futures options transactions, along with certain account-related or support fees for the services they provide.
Other charges – such as futures exchange fees, clearing fees, regulatory fees, market data fees and trading platform fees – are not generally retained by the futures broker. They are assessed by the futures exchanges, clearing firms, regulatory organizations, market data providers or trading platform providers. The futures broker passes these fees on to the associated service provider.
Why Do Futures Brokers Charge Commissions When Most Stock Brokers Don’t?
Stock brokers can offer commission-free trading because they use the ‘Payment for Order Flow’ (PFOF) business model.
With PFOF, a stock broker routes customer orders to certain market makers or other trading firms that compensate the broker for that order flow. This can allow the brokerage firm to generate revenue from customer transactions without charging the customer a traditional trading commission.
The futures markets operate differently. Futures brokers do not have the same Payment for Order Flow business model available for exchange-traded futures and futures options orders. Instead, futures brokers earn revenue by charging a commission for the brokerage and related services they provide.
For futures traders, this makes the commission rate only one part of evaluating a brokerage firm. Trading platform technology, order routing, margin policies, market access and the level of brokerage support provided should also be considered when comparing futures brokers.
How Does Futures Margin Fit Into the Brokerage Relationship?
Margin is another important part of the futures trading system.
Initial and Maintenance margin requirements are established and set by the futures exchanges.
Futures brokers may also establish reduced day-trade futures margin requirements that allow qualifying traders to hold positions during the trading session with less account equity than would be required to carry those positions beyond the market close.
Day-trade margin policies can therefore differ from one futures broker to another.
Traders should understand that margin is an account requirement and does not represent the amount of profit or loss that may result from a futures trade.
Learn More About Futures Margin
For a more detailed explanation of Day-Trade, Initial and Maintenance margin requirements, read:
Futures Margin Explained: 5 Things Traders Often Misunderstand
How Are Futures Brokers Regulated?
Futures brokerage firms that are located in the United States or provide futures trading services to U.S.-based clients are regulated by the following U.S. regulatory organizations:
- The Commodity Futures Trading Commission (CFTC) regulates the U.S. derivatives markets.
- The National Futures Association (NFA) serves as the industrywide self-regulatory organization for the U.S. derivatives industry.
Futures brokerage firms and applicable industry professionals are subject to registration, compliance and regulatory requirements.
Investors can use the NFA BASIC database to research registration and regulatory information for futures firms and industry professionals.
Insignia Futures & Options is registered with the CFTC and is a member of the NFA.
What Is the Difference Between a Futures Broker and a Stock Broker?
Futures brokers and stock brokers both provide market access, but they operate in different markets and under different account structures.
Futures brokers specialize in exchange-traded futures and futures options. These markets use futures-specific margin requirements, contract specifications, expiration procedures and trading hours.
Stock brokers primarily provide access to equities and securities markets, which operate under different regulatory, margin and trading rules.
Some financial firms offer both securities and futures services, while specialized futures brokers focus exclusively on the derivatives markets such as Insignia Futures & Options.
Understanding the Futures Broker’s Role
A futures broker is only one part of the larger infrastructure that makes futures trading possible, but the broker often serves as the trader’s primary connection to that infrastructure.
Through the brokerage relationship, traders gain access to futures exchanges, order-routing technology, trading platforms, account services and other resources necessary to participate in futures markets.
Understanding the roles of the broker, FCM, trading platform, exchange and clearing system can make it easier to understand how a futures account actually works.
Ready to Learn How to Compare Futures Brokers?
This page explains how the futures brokerage system works. If you’re ready to evaluate brokerage firms and compare services, technology, execution, costs, margins and support, read our complete Futures Broker Selection guide:
How to Choose a Futures Broker: The Complete Guide for Futures Traders
Why Choose Insignia Futures & Options?
Since 2001, Insignia Futures & Options has been serving futures traders worldwide, combining professional futures brokerage services with the technology, futures market access and personal support today’s traders demand.
Trade with CME exchange-direct order routing, low day-trade margins and professional futures trading platforms, including our proprietary InsigniaTrader platform or access to other major futures trading platforms.
Whether you prefer to trade completely independently or want the added support of an experienced futures broker, you choose the level of service that fits the way you trade. Our clients have access to personalized brokerage support, market information and trade recommendations when requested.
At Insignia Futures & Options, you’re more than an account number. When you have a question about your account, platform, an order or the futures markets, you can speak directly with an experienced futures broker who can help.
Discover What Insignia Futures & Options Has to Offer
Explore Insignia Futures & Options trading platforms, margin requirements and brokerage services, or speak directly with an experienced futures broker.
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