Commodity brokers are professional traders who exchange commodities (in spot transactions and as commodity futures on behalf of clients in exchange for a commission. These clients may be producers seeking to purchase commodities necessary for manufacturing their products or individuals and firms selling commodities that they have produced. A recent trend currently affecting commodity brokers, however, is the growth of online commodity trading. With an increasing number of investors personally taking part in commodity exchanges, the need to trade through a broker appears less necessary.
The role of the commodity broker is to advise their clients on how to most profitably exchange their commodities. Therefore, they are expected to have a thorough and detailed knowledge of commodity trading systems and strategies used to identify trends. As the commodity broker receives a commission from the exchanges he or she makes, it is in their personal and professional interest to capitalize on the markets in question. Commodity brokers can be contrasted with commodity traders, or floor traders, who make personal exchanges independently. A commodity trading broker is always at the service of a client.
Traditionally, most of the commodities that brokers have dealt with have been either agricultural commodities, metal commodities or energy commodities (for instance corn, gold and Brent Crude oil), but now a commodities broker will often deal with financial derivatives that are based on a wide range of assets, such as currency.
There are several types of commodities brokers, and their roles and responsibilities differ depending on their specific post. Floor brokers, so called because they trade down in the ‘pits’ of the contract markets, actively acquire the figures and quotes necessary to determine trends and are in constant communication with their clients so as to receive authorisation for deals. The responsibility of the floor broker is to protect his client(s) from large financial losses and from the hectic and stressful environment of the pit. The client will be informed and advised on different exchanges and the results of finalised deals.
Commodity trading advisors provides his or her client with information on commodity trends and advice on how to best put their assets to use. However, unlike the commodity broker, a commodity trading advisor does not personally negotiate deals or purchases futures contracts. As a commodity broker performs these tasks, it is the firm who is held responsible for any of his/her mistakes on the floor. This is not the case for the commodity trading advisor as they simply provide advice and are not liable for any losses incurred through commodity trading.
The discount commodity broker is a relatively recent post and especially relevant to amateur investors. Discount commodity brokers will perform the same duties as floor brokers but without any personalized advice. These brokers are familiar with the commodity trading system and have the know-how to perform investments that amateurs will not know how to do. As is evident from the title, they are also a cheaper alternative to floor brokers and are often available through online services. However, the lack of advice could prove disastrous for some investors.