The Cost of Trading: Trading Commissions, the Bane of Futures Traders, Are a Mystery to Many. Every Link of the Chain That Makes Up the End-User's Final Cost-Exchanges, Futures Commission Merchants and Introducing Brokers-Claim They Are Being Squeezed by Higher Costs and Lower Fees

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Competition has forced rates down, but there are still traders willing to pay higher commissions for better service. While the large wire houses have to a great extent eliminated retail business and those competing for the introducing broker business are seeing their rates squeezed as they race for scale, end users who are looking for a little added service or managed accounts can still face round-turn rates north of $50.

Commissions have a direct impact on the ultimate performance of a commodity trading advisor's (CTA) program. Performance figures are quoted net of trading commissions, management fees and incentive fees, so higher rates directly effect performance.


Large CTAs have little impact on commissions their customers pay. Their customers are either institutional investors or sophisticated investors with established relationships with futures commission merchants. These investors have already negotiated the best rates available and do not need a CTA to work on their behalf.

"Most of our customers are the trading manager types that are managing large sums of money," says Mark Walsh, president of Mark J. Walsh and Co.

Walsh says that futures commissions have come down, but not nearly as much as on the securities side where you can trade 5,000 shares of stock for $5 with some online brokers.

"Obviously, everyone's costs must have come down, but fees don't seem to have come down as quickly," he says.

Walsh says that his customers pay between $7 and $20 a roundturn in trading commissions. Customers who are introduced through wire houses pay more because of brokerage fees, as do allocations from commodity pool operators.

"CPOs make money on the commission end of it," Walsh explains. "They negotiate a rate of $8 and charge $20 to the client and take $12 as their fee. Most CPOs are IBs too. They are making money a lot of different ways."


The ways that intermediaries receive compensation has caused some concern in the industry. David Matteson, partner in charge of futures practice at Gardener Carton and Douglas LLP, says that given the growth of the industry and in the wake of the mutual fund scandal that it is a good time for the managed futures industry to examine compensation.

"Is the compensation appropriate? All compensation takes money out of the limited partners," Matteson says.

Matteson says that some pool operators and IBs share in brokerage fees. A pool operator will negotiate the lowest rate possible with an FCM and then charge the pool a higher commission for trades. The CPO still stands to receive management fees and performance fees. This practice concerns Matteson because there is no arms length negotiation of the fees the fund's customers are charged. CPOs also can request a portion of commission go back to an IB.

"What is the justification of the IB receiving a portion of the commissions. Is it fair and appropriate for the pool operator to receive brokerage fees?" asks Matteson.

Matteson is not suggesting that brokers who bring customers to a CTA or CPO aren't entitled to compensation but says the industry needs to take a critical look at how those fees are determined.

"The IB who does research, assist in order entry or has ongoing client responsibilities is entitled to make money," Matteson says. "The fee should be a fair and competitive amount. There is no problem with them getting a percentage."

A broker at a major FCM says it is common for an IB to demand a roundturn rate of under $7 for a customer who wants to invest in a certain manager and then have that IB turn around and charge the customer $75 a roundturn.

"Because there is no arms length negotiation of pool fees there is potential for excessive fees. Every pool operator and trading advisor needs to remember it is a fiduciary," Matteson says. …