As a trader, it is crucial that we select the broker that best suit our trading needs and style.
In this post, I'd like to share my thoughts on the criteria a futures spread trader can refer to while choosing a broker:
#1 Choose a broker that offers trading platform with access to spread trading
These days, when a trader opens a futures account with a broker, it'd usually come with a trading platform for trade execution.
While doing so, it is important for a trader to inquire if the trading platform that is offered by the future broker allow access to a seamless spread trading.
As an example, for a Natural Gas (NG) January:February (F:G) calendar spread, I'd like to be able to execute a bull of bear spread simultaneously instead of executing each individual futures contract one-by-one.
Let me demonstrate why being able to execute a spread trade seamlessly is important:
Let's say I'd like to take a long trade on the NG F2025:G2025 calendar spread below.
If I were to take a long trade directly via the calendar spread, I'd be hitting the Ask price and enter at 0.178.
However, if I were to take this trade separately (ie. Long NG F2025 & Short NG G2025), I'd be hitting the ask price of NG F2025 at 3.909, and the bid price of NG G2025 at 3.729. This means I am entering my spread trade at 0.180 instead, which is 2 ticks higher than my intended price.
Simply put, being able to trade spread seamlessly brings more efficiency for a spread trader.
Furthermore, for traders that intend to trade butterfly spread, it is also important to choose a broker that offers a seamless butterfly spread execution, as not all brokers allow access to trade butterfly spread directly.
#2 Choose a broker that offers a competitive commission
Another important factor while choosing a futures broker is its commission. Since trading a calendar or butterfly spread means taking 2 or 4 outright positions at once, it also means double or quadruple the commission per trade.
Let's look at the difference if fees if we were to trade spread with broker A that offers $4/Round Turn (ie. Enter & Exit) and broker B that offers $5/Round Turn:
Total commission paid to broker after 100 Round Turn | Broker A ($4/Round Turn) | Broker B ($5/Round Turn) | Difference |
|---|---|---|---|
Outright position | $400 | $500 | $100 |
Calendar spread (2 individual outright trades) | $800 | $1,000 | $200 |
Butterfly spread (4 individual outright trades) | $1,600 | $2,000 | $400 |
As a result, a $1 saving in commission paid to broker A can turn into a significant savings in the long run.
For traders that trade a large volume, it is also beneficial to look for a broker that offers a lower commission rate as you trade more volume.
#3 Choose a broker that offer access to the asset class or instrument that you trade
Not every futures broker offers the instrument or asset class that you trade.
For instance, some brokers may not offer access for the spread trading of Vix futures, which can be inconvenient if you want to trade the instrument.
As such, it is important to inquire your broker on the availability of a specific instrument before opening an account.
#4 Choose a broker with a more lenient margin requirement to maximize the use of capital
A major benefit of trading spread is a lower margin requirement (in general) compared to trading their outright counterpart.
Trading with a more lenient margin requirement means traders do not need to park as much capital to fulfill the margin requirement while initiating a trade, which free up more capital to initiate more trades.
However, each futures broker has a different margin requirement. Hence, it is essential to find out which broker has the most lenient margin requirement for your needs:
#5 Select a broker that offers a good support & complete execution platform
Finally, it is important to consider a broker that offers a solid support and complete execution platform.
Some key features that a trader may find important include:
24/7 customer support
Basic or advanced charting feature
Mobile app execution
Low FX spread for currency conversion
Real time, low latency market data
Verdict: A quality broker is a strong ally in your trading journey
Selecting the right broker is an important part of the journey as a spread trader. In this post, I've highlighted 5 key criteria that a trader should consider while choosing a futures broker.
What other criteria do you think should be included while selecting a broker? Feel free to leave your thoughts in the comment section below!
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Disclaimers
Any of the information above is produced with my own best effort and research.
This post is produced purely for sharing purposes and should not be taken as a buy/sell recommendation. Past return is not indicative of future performance. Please seek advice from a licensed financial planner before making any financial decisions.
Leverage is a financial tool that comes with its advantages and risks. Please learn and understand both the upsides and downsides of leverage before using it for trading.
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