Why Trade Futures?

You make a great point. Billions of dollars in client funds is at risk without seg funds and insurance. It's important that traders be able to know with confidence that the money they deposit with their broker will be there for them when it's time to make a withdrawal. The brokerage industry has come under financial struggles over the years as a result of 3 major points:

1. FCMs (primarily futures brokers) are struggling due to falling trade commissions as a result of price competition
2. Low volatility has lowered trading volumes, thereby further lowering revenue earned by commissions or spreads
3. Low interest rates have greatly reduced interest earned on client deposits as a source of revenue

Regarding the last point, below is an excerpt from an article in Financial News:

According to a study by US consultancy Tabb Group published last month, US FCMs collectively made more than 40% of their income in this way in 2008 – more than they made from either clearing or execution. But with interest rates in the US and Europe at record lows, this source of revenue has all but dried up. Tabb Group said that, this year, investment income was expected to account for just 10% of US FCMs’ revenues and the pool of revenues available to US FCMs is set to almost halve from $7bn to $4bn. As the available revenue has shrunk, so too has the number of brokers. A study by PA Consulting in September found that the number of US FCMs registered with the Commodity Futures Trading Commission had dropped by 33% since 2008.

On top of all that, there’s the rising costs of regulation, compliance, and other rising business costs such as health insurance, cost of living increases, etc. All of this has presented a challenging business climate for the brokerage industry. The resulting constant pressure can result in a firm making aggressive, losing bets with client funds (MF Global) or in an outright fraud (PFG Best).

It's hard to know the true health of brokerages that are privately held companies. In order to make the industry more transparent and allow traders to get a better view of their brokerage's financial health which could impact the safety of their funds, FXCM has made the following proposals to the NFA and CFTC:

1. Require all FCMs and RFEDs to employ a top ten accounting firm
2. Require all FCMs and RFEDs to publish a consolidated balance sheet and income statement once a quarter

Safety of client funds has become a very important issue in light of last year's events, and the financial health of brokerages has become a major concern.

Jason

 

accounting firms are still made up of people... I will just say: Arthur Andersen...

Balance Sheets can still be falsified, even with a top tier accounting firm auditing them.... too many companies to name in that case to show an example...

the only real way for an investor in futures/currency to protect himself: keep on deposit as performance only what you need to trade, sweep all the rest out to where it can be insured against failure due to fraud or simple management incompetence...

 

lot of misinformation so far

just ask

what is better for you?

ES or SPY?

and then ask

what is better for you?

Individual stocks?

or an index?

 

and then ask

what is better for you?

buying and selling businesses?

or buying and selling commodities?

 

Like the man told me, "Don't ever try to buy or sell a stock unless you have inside information."

But it can work both ways, that's why I never traded Pork Bellies.

I don't like trading on inside info.

 

to get the same kind of leverage you can get with futures in stocks, you need to hook up with a prop firm, and that means giving up a lot

but if the strategy you have only works with stocks, then are are left with no choice

 

I can tell you from a brokers point of view

It is a hell of a lot better to be that guy sitting there in the corner with a series 3 and getting everybody "referred" to you

than it is holding only a series 7

although in the long run

very few (as a matter of fact not any) of the futures traders amount to anything

some of the brokers handling stock only accounts are still alive

 

He may have meant 'a cookie'

 

I had plenty of inside info on Bellies

I just never liked trading that way

I always wanted to be independent

 

That statement is incorrect. Professionals trade across all those asset classes, often simultaneously.