Do Cheaper Futures Trading Commissions Equal Better Results?

Do Cheaper Commissions Equal Better Trading?


The following article on Futures Trading Commissions is the opinion of Optimus Futures.

futures trading commissions

Everybody wants the best quality goods and services they can find for lower costs. But paying less doesn’t necessarily mean buying cheap. It often means that a company can offer a product more efficiently or price it more competitively. That’s what competition is about. Heck, that’s what capitalism is all about.

But is it always a good thing? Sure, if you know what you’re paying for. A lower-rate mortgage loan may be better than a higher one when buying a house. A lower price offer for a car may be better than a higher offer for the same car but from another dealer. Lower futures commissions are always more attractive than higher commissions—BUT, and here’s where you’ve got to stop and think: what exactly are you paying for?

How Discount Futures Brokers Compete with Commissions

Suppose you come across a futures brokerage ad that touts “cheapest futures commissions.” You’ll likely encounter two types of brokerages:

  • One that charges a flat, transparent, and uniform commission rate; and
  • Another whose individual brokers can charge different commission rates.
The second option might seem favorable to you as one individual broker might charge a more competitive commission than another broker sitting across from him.

But here’s a dirty little secret: even if another broker charges a more competitive rate, more often than not, you’re stuck with whichever broker first registered you in their system as a client (brokerage firms do this to avoid broker fights within the company).

So, although brokerages encourage competition within their firms, you might not necessarily benefit from this intra-institutional competition, not when it comes to switching brokers and benefiting from their lower rates.

Let’s back up even further and look at how commissions are quoted, as not all brokers aim for transparency–especially in an environment where they can charge different customers different rates.

Breaking Down the Futures Commission Quote

  • “We charge you $0.50 commissions per contract plus fees.”
  • “Just $1 round turn plus exchange fees.”
  • “$1.94 all in.”
Absolutely unclear. And then a broker tries to pull this on you: “Your current broker charges you $1.00 round turn, we only charge $0.75 for each contract plus fees.”

This last example may sound petty, but it’s been done more often than you think. Some discount futures brokers rely on the likelihood that customers are suckers who don’t get the terminology–and often they’re right! Many traders don’t understand all the terminology.

So here it is, again (you can read the article we wrote about futures commissions here) the components of a futures trading commission rate:

  1. Exchange/Clearing Fees (FCM + Exchange)
  2. National Futures Association (NFA) Fees
  3. Execution Fees (Technology / Order Routing)
  4. Brokerage Commissions
Next time you get a quote, ask your broker to break each cost down to these four essentials. If your futures broker won’t offer you immediate transparency, then you can do it yourself by asking your broker to itemize it.
Now that we’ve covered the foggy world of “competitive” futures commissions, let’s get down to the main issue, whether cheaper commissions can help you become a better trader?

Will Cheaper Commissions Help You in the Long Run?

Let me ask you this: when the Federal Reserve slashes interest rates, making it easier for businesses to borrow money for investment, does “cheap money” help or hurt most businesses?  The answer depends on the business, whether a given business “invests” or “malinvests” the money.

Business owners who are less experienced, less skilled, or just plain reckless will make poor use of “cheap money.” As a result, many businesses eventually go bust.

Trading–as a form of business–isn’t any different.

There are way too many inexperienced traders out there who are not ready for the full risks of frequent speculation opportunities.

If cheaper commissions means the opportunity to trade more frequently and to trade larger contract sizes, then it’s like placing a regular commuter wanna-be race-car driver into a major race with a car capable of driving at 200 mph.

No sane person would do that. Yet too many sane “traders” don’t see the risks of doing the equivalent in the field of futures trading.

Many traders who study under so-called “trading gurus” are often taught to seek the lowest commissions to slow down the erosion of the students’ profits.

What profits? Most of these coached day traders do poorly. A higher commission rate may only slow that trader down. And perhaps that is what might keep them in the game–slowing down.

Low Commissions Play a Minor Role in Trading Growth if you are a Disciplined Trader

The best advice here is to focus on your game and to stop spending too much time comparing futures brokers’ commissions.

In fact, a higher commission may help save yourself from yourself! Imagine having to carefully plan each trade, knowing that you can only make a few trades at any given time–no throwaway efforts. This is, perhaps, what you should be doing.

Or you can follow the average day trading herd and race off the cliff–at a steep discount.

Remember, if you are trading the S&P 500, Dow, Nasdaq (or any other index), you are not “buying” those indexes–you are buying risk.

And if you want to buy more risk for cheap, well that’s your business. But for most traders, it isn’t necessarily a good business model.

But if you focused on trading well, trading efficiently, and trading strategically, then the “cost of doing business” may be well spent on a business worth the costs.

Please be advised that trading futures and options involves substantial risk of loss and is not suitable for all investors.  Past performance is not necessarily indicative of future results.  This matter is intended as a solicitation to trade.

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