Choosing a broker or prop firm safely

Lesson 11 showed how prop evaluations work, and Lesson 12 compared a personal account with a firm-funded program. This lesson is the step before either one: checking who you are about to hand money to. It is free and takes a few minutes.

LearnToTick does not recommend or endorse any broker or prop firm.

Two kinds of futures brokers

When people say “my futures broker,” they usually mean one of two kinds of registered firm:

• Futures commission merchant (FCM). The CFTC describes an FCM as a firm that solicits or accepts futures orders and accepts money, securities, or property from customers to margin or secure those trades. In short, the FCM holds the money.
• Introducing broker (IB). An IB also solicits or accepts futures orders, but the CFTC’s definition says it does not accept money, securities, or property to margin or secure those trades. NFA’s page puts it the same way: an IB does not take customer money or other assets to support the orders.

How they fit together: you might open your account through an IB, but NFA’s investor guidance says your funds are held at the FCM, not the IB. So find out which FCM will hold your account, and check that FCM too.

NFA’s investor guidance says brokerage firms doing futures business with the public must be registered with the CFTC as an FCM or an IB, and NFA states that all registered FCMs and all registered IBs must be NFA members.

Checking a broker on NFA BASIC

NFA’s BASIC (https://www.nfa.futures.org/basicnet/) is a free tool for researching futures firms and professionals. Lesson 16 walks through a search step by step. Based on NFA’s own description of what BASIC contains, here is what to look for once you find a broker:

• Registration and membership. BASIC shows the firm’s current and past CFTC registration and NFA membership status. Check that the firm is registered in the category it claims (FCM or IB), and that its registration and membership are current, not only in the past.
• Regulatory actions. BASIC lists actions taken by NFA committees, by the CFTC, and by U.S. futures exchanges. Read any that appear: what happened, when, and what penalty followed.
• Customer claims. BASIC shows the number of cases customers have filed through the CFTC’s reparations program, and some information on NFA arbitration cases where an award was decided.

Know the limits. NFA says BASIC leaves out, for example, criminal cases, actions by state regulators and other agencies, and arbitration cases that were settled, withdrawn, or still pending, and new actions can take time to appear. A clean page is a good sign, not a guarantee.

Segregated funds, in one paragraph

The CFTC requires an FCM to keep customer money for exchange trading separate from the firm’s own money, in accounts titled for the benefit of customers. Lesson 12 covered what this does and does not protect. One more thing to know: FCMs file monthly financial reports with the CFTC, which posts selected data from them on its FCM financial data page (https://www.cftc.gov/MarketReports/financialfcmdata/index.htm).

Reading a prop firm’s rules

A prop firm program, as Lesson 12 explained, is a private company’s product under a contract, not a customer account at an FCM. The CFTC’s segregation rules describe customer funds held by FCMs, so do not assume they cover money you pay a prop firm. The agreement governs. Read it for these items.

All numbers below are made up for illustration. They are not any firm’s real terms.

Fees

• Evaluation fee: for example, $150 to start.
• Recurring fee: for example, $150 every month until you pass or cancel.
• Reset fee: for example, $100 to restart after breaking a rule.
• Activation fee: for example, $130 once you pass, before you can trade the funded account.

Add them up for a realistic case. Example: three months at $150, plus two resets at $100, plus activation at $130, is 450 + 200 + 130 = $780 before any payout.

Payout terms

• Profit split: for example, you keep 90 percent and the firm keeps 10 percent.
• Schedule: for example, one payout request allowed per week.
• Minimums: for example, at least $500 of profit before a request, or a set number of winning days first.

Look for any rule that lets the firm deny or reduce a payout, and read exactly how it is worded.

Drawdown type

Lesson 11 covered trailing drawdowns. Firms define their loss limits in their own words, so find the firm’s exact definition and get clear answers to two questions:

• Does the limit stay fixed, or does it move? A trailing limit moves up with new highs (Lesson 11). Find out whether this firm’s limit trails, and if so, when it stops.
• When is it checked? Find out whether the limit is measured against your balance while trades are still open, or set from your closing balance, and whether it is enforced during the day either way. Lesson 11’s dated example showed one firm doing both: setting the limit from the end-of-day balance but monitoring it during the day.

Questions to ask

For a broker:

• Is it an FCM or an IB? If an IB, which FCM holds my money?
• Does NFA BASIC show current CFTC registration and NFA membership in that category?
• Are there regulatory actions or customer claims listed, and what were they about?
• What is every charge to my account, and what is each one for? (NFA advises knowing this before you trade.)
• Have I read the account agreement and every document the broker gave me?

For a prop firm:

• What is the total I could pay in fees, including recurring, reset, and activation fees?
• What is the profit split, how often can I request a payout, and what minimums apply?
• Does the drawdown limit stay fixed or trail, and is it checked while trades are open or only at the close?
• Under what conditions can the firm close my account or deny a payout?
• Can the firm change the rules, and how will I be told?

Key ideas

• An FCM accepts orders and holds customer money; an IB accepts orders but does not hold the money. Your funds sit at the FCM.
• Check every broker on NFA BASIC: registration category and status, NFA membership, regulatory actions, and customer claims. BASIC is a starting point and does not show everything.
• FCMs must keep customer funds segregated from their own money; that describes FCM customer accounts, not prop firm programs.
• A prop firm program is a contract with a private company. Total up all fees, read the payout terms, and know exactly how the drawdown works before you pay.
• Only use money you can afford to lose, whether it is a deposit or fees.