Don’t Let Your Broker Break you

January 28, 2014 06:30 PM

Know the risks of trading commodities

Iowa farmer Doug Bell is on a mission to inform others about the regulatory process of commodity brokers and trading futures.

"Several years ago, the combination of a price drop in the soybean market and my broker not following industry rules left me with an unmanageable margin call," Bell says. His account was liquidated and the brokerage company sued him for the deficit.

Bell filed a complaint with the National Futures Association (NFA), a self-regulatory organization that enforces rules for brokerage companies. But the complaint brought no recourse. "I don’t know if the broker lied or if the investigators didn’t do their job," he says.

"I want other farmers to know how they would be represented if there was a problem with their broker."

Bell even filed a Freedom of Information Act request to see the testimony the broker supplied to the investigating regulators. But NFA denied this request, stating the information was non-public. To Bell, the issue remains unresolved, and the brokerage firm has closed its doors.

The amount of money lost was "life-changing," Bell says. While he knows there’s risk in trading the futures market, he believed barriers were in place to hold brokerage companies accountable. "I want other farmers to know how they would be represented if there was a problem with their broker," he says.

Stay Safe. In the shadow of the MF Global and Peregrine Financial Group debacles, skepticism remains in trading the commodity markets. Mark Gold, president of Top Third Ag Marketing and a 40-year veteran of the industry, says farmers need to understand their risks.

The first step for farmers is to know their business partner. "The bottom line is the customer has some responsibility to know who they are doing business with," Gold says.

Farmers can look at the financial stability of brokerage firms. Use the "Investor Information" tab on NFA’s website to access learning tools and check the registration status and
disciplinary history of businesses registered with the association.

Gold says you can see if a firm has a past of false advertising, churning accounts or other complaints.

Be Realistic. When trading in the commodities market, risk is two-fold. "There’s the risk of the trade itself (being wrong in the market) and the risk of any excess cash in the account that is over the exchange guarantee maximum," Gold explains.

His advice for farmers is: Don’t keep excess funds in your account.

"That’s near impossible to do if you are trading marginal positions," he says. "I only advocate the use of commodity options with long positions, which is the only non-marginable position."

Don’t expect your broker to predict the future, Gold says. "You have to look at your broker as a professional who is assessing risk and should clearly divulge the risk to you."

He says farmers should ask their broker, "What if your advice is wrong? And, is there a plan in place if you are wrong?" If the answer is no, Gold says to consider a new broker. 

Read more from Bell and how he says farmers can make this issue more transparent at

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