As 2012 comes to a close it’s apparent the commodity interest markets have had a tough year. We’ve continued to watch the developments of MF Global, seen Peregrine Financial Group (“PFG”) come unglued and nearly watched Knight Capital crumble after a trade error. We’ve seen commission rates continue lower, talked to clients who are uneasy about investing in our industry, and have had to deal with the many considerations of the Wall Street Reform Act (“Dodd Frank”). Yet, even with all the setbacks, the managed futures space has continued to grow; attracting interest from investors the world over. This article intends to examine several ways that your brokerage can separate itself from the pack and take advantage of the growing interest in the managed futures asset class.
Differentiate Yourself
As an Introducing Broker one of the things that can be presented to your customers is your expertise in the managed futures space. In this instance I’m not talking about having some supernatural and uncanny ability to pick the best CTA’s. Rather, what I’m suggesting is that you should become incredibly well versed about the advantages and disadvantages of this asset class. Once you have acquired a strong understanding of the space you can then work to begin offering better and more diverse CTA options for your customers. Having a handful of managers that you like and allow your clients to choose from can make all the difference in the world for your brokerage. So how do you go about finding the “right” managers? Where are they hiding? How do you get to know and market their trading styles once you find them?
Choose a Specialty
Many Introducing Brokerage firms have made a name for themselves by finding a niche within the managed futures space. As an example some brokers are the best at sourcing and offering systematic or purely discretionary CTA’s. Some brokers focus on their extensive knowledge of a specific commodity market. Other brokers have experience in constructing portfolios for larger clients looking to allocate to a variety of managers. Whatever you know best is where you should start. Once you’ve determined your niche you should be able to then scour the large CTA databases to find the types of money managers you’re interested in. After finding these managers you’ll then need to take the time to call them, ask them about how they trade, request their disclosure documents, and in general evaluate them as if you’d invest your own personal funds with them. This process should be very thorough and may take weeks, months, or even years to complete. Whatever metric you decide upon to evaluate managers you cannot be bashful about asking tough questions nor can you cut corners.
If asking challenging questions to CTA’s seems awkward or difficult don’t worry. From working with many CTA’s via Turnkey Trading Partners (“Turnkey”) I can personally assure you the money managers you’ll contact will be happy to receive your call. In fact most Commodity Trading Advisors are dying to find an Introducing Broker that wants to work with them. Ironically, the problem we’ve found is that many IB’s simply don’t put in the time to get to know the managers within their niche. Not every CTA you speak with will be the right fit for your clients, but you won’t know until you do your due diligence. Now for those of you thinking “Our brokerage firm does just fine with self directed accounts, hedgers, systems etc.” or “Everyone uses the same CTA’s, there is no way to differentiate.” I disagree, here’s why.
Developing CTA’s
Turnkey Trading Partners has made a name for itself helping small to medium sized brokerage firms of all types become operationally successful. Through this experience we have worked with many sole-proprietors turned CTA and helped them find a pathway to success. Where did these sole-proprietors learn to trade before they came to us? Many of them were trading through Introducing Brokerage firms just like yours! If your IB business succeeds because of the self-directed traders who access the markets through it here’s your chance to be unique. You know your customers, you see their trades, you can tell from watching over the years those accounts that are consistent and those that aren’t – have you thought about presenting the option of becoming a CTA to these clients?
Many of the emerging CTA’s Turnkey has worked with decided to register because someone, somewhere heard they were a good trader. That someone, whether it was a friend, family member, or their broker planted the seed to get them thinking about becoming a professional money manager. Many of these traders had never thought about managing money for other people but love the idea of doing so as a Commodity Trading Advisor. In almost every instance all they needed to consider starting a CTA was someone taking note of how they were able to trade for their personal account. If you have any traders that fit this description it might be in your best interest to ask them if they have ever thought about trading professionally. Assuming you ask this question now you’ve got the potential for unique CTA product.
Helping Traders Become Managers
If you’ve identified a trader at your brokerage firm who has shown interest in becoming a registered, NFA member CTA they’ll likely you turn to you for advice. When they do so you’ll have three options:
1) Tell them you can’t help them (not an option).
2) Develop internal staff to assist them with their procedures, track record accounting, disclosure documents, registration, marketing, and everything else required to become a CTA.
3) Outsource this work to a company specializing in assisting start up firms.
At Turnkey Trading Partners we regularly work with Futures Commission Merchants and Introducing Brokers to help them get traders from all over the world set up as registered CTA’s. With our help these brokerage firm’s add tremendous value to their customers without any out of pocket costs. Similarly these firms also benefit from having unique emerging CTA product for their other clients to consider. Most importantly though, the brokers we work with haven’t disrupted their relationship with their previously self-directed, individual trader. The original relationship remains intact while commissions likely remain the same and/or grow as the manager grows.
We All Need Each Other
By looking for and sourcing new traders from the internal accounts you already have you’ll create a potential winning situation for the entire industry. You’ll have new CTA product, your client (the new CTA) will have a new business, and your customers will have more choice in where they may want to invest. If the CTA grows you may gain more accounts and other industry participants may decide to allocate to the trader you helped source. Given the continued growth in the managed futures space you’ll also be capitalizing on an upward trend that new investors to the space are regularly seeking out. If there is any way that we can help you after you’ve identified traders you’re interested in developing, please feel free to give us a call.
James Bibbings is the President and CEO of Turnkey Trading Partners (“TTP”), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. Since departing from NFA, Bibbings has owned and operated an independent introducing brokerage, participated in international forums on proposed CFTC regulatory requirements, and been qualified as an expert witness in Federal Court. He has provided financial markets content for Financial Times, Bloomberg, MSN, The Wall Street Journal’s Market Watch, and many other highly acclaimed investment publications. James can be reached by calling (312) 324-0040 or via email at info@turnkeytradingpartners.com
