What is a FCM and why do I need it and can I avoid it

[nooby_mcnoob]

Hello friends and ne'er-do-wells,

I am back. I have become a profitable trader. However, I am looking to scale up and cannot get the leverage I want at my current retail broker.

So I was looking at FCMs which offer the margin I want when I realized I don't actually understand:

1. Why do I need a FCM
2. How do these FCMs provide day trading leverage at ~5% the cost of $RETAIL_BROKER
3. Do these FCMs blow up regularly

The rest is for anyone who is curious:

* I rarely trade for more than 1 hour a day
* It was fucking hard, but then also not hard.
* I use my own transformation of trade data, I could not make it work with anything else
* I also could not make it automated aside from the transformation. One day.. One day..
* Zero indicators
* And what you guys really want: I make (unleveraged) around $1K/day which is fine for me. Variance is very low, risk very low. etc etc. For obvious reasons, I want to scale this.

Advice I can give to anyone else trying manual trading:

* There is no real intelligence required, only emotional control
* Gain an understanding of "your setups" and the statistics

Advice I can give to anyone starting:

* Trade one thing. Look at nothing else.
* No indicators.
* Put in the hours. It's not that you need the hours, it's that you need the time to get humbled over and over and over and over and over. If you are already humble, maybe you will need less time.

This has been the most difficult journey of my life. I learned so much about myself and my personality has changed as a result which I love. Also a primary reason why I stopped going to online forums, there is too much fighting which I am not interested in (edit: but 90% of the time I instigate myself). The need to be right can be fatal and for me to trade well, I need to keep my mind flexible and not interested in being right. So most of the time I'm just talking shit on twitter and that's the extent of it. Maybe one day I can trade and argue because I love to argue needlessly.

Thanks!

 

[ph1l]

1. Why do I need a FCM

As a retail trader, you would need a futures commission merchant (FCM) if you don't want to use an introducing broker to trade futures or options on futures.

2. How do these FCMs provide day trading leverage at ~5% the cost of $RETAIL_BROKER

Futures margin is a good faith deposit, not a loan as with stock margin.

3. Do these FCMs blow up regularly

It's happened before, but customer funds are supposed to be kept in segregated accounts.

 

[nooby_mcnoob]

Futures margin is a good faith deposit, not a loan as with stock margin.

Thanks for the references to terminology. This in particular I don't understand: why don't retail brokers like IBKR do this as well? For as long as I can remember, I've always had to put up the initial margin on any futures trades.

 

[Robert Morse]

#1. You need a clearing broker that is NFA member and Exchange member to clear and custody your trades and cash with segregated accounts. No one will do business with you directly. #2. They do not provide leverage. As ph1l said, they require a small amount of money to cover risk as you are not buying anything today, you are locking in a future delivery of goods or cash. The FCM also has to put up 8% of your requirement, also for counter-party risk. #3. I would say it is rare and not regular, but that is subjective.

1. Why do I need a FCM
2. How do these FCMs provide day trading leverage at ~5% the cost of $RETAIL_BROKER
3. Do these FCMs blow up regularly

 

[nooby_mcnoob]

Thanks for your reply Robert.

No one will do business with you directly.

Who is this "one" who will not do business with me directly? The exchanges?

As ph1l said, they require a small amount of money to cover risk as you are not buying anything today, you are locking in a future delivery of goods or cash

I understand this conceptually, thanks. But I still don't understand why when I go to your site or (say) IBKR, they make no mention of this, but talk only about x% of contract value for required margin as opposed to (say) AMP where they talk about "day margin" which is roughly 5% of the above x%. As you said, the FCM has to put up the x% anyway.

Are these brokers (IB, Lightspeed) just choosing not to do this? Is there a reason one company chooses to do this and another doesn't? I guess they are not interested in micromanaging intraday positions?

#3. I would say it is rare and not regular, but that is subjective.

Excellent, thanks.

 

[nooby_mcnoob]

Follow up question: is a FCM the only way to leverage the way I want (i.e., say $500 for ES futures).

 

[Robert Morse]

Yes because the CME does not offer that. We do not either as a 10 point move would knock you out. I hope I did that math right. (4380*50=219,000. 500/219,000 = 0.002283. .002283*4380= ~10.00)

Follow up question: is a FCM the only way to leverage the way I want (i.e., say $500 for ES futures).

 

[nooby_mcnoob]

Yes because the CME does not offer that. We do not either as a 10 point move would knock you out. I hope I did that math right. (4380*50=219,000. 500/219,000 = 0.002283. .002283*4380= ~10.00)

Perfect, now I understand. A 10 point move doesn't necessarily knock you out unless you're fully leveraged, I doubt anyone is going in with full leverage every time. Still, being off by 10 points is no bueno for me anyway.

Thanks!