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Brokers in a New World

This perspective on prospects for introducing brokers is from John Jensen, president of the National Introducing Brokers Association and head of Heritage West Financial Inc., a brokerage firm in San Diego. Reflecting on his long experience in futures markets, Mr. Jensen argues that new business models are developing.

Having worked as an introducing broker for over two decades, I've watched our business change dramatically. This is largely due to technology. When I started, futures traders did not use personal computers and there were no cell phones or 24-hour cable.

Anyone who wanted to trade used to have to go to a broker; now you don't necessarily have a full-service broker. Access to research, quotes, other information was through a broker. The client had to talk to us to get information.

It's a different world now. People can open an online account, execute their own trade and get access via the Internet to research that only brokers used to have. Markets used to be active only five or six hours a day. Now, it is close to 24 hours a day, six days a week.

What is the role of the IB in this new system? We can't compete with the large online discount platforms in terms of price. Trade commissions have decreased steadily though the years. They're only a small fraction of what they were 30 years ago.

"We can't continue doing what we used to do decades ago."

To compete, we have to provide really excellent service. As an IB you can't just be a wire house that executes trades; you have to provide services beyond that to attract business. As a smaller firm, we go out of our way to help clients. They have access to us 24 hours, can reach me on my cell phone even when I'm travelling. We'll work to get them any report or study they want.

But there is something else IBs offer, something that is essential to a trader's success. We have decades of experience in the market and can provide guidance.

Misconceptions

Opening an online account, getting information and trading is so easy these days that it is dangerous in a way. Not everybody who does this is good at trading. People do it without understanding what they're doing. Many people who try to trade futures on their own lose money. The technology has made it easy for almost anybody to get into trading without even talking with a broker.

There are nuances of the market that you learn only with experience. Part of our job is to keep clients out of trouble. If a trade does not look right to us, we'll say so. A lot of the time we try to protect the customers from themselves, when they want to do something that is inappropriate.

We can help the public understand futures markets. In the past couple of years, futures markets received a lot of bad press and were blamed for many things, like the 2008 run-up in oil prices. When I tell people I'm a commodities broker, they immediately think of pork bellies, soybeans and high risk.

There are a lot of misconceptions and brokers have opportunities to help educate people about futures, as well as guiding customers. We should establish ourselves as the reliable source of information about futures markets.

This is part of the mission of the National Introducing Brokers Association. We work to develop professionalism and knowledge, in addition to representing our membership at the Managed Funds Association, Commodity Futures Trading Commission and US Congress. The president of NIBA sits on the hearing and nominating committees of the MFA.

We have achieved a lot. There used to be a number of rogue firms 20 years ago. NIBA cleaned up the industry. A couple of years ago we instituted controversial enhancements to a rule, which gave rise to complaints about draconian rules. But the changes NIBA instituted over the years got rid of disreputable firms, which helps all of us.

Looking into the future, I think a brokerage has to find its niche. We can't continue doing what we used to do decades ago. The business is much more of a challenge because of the changes I've mentioned.

IBs are branching out to develop new products. Many brokers raise money for outside commodity trading advisors. Some have a regular stable of CTAs they represent while others have in-house managers. Our firm is starting the process of becoming a CTA.

Meanwhile, Congress is working on new financial regulations. In our endeavors as an industry, being professional in every way is more important than ever. We have a lot to offer and as long as we keep up our standards, we should be able to build ourselves a new market niche.