Commodity Contracts Brokers and Dealers

SIC 6221

Industry report:

This industry classification includes establishments primarily engaged in buying and selling commodity contracts (futures) on either a spot or future basis for their own account or for the account of others. These establishments are members, or are associated with members, of recognized commodity exchanges. Establishments primarily engaged in buying and selling commodities are classified in wholesale trade. However, the Chicago Board Trade doesn't trade, it just provides facilities for members to trade future and options contracts.

According to the U.S. Census Bureau, in 2008, there were 2,393 establishments operating in this industry segment with industry-wide employment of 21,700 workers. Illinois led the nation with 639 operations, followed by New York with 351 operations. The industry reached sales of more than $11.1 billion in 2009, with average sales per establishment an estimated $5.1 million.

The commodity contracts brokers, and dealers industry sector comprised 45.7 percent in market share; commodity brokers contracts accounted for 30.7 percent; commodity traders contracts with 15.2 percent; commodity futures brokers and dealers held 5.7 percent; and commodity contract dealers with 2.8 percent.

According to D&B Sales & Marketing Solutions, in 2007, there were 2,609 establishments operating in this industry segment. The industry employed nearly 20,000 people and generated $8.7 billion in sales. Through the first half of 2007, growth was robust in the commodity sector, especially in the energy and agriculture sectors. According to Futures Industry magazine, futures and options trading in agriculture was at nearly 147 million contracts for the first nine months of the year. That represented a 28 percent increase over the same period in 2006. While in the energy commodities market, crude oil saw an incredible surge with WTI futures trading increasing 88 percent to nearly 128 million contracts.

In general, brokers are independent traders who bring together buyers and sellers of the same commodity and execute their orders. The broker receives a commission on each of these transactions. These brokers are agents of their clients and are, therefore, subject to the law of agency in their dealings with their clients. In contrast to the broker's role as an agent, a dealer acts as a principal in relations with customers. This is the only difference between commodities brokers and dealers. The number of agents grew significantly during the late 1990s and early 2000s, from just 630 establishments in 1997 to nearly 1,100 in 2002. Brokerage firms, however, remained stable in numbers during the same time period.

Commodities brokers and dealers are engaged in the trade of commodities on either a current, "spot," or a future basis. Commodities are typically agricultural, mineral, or other basic products and financial futures that are traded on a commodity exchange. The products are generally substitutable. This means that the purchaser is unlikely to differentiate between one unit of the product and another. Agricultural products such as wheat, corn and soybean contracts are written with certain grade and other specifications as standardized contracts stating the quantity and quality of the product.

The commodity exchanges are organizations that are owned by their members for the purpose of bringing buyers and sellers together. The transactions made by these parties can be performed on a spot basis, in which the commodity is sold for cash and immediate delivery, or on a future basis, under which the purchaser has the right to buy a commodity at a future time at a fixed price. There are a number of these exchanges throughout the country, all of which are supervised by the federal government under the Commodity Exchange Act administered by the Commodity Futures Trading Commission. The largest exchange is the Chicago Board of Trade (CBOT). Established in 1848, this exchange has more than 3,600 members who trade futures and options either electronically or by open auction. And, in late 2006, CBOT and the Chicago Mercantile Exchange (CME) announced a merger, which then created the largest derivatives exchange in the world.

Commodity prices are quoted on either a spot or future basis on an electronic board each time they change. Future prices are quoted based on the date of delivery of the contracted commodities. Prices are quoted as they occur, based on trades in trading pits during specified hours. Trades are only made by members. There has been a trend in the commodities futures markets to move away from traditional commodities. As the type and number of commodity futures contracts have increased, brokers have handled ever-higher volumes.

Commodity brokers and dealers range in size from large operations to small businesses. Industry leaders include Smith Barney, which operated within Citigroup's Global Market Holdings unit, Archer Daniel Midland Company, Bank of America Corporation, Deutsche Bank A.G., Bunge Limited, Morgan Stanley, Goldman Sachs Company, and Merrill Lynch Futures Inc.

During the mid-2000s, the commodities market was in the midst of an upswing in activity and productivity as futures exchanges began to open up to previously untapped but dynamic markets in Asia, namely China. This globalization of the industry has led to rapid expansion of technology use, and Internet trading, which in turn has increased efficiency within the industry. Brokers who once traded in narrow categories were being pushed to offer customers integrated packages with a broad range of products. Also, customers in the twenty-first century have a wealth of information at their disposal and thus require that brokers and dealers stay abreast of all activity within their markets.

With so much trade activity occurring electronically, brokers and dealers often do not have the traditional one-on-one human contact with their clients, and thus must find creative solutions to build relationships to build loyalty and retain trust from their customers. The U.S. commodities market was relatively strong during the mid-2000s, which boded well for the industry. Extended high oil prices and a slowly increasing interest rate were causes for longer-term concern.

In the mid- to late 2000s, momentum continued to build in the commodity sector with futures and options trading in agriculture that reached nearly 889 million contracts, a 38.7 percent surge compared to nearly 641 million contracts for 2007. By mid-2008 the global financial meltdown and events that followed channeled throughout the commodities market. Some majors disappeared such as Lehman Brothers who declared bankruptcy in September 2008, credit risk soared and volatility set in, while some of the industry's well-known contracts plunged.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. Under the changes in the regulatory system exclusive for commodities brokers and dealers, establishments will be required to clear most over-the-counter derivatives through regulated central clearing organizations and to trade the derivatives on regulated exchanges, as opposed to unregulated to increase clarity.

The Commodity Futures Trading Commission and other related agencies have until July of 2011 to put the new regime in place. However, the Futures Industry Association warned that "restrictions on exchange-traded commodity futures would push trading into foreign markets or into the over-the-counter markets," not to mention an estimated $18.8 million per establishment to maintain an OCR database Joanne Morrison noted in the November 2010 publication of Futures Industry.

Furthermore, according to the Office of the Comptroller of the Currency, JPMorgan Chase, Citigroup, Bank of America, and Goldman Sachs comprise more than 90 percent of the banking industry's involvement in derivatives. As a result, banks and related-services firms will no longer be able to hold no more than 20 percent of any given derivatives exchange.

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News and information about Commodity Contracts Brokers and Dealers

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