9.7. Brokerage on commodity exchange
In accordance with the applicable law of stock exchange transactions shall be entitled to only the exchange members or brokers.
Brokers are individuals registered by the exchange under its Charter, the duties of which consist in the execution of orders of exchange members they represent, on the implementation of exchange operations by finding and reporting contracts carried out by them for transactions on the exchange. They can be independent, have its own brokerage place certified by the relevant contract a right of the participant on the exercise of stock trading on a commodity exchange.
Most brokers are brokerages state.
Brokerage firm is an enterprise with rights of legal entities established by the exchange member or other enterprise. According to the Law of Ukraine “On commodity exchange”, each member has the right to open their own brokerage firm. To brokerage firm can be considered as a legal entity that has entered into an agreement with the stock exchange about the acquisition of rights to use exchange. As a legal entity, the brokerage firm shall be registered and operates in accordance with the constituent documents of the founder.
In the Charter brokerage firm provided her the right to enter into mediation and other instruments, to open Bank accounts, to be a tax payer and other compulsory payments to the budget.
On the legal form of a brokerage office may be organized as a joint stock company or a limited liability company.
The state of a brokerage office consists of the Manager, brokers and technical staff. The head of the brokerage firm appointed by the founder, unless otherwise provided by the constituent documents.
Exchange members have the right to rent out they have created the brokerage firm and receive profits in the form of rent.
During the registration of an independent broker or a brokerage office at commodity exchange for working in the stock market they are given a number and an individual code.
The Charter and exchange trade rules governing organizational and production relationships between commodity exchanges and brokerage houses.
The main actor in the stock market is the broker, on which depends the successful operation as the brokerage firm and all exchange trading. Brokers must have special training and abilities to activities in the field of business. They specialize in the sale of particular types (groups) of goods and perform a large amount of work on the real market of a certain commodity.
To counter their function belongs the study of the enterprises — potential customers, the selection, formation and establishment of close business relations with regular clients. The basis of the broker should have marketing activities: identifying the demand and supply of goods, the systematic analysis of information about market conditions, trends of its change. The broker should possess the means of advertising and effectively use it. For the success of the broker on the real market it is necessary:
to study legislative and normative-legal acts, which regulated trade and exchange activity, mediation and the activities of enterprises — potential customers;
compile a list of enterprises operating in the area of his activity (with addresses, names and phone numbers of managers, responsible officials); to figure out the scope of their activities, to assess the competitiveness of products and possible sales and needs for material and technical resources, financial position and solvency of the company, to identify the image of individual companies in the area of operations;
to study the situation of internal trade, well-versed in the prices on both real and on the stock market, study of stock exchange bulletins and exchange information on the status of stock trading and trends of its change;
to study the content of the documents, which are formalized relationships with brokers, clients, requirements and procedures of their filling, as well as informational and promotional materials that may interest the customer;
to think and develop tactics of getting in touch and negotiating with specific clients, to know clearly what benefits the client will receive from working with a broker what customer needs can meet firm.
Cooperation brokerages with clients in the domestic stock exchanges formalized by the conclusion of such basic documents:
the contract for brokerage services;
the Agency contract with a brokerage.
The brokerage service agreement is concluded between the producer (seller, buyer) who wants to sell or buy products through the exchange, and the brokerage house (broker). It is, as a rule, the indefinite contract that provides the client the ability to instruct a brokerage firm to represent its interests and enter into transactions on the exchange, but does not contain any conditions and obligations in respect of payments. On the basis of this contract the client signs with the brokerage house (broker) the Agency contract for brokerage services, which defines the duties and responsibilities of the client and broker for buying/selling goods on the exchange. The contract-order issued for a certain period of time. In the contract-the Commission define the size and form of payment of brokerage firms, as well as the shape and size of responsibility of the parties for violation of the terms of this agreement, the indemnity incurred by the aggrieved party as a result of default or improper performance of obligations the guilty party.
At the present stage brokerages set their fees for providing services to clients or as a percentage of the value of completed contract (within 2-10 %), or as a part of the difference between the contract price is the price the customer and the value of the executed contract for the actual price. Usually this compensation is 50 % of the difference.
The specific level of remuneration is determined by agreement of the parties and depends on many factors: the level of competition in the market of brokerage services; the experience and specific interests of the client, its financial situation, the complexity of assignments, the interests of the broker and the like.
During the execution of the trust agreement, the broker is obliged to inform the customer of the established rules of stock trading, the order of display of goods in exchange auctions and withdrawals from them.
After signing the agreement the customer must provide a broker (broker) a Commission for the right to make deals and conduct transactions on its behalf.
In the contract-the Commission provided for the maximum and minimum price of purchase/sale of goods, the quantity and quality with reference to the corresponding state standard or technical conditions, production status, product location, specific date and basic terms of delivery, form of payment. Contract-Commission add:
a certificate of the existence and amounts of sale of the goods (for vendor);
quality certificate independent Inspectorate for quality control of the goods (for vendor);
a certificate of the banking institution confirming the existence on the account of the buyer the necessary funds or guarantee of payment from Bank (for the buyer).
In accordance with applicable law brokers may verify the presence and quality of the proposed product, as well as the solvency of the buyer, to propose alternative conditions of contract and to carry out any other actions that are not contrary to the interests of clients.
The Agency contract, or other document which replaces it, is the basis for the submission by the broker of bid for participation in exchange trading.
Broker who agreed with the other party during bargaining in the exchange pit, prepares the contract and submits it for registration on the exchange. After implementation of all prescribed rules of exchange trading operations and the registration of the exchange contract counterparty is sent a copy for execution.
Brokerage office together with the exchange contract provides the client with a report of the broker on the work done in accordance with the concluded with it the contract-assignment. The report provides for the calculation of the final amount of an appropriate brokerage firm remuneration for their it services based on the actual price and the contract price.
On foreign futures exchanges together with brokers who trade on the exchange and perform only the orders received from brokerage firms or directly from clients, work brokers-speculators. This so-called independent brokers, who make deals on their own behalf and at its own expense, that is at your own risk. Unlike brokers, stock exchange halls, speculators hope to profit from changes in the price level, not price difference of buyers and sellers. The strategy of these brokers is to buy contracts at low price and selling them at higher prices. They buy a futures contract hoping that price will increase and sell at a higher price will bring them profit. Speculators sell the contract in the hope that prices will fall to buy it at a lower price and again make a profit. The decision of speculators, will they sell or buy, depends on the predict market situations, and their profit or loss — from experience and the ability to anticipate the movement of prices.
Successful operation of the broker is possible only with the development strategy of speculation, analysis and forecasts of prices and the ability to effectively manage allocated for operations capital. Long-term activities of brokers-speculators on the futures exchanges have already formed a list of rules which must be adhered to for the successful implementation of speculative operations. Here are some of them:
to perform speculative operations only by the amount of money the broker can afford to lose;
before starting each operation to determine the level of risk and expected profit;
to get maximum profit with minimum losses;
for each transaction risk no more than 5 % of speculative capital;
in the implementation of speculative operations to understand clearly that the average income in 10-15 times higher than the potential loss;
not to add every time contracts more than in the time of the initial open positions.
The activity of speculators in the futures market enhances its liquidity, that is, allows a quick sale and quick purchase, but also increase competition. Buying futures contracts with low prices, speculators increase demand, which increases prices. The speculators sell futures contracts at high prices reduce demand and therefore prices. Therefore, they contribute to a more efficient identification of objective rates, the elimination of sudden changes in prices and relative stability of the market as a whole.
The functioning and development of the world of stock trading is convincing evidence that futures trading is becoming the predominant form of activity of commodity exchanges. They are not only the organizers of the wholesale commodity market, and becoming centres of futures trading in the modern sense of the concept. Commodity exchange becomes a recognized center of pricing, the insurance profit and commercial activities, which gives you the opportunity to earn additional income.
According to world tendencies of development of exchange trade can be expected of establishment of a futures market in Ukraine. This contributes to the growth of volumes of exchange trading of forward contracts, the formation of a modern regulatory framework for the development of the stock market and in particular futures trade.