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How To Become A Commodity Trading Advisor (CTA)

Emanuel Balarie, July 2nd, 2008

How To Become A Commodity Trading Advisor (CTA)

This article will look at the steps that you need to take to become a Commodity Trading Advisor.

Finally! After years of trading for yourself, you have finally decided to become a Commodity Trading Advisor. But what

are your next steps? And how exactly do you get started? In this article, I will look at the steps that you must take in order

to become a Commodity Trading Advisor.

What Is A Commodity Trading Advisor?

Before I start writing about the necessary steps to becoming a CTA, I want to define this industry. According to the

National Futures Association, a Commodity Trading Advisor is an individual or firm that directly or indirectly advises

clients on buying or selling futures or options contracts. Commodity Trading Advisors are registered with the

Commodity Trading Futures Commission (CFTC) and receive management and/or incentive fees based for their services.

In essence, CTAs are professional money managers that make up the managed futures industry.

Step 1: Reviewing Your Current Situation

The first step to becoming a Commodity Trading Advisor is to review your current situation. The goal here is to find if

you are ready to become a CTA or whether you should wait a little bit longer before you start your firm. Here are some

questions that you should ask yourself:

What is your defined trading strategy?





How do you stack up against the competition?

Have your returns been consistent over a wide range of market environments?

Do you have actual or hypothetical returns?

Who is your target investor?

In addition to evaluating your trading program, i t is best to consider your personal financial and emotional situation.Given the fact that becoming a CTA takes time and money, consider the following questions:

Do you have the start-up capital to pay for registration, operational, marketing, and miscellaneous costs?

Is this going to be a full or part-time business?

If it's a full-time business, do you have enough money to pay for your mortgage and living costs during this transitional

and start-up phase?

Step 2: The Registration Process

Once you have decided that you are ready to become a Commodity Trading Advisor, the next step is to meet all of your

registration and regulatory environments. It is important to note that there is no formal education process to becoming a

CTA. Anyone can become a CTA as long as they meet the following guidelines:

Registering and Passing the Series 3 Exam

Anyone who applies for NFA membership must pass the National Commodity Futures Examination (NCFE

or Series 3) within the two years prior to their application. The Series 3 exam is a 120 question, 2.5-hour

exam that measures your understanding of the futures market's make up and regulations.

Registering with the National Futures Association and CFTC

Once you pass your series 3 exam, a CTA is required to file the following:

•· A completed online Form 7-R.

•· A completed online Form 8-R, fingerprint card and fee of $85 for each individual principal. Fingerprint

card and fee are not required if such person is currently registered with the CFTC in any capacity or is

listed as a principal of a current CFTC registrant.

•· Individual principals and branch office managers who are applying for registration as an associated

person must satisfy all applicable filing requirements. Also, for each branch manager proof of passage of

the futures branch office manager examination (Series 30) or sponsorship by a broker-dealer and proof

of having met the branch office manager requirements of the Financial Industry Regulatory Authority.

•· A non-refundable registration fee of $200.

There are also additional fees associated with the above requirements. For examples, all registered CTAs

who manage or exercise discretion over customer accounts must be members of NFA in order to conduct

futures business with the public. The annual NFA membership fee is $846 for Commodity Trading Advisors.

Step 3: Setting Up Your Business

Before you are ready to solicit clients, there are several more steps to complete. The first has to do with setting up your

business and operations. Take time to put together a detailed business plan of your business. At this point, you will be

able include some of the questions you answered from step one, like what is your startup and operational capital?





Additionally, you must decide whether you will work out of your house or whether your will need office space. Typically,

start-up CTAs work out of their homes until they have enough money under management to justify an additional expense.

Step 4: Finding The Right Brokerage Firm

Finding the right brokerage firm is extremely important. There are many brokerage firms that provide you with clearing

and execution services. However, it is beneficial to find a commodity brokerage firm that provides you with value-added

benefits. Some of these benefits include, assisting you with the start-up and registration process, providing marketing andoperational support, and also helping you attract capital by offering capital introduction services. In essence, you should

find a brokerage firm that can provide you with a partner-like relationship.

Commission, is another factor to consider when selecting the right firm. Since a high rate of commission negatively

impacts the performance of your accounts, it is essential to find a firm that offers you a competitive commission rate.

Step 5: Soliciting Clients

When it comes to soliciting clients, the NFA and CFTC require you to draft a disclosure document. A disclosure

document, also known as a DDOC, is a communication piece that must be submitted to every prospective client. The

DDOC includes information about yourself, your trading program, the risks associated with the trading program, the fees

charged, performance capsules( if you have any), and other material that the CFTC and NFA require that you disclose to

potential clients. Since your disclosure document has to be approved by the NFA, it is available that you hire an

experienced attorney to draft the document for you.

For many commodity trading advisors that are looking to solicit funds from known contacts, a disclosure document serves

enough of a purpose to solicit client funds. However, if you are trying to solicit funds from investors that you do not

know, it is advisable to also prepare marketing material. Creating a website, logo, and information brochures will assist

you to professionally depict your message and trading program.

It is important to note, however, that the NFA must approve any promotional material before it is submitted to potential

investors. Rule 2-29 of the NFA manual serves as a guide regarding promotional material.

If you are interested in more information on becoming a CTA, please visit: www.balariecapital.com

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