According to research in South Africa, an introducing broker or IB is a broker in the futures markets who has a direct relationship with a client or trader, which in turn delegates the work of the floor operation and trade execution to another futures merchant, typically a futures commission merchant (FCM). An IB is usually affiliated with the FCM, either as an independent entity or as a direct subsidiary of that FCM. An Introducing Broker (IB) is basically an agent which introduces new customers to a Forex brokerage and in return for sending new customers to a brokerage, the Introducing Broker receives a fee in return.
In certain countries, it is required by law that Introducing Brokerages are regulated entities including the United States, where Introducing Brokers are required to be registered with the NFA in order to be able to solicit the business of US residents. In countries like Europe however there are no such requirements which insists that Introducing Brokers are regulated, which essentially allows any individual or company to act as an IB introducing new clients to a brokerage.
A prospective IB may be subject to a vetting process and will additionally be required to provide identification and documents to verify their identity. Brokerages often check up on their IB’s to ensure they are promoting the brokerage in a reputable way which is consistent with the firm’s regulatory requirements.
Here are a few key takeaways before we move on
- An introducing broker will advise clients in the futures market but delegates trade execution and back office operations to others.
- The IB is usually affiliated with the FCM, either as an independent entity or as a direct subsidiary of that FCM.
- IBs are better able to service their clients as they are usually locally situated, and their primary goal is customer service.
Firstly – lets cover the basics
What is Forex trading and how does it work?
Forex trading always involves selling one currency in order to buy another, which is why it is quoted in pairs – the price of a forex pair is how much one unit of the base currency is worth in the quote currency.
Understanding Introducing Broker (IB)
An introducing broker (IB) basically acts as a middleman by matching a client who is seeking access to markets with a broker willing to take the other side of the transaction. IBs essentially makes recommendations while delegating the task of executing trades to someone who operates on a trading floor. The introducing broker and whoever execute a transaction split the fees and commissions accordingly. Introducing brokers play the same role in the futures markets as stock brokers do in the equities markets but are regulated by different authorities. Stock brokers are registered with the Securities and Exchange Commission (SEC) and are regulated by the National Association of Securities Dealers (NASD) or Financial Industry Regulatory Authority (FINRA). Futures introducing brokers are registered with the Commodity Futures Trading Commission (CFTC) and regulated by the National Futures Association (NFA).
Introducing brokers not only help to increase efficiency but also lowers the work load for futures commission merchants. The arrangement allows for specialization and the IB focuses on the client while the FCM focuses on trading floor operations.
Examples of Introducing Brokers
Many IBs are one-person operations, whilst others are much larger, multi-location businesses. IBs are better able to offer customer service as they are local, and this is their primary goal as previously mentioned. Outsourcing the prospecting and servicing of clients to the IBs creates economies of scale for FCMs and the futures industry. Most IBs do not have the financial resources to execute trades for traders directly because this will require a direct relationship with futures exchanges and the large overhead of maintaining accounts, trades, and reporting, as well as developing and maintaining trading platforms.
Guaranteed Introducing Broker (GIB)
GIBs have an exclusive relationship with one FCM. All of the accounts of the GIB are held by the FCM. The FCM uses its capital to “guarantee” the operations of the IB as well as oversee compliance. Client accounts with GIBs are backed by the capitalization of the FCM, not the IB.
Independent Introducing Broker (IIB)
An IIB is self-guaranteed and must maintain its own minimum capital as well as compliance. IIB’s can trade with multiple FCMs. Client accounts with GIBs are backed by the capitalization of the IIB, not the FCM. The National Futures Association (NFA) maintains strict financial and compliance requirements for non-guaranteed firms.
The Benefits of Using in Introducing Broker includes
Introducing Brokers earn commission based on the volume traded by their referrals, which means they want their traders to be as successful as possible by ensuring that they continue to earn commission. Additionally, many Introducing Brokerages will also offer rebates to their customers and essentially, they share a percentage of the commission they make with those who choose to sign up under them. For many traders, the fact that they can receive rebates is one of the primary reasons that they sign up.
The Disadvantages of Using an Introducing Broker include
Introducing Brokers are often given a significant amount of information regarding those who sign up underneath them which in turn gives IB’s the opportunity to build up a relationship with their clients. While this isn’t fundamentally problematic, there are many traders who won’t consent to have their details shared with a third party. This may be a small price to pay, in return for rebates or the opportunity to get access to premium resources for free.
What is the Difference between an Introducing Broker and Forex Affiliate?
As previously mentioned, Introducing Brokers are given significant amounts of information regarding their referrals whereas an affiliate, however will receive little if any details regarding the activities of those who signed up underneath their affiliate link.
How to Make Money as an Introducing Broker?
Introducing Brokers make money by charging their clients with commission, but why would a client trade through an IB rather than directly with the firm? An IB can offer additional services and support, such as the training of clients and staying in touch with them and they will have their own broker that they could trust and build a personal relationship with.
The Art of Making Money as an IB is
- If an IB doesn’t have clients, they won’t earn money.
- Get clients that has generates the highest commission.
- Don’t be a crook.
- Watch the markets all day and learn from it.
How to get started?
Get a Licence
Characteristically, there are specific requirements which need to be fulfilled in order to work as an IB. Applicants will usually need to fill out an Introducing Broker Agreement and submit it to the broker firm or the commission merchant. A serious firm will also ask for an applicant’s passport, a Certificate of Incorporation, or any other valid proof of identity. Many countries do require that an applicant has a licence in order to perform as an IB.
For example, in the U.S. an applicant must be registered in as a FCM, CPO, CTA or an IB with the NFA (National Futures Association) to work as an Introducing Broker and to check if a license is required for a specific country, consult the respective authorities in said country. If a license is not required in a country and an applicant will still need to submit some sort of proof that they could work as an IB, typically in the form of a Letter of Compliance from a lawyer. Getting the license may take years of higher education, depending on how much an applicant already knows and what knowledge is still required.
Find A Bank or a Brokerage Firm
When an IB has their licence (if required), they need to find a broker company to work with. There are probably hundreds of companies to choose from when starting an IB business.
What is a Forex Broker?
Forex brokers provide traders with access to a platform which allows them to buy and sell foreign currencies and transactions in the market are always between a pair of two different currencies, so forex traders either buy or sell the particular pair they want to trade.
So, what should an IB look for in an online broker?
Is the broker regulated?
First and foremost an IB needs to check if the Broker is Regulated! The most important thing when selecting a CFD broker is to ensure that an efficient regulatory agency supervises that broker. Having an administered broker will assure that the broker meets and operate according to the supervisory body’s guidelines. IB’s must always remember this when choosing an online broker to partner with. If a broker is unregulated, they are likely to be untrustworthy, and an IB will be putting their own reputation at risk. This will result in losing customers and future commissions due to a poor reputation.
The second factor for an IB to consider while choosing a broker is the quality of the customer service provided. It is an IB’s responsibility to its clients to partner with an online broker which offers excellent customer service to its customers.
The trading platform & software
Trading platforms are considered to be the doorway to the market, and it is very important to choose a reliable one accordingly. Most brokers offer a variety of trading platforms to choose from – options that cater to different kinds of traders.
Does the Broker offer a unique mobile trading application?
Having all transaction options, reports, and results on the go is critical in the fast-paced financial markets of today. The ease of a mobile trading app ensures that the customer’s trading experience is not only uninterrupted but smooth, and productive.
Does the broker offer a wide range of financial instruments and assets to trade?
CFD brokers such as AvaTrade which we will look at shortly will offer customers the chance to trade a wide range of financial instruments and assets: stocks, options, indices, forex pairs, commodities, cryptocurrencies, ADR’s, bonds, and ETFs. An IB’s customers will appreciate all the trading options available to them.
Help with marketing
IBs need to grow their own businesses. A good partnership is built on an understanding of mutual interest and benefits, which includes offering the IB top the best in marketing tools. These tools should include promotional marketing material such as banners, landing pages, embeddable material for their websites, trading tutorials and other educational information. All of these can draw considerable online traffic towards the IB and increase their profits.
Our top Forex Broker choices for this purpose includes
AvaTrade is an online broker which was founded in 2006 and offers Forex, CFDs, Spread Betting and Social Trading and is a global broker with their head office situated in The British Virgin Islands.
For those who are looking to start out with AvaTrade will need a minimum deposit of $250 and a demo account is available for those who want to get acquaint with the popular MT4 forex trading platform. AvaTrade also offer mobile apps for Android and iOS.
AvaTrade is perfect for various levels of traders including beginners and all traders can trade a wide variety of instruments and currency pairs.
- Over 250 instruments
- Over 80 currency pairs
AvaTrade Trading benefits include:
- Allows scalping
- Allows hedging
- Low min deposit
AvaTrade Trading Accounts on offer include: Demo, Micro, Mini, Standard and Islamic and AvaTrade allows traders to execute a minimum trade of 0.01 Lot and support a wide range of languages including English, Italian, German, French and Greek.
TickMill offers traders 2 basic account types, accessible through the popular MetaTrader 4 platform and offers market execution with average speed of 0.3 seconds, variable spreads, leverage up to 1:30 and micro tradeable lots. The Classic account is commission-free and The Pro ECN carries a charge of a small commission fee and get tighter spreads.
|Account type||Minimum deposit||Minimum trade size||Maximum leverage||Spreads (& Commission)|
|Classic||$100||0.01||1:30||From 1.6 pips|
|Pro||$100||0.01||1:30||0.2 pips + $4 / Lot*|
*Commission is calculated per standard lot of 100 000 units round trip.
TickMill supports the MetaTrader4 (MT4) platform, available for Mac/Windows PC, Android & iOS devices and as a web-based version and accepts a wide range of payment methods: via credit/debit cards, (Visa, MasterCard, Maestro), bank wire, Skrill, Neteller, dotpay, and Sofort.
IC Markets is an online broker which was founded in 2007 and offers Forex, CFDs, Spread Betting, Share dealing, and Cryptocurrencies trading on offer both of the MetaTrader platforms; MT4 and MT5 plus the cTrader platform developed for traders.
IC Markets is a global broker and has a head office situated in Australia and new traders will need a minimum deposit of $200 to get started and a demo account is on offer for those who want to get acquainted with the IC Markets platform. IC Markets are able to accommodate various levels of traders whether they are experienced or just beginning in the trading game.
Traders can trade in a wide variety of instruments and currency pairs
- Over 232 instruments
- Over 65 currency pairs
IC Markets also offer traders mobile apps for Android and iOS and two accounts types, Standard account and Raw Spread account. IC Markets supports a wide range of languages including English, Japanese, Chinese, Polish, Afrikaans, Danish, Dutch, German and more.
ForexTime (FXTM) Offers Local NGN Funding, an offer not made by most online brokers which increases exchange costs of currency trading. ForexTime offers NGN account funding through bank wire transfer or Neteller with a minimum deposit of $100 for a standard forex account for ForexTime. This allows traders to start trading a range of currency markets while lowering the exchange costs when moving NGN currency to a standard base currency.
Pros and Cons
|Provides multiple execution methods by account type||Leverage caps and margin restrictions on ECN accounts|
|Regulated in several jurisdictions, including outside the EU||Certain range of markets segmented across account types|
|Offers Cryptocurrency CFDs||On ECN accounts, stop and limit levels can be added only post execution|
|FXTM Invest for auto trading||Low max order size of 30 standard lots per trade|
Key Features of FXTM (ForexTime)
ForexTime offers social trading (copy trading) which means a trader:
- Selects a Strategy Manager
- Makes a deposit (minimum deposit of $100)
- Mirror the Strategy Manager’s trade
- Watch as you share a percentage of wins/losses
- Cash-out or add deposits when required
ForexTime is ideal for Nigerian traders new to CFDs with a higher risk profile.
The HotForex MT5 terminal offers 21 different timeframes, superior analysis tools, trading across HotForex asset classes, close to 100 simultaneous charts, hedging and one-click trading and 80+ technical indicators plus an in-built economic calendar.
The account can be accessed from anywhere using an iPhone, interactive charts for 9 timeframes, advanced trading functions, one-click trading, 24 analytical objects, and 30 technical indicators.
Hotforex’s Metatrader offers a fast order execution, news feed, multiple order types, support for EAs.
Key features include:
- Supports: MT4, MT5 for desktop, web & mobile
- Minimum deposit: $5
- Leverage: 1:1000
- Trading Instruments: Forex, Cryptocurrencies, CFDs on Stock Indices, Commodities, metals
Finally, the last and most exciting step – Start Recruiting, Make Money, according to research in South Africa.