Introducing Brokers and Forex
An Introducing Broker (IB) is essentially an agent which introduces new customers to a Forex brokerage. In return for sending custom to a brokerage, the Introducing Broker receives a fee, when it comes to Forex this is normally a certain share of the Spread or Commission charged by the brokerage. Supposing you are charged a total of $3 commission on a particular FX trade it might be quite possible that the Introducing Brokerage who refereed you to the broker would receive over half this sum. A significant percentage of brokerages, run IB programs as it can significantly reduce the costs involved in acquiring new customers with marketing efforts being left to companies and individuals who are working on a commission only basis.
In certain countries, it is required by law that Introducing Brokerages be regulated entities. This is the case in 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 Europe, however there is no requirement that Introducing Brokers be regulated, which essentially allows any individual or company to act as an IB introducing new clientèle to a brokerage. Though the prospective IB may have to go through a vetting process and will additionally be required to provide identification and documents to verify they are who they say. Brokerages often check up on their IB’s to ensure they are promoting the brokerage in way which is consistent with the firms regulatory requirements.
Benefits of Using An Introducing Broker
Introducing Brokers earn commission based on the volume traded by their customers, which means they want their traders to be successful ensuring that they continue to earn commission. This means that many IB will give free gifts to those who have opened trading accounts under them. These gifts often vary significantly but it is not uncommon for Introducing Brokers to give traders premium Expert Advisors, books and other trading resources, all in an effort to keep traders trading with them.
Additionally, many Introducing Brokerages offer rebates to their customers. Essentially, these Introducing Brokers share a percentage of a 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 under an Introducing Broker (IB), as overtime these rebates can add up to a significant amount.
Disadvantages of Using An Introducing Broker
Introducing Brokers are often given a significant amount of information regarding those who sign up underneath them, as this gives the opportunity for an Introducing Broker to build up a relationship with their clients. While this isn’t inherently problematic, there are many people out there who would rather not 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.
Difference between an Introducing Broker and Forex Affiliate
Many are slightly confused regarding the difference between a Forex affiliate and an IB. As previously mentioned, Introducing Brokers are given significant amounts of information regarding their referrals and are often expected to foster relationships with those clients. An affiliate, however will receive little if any details regarding the activities of those who signed up underneath their affiliate link. This leaves the brokerage itself as the one responsible for fostering a relationship with the client, with the affiliate simply attracting business. This often means it is much easier to become an affiliate than an Introducing Broker, as a brokerage has to do less to check the suitability of the person promoting the brokerage.