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Intelligent Investing: What Is an Introducing Broker? editorial staff editorial staff

Understanding who the major players are in this world is vital to navigating the stormy seas of investing. Learn how to find the right help.

  • An introducing broker (IB) is an industry term for a commodity broker or futures broker.
  • An IB is responsible for placing any pending trades on behalf of their clients.
  • Instead of asking for money from clients, an IB earns a salary through brokerage commissions.

Investing is challenging. The grind. The pace. The victory. The defeat. All of these aspects make up the financial sphere of investing. Understanding who the players are in this world is vital to navigate the storm and seldom calm seas.

What is an introducing broker?

An introducing broker (IB) is better known as a commodity broker or futures broker (something most investors are familiar with in the futures market). An IB is the one who places the pending trades for their clients.

What does an introducing broker do?

To see the complete picture, your IB is the face that meets and helps the clients, while the futures commission merchant (FCM) is mainly referred to as the clearing firm. Introducing brokers and FCMs have to work in sync to run a smooth trading firm. The FCM is the task force behind the scenes that does the following:

  • Maintain orderly functional trading platforms
  • Provide account statements and reports
  • Maintain connections to the various exchanges in order to clear trades
  • Deposit funds into customer segregated accounts

IBs and FCMs support one another in the development of the futures exchange market. IBs present the complexities of trading in a palatable, easily understandable way. FCMs, in a perfect business model, focus on clearing trades, accounting, account statements, compliance and generally making sure everything is working smoothly behind the scenes. At first glance, it seems that FCMs receive most of the glory; however, in this symbiotic relationship, IBs and FCMs make a solid partnership.

Introducing brokers are vital to the futures market because they help those who are new to the commodity market acclimate to the hectic environment. IBs are like full-service brokers in that they are your middlemen between individual tradespeople and the exchange market.

IBs provide service to clients. It may take the form of assisting clients who need full service or providing technical support to online traders. In general, a good introducing broker will do their best to provide constant and helpful information, assisting their clients with any trade-related and customer service issues.

When it is time to choose an IB, this question should be on your short list: What is the total value the IB provides, taking into consideration commissions, support, knowledge, longevity, and (most importantly) quality and speed of customer service?

Many new clients make the mistake of only comparing commissions, as it may be easier for the brain to compare numbers, but just like a savvy businessperson does not only look at one number, a savvy trader should take the time and effort to make a table of all the factors in the above question.

IBs make their money through brokerage commissions. FCMs charge the IB a fee for each trade. As you look for a dependable IB, expect a markup to account for the FCM's fee; however, this does not mean you have to shell out the full trade to get the direction and guidance to meet your financial independence. A good measure of how much involvement you need from an IB is how often you trade on the market.

Benefits of an introducing broker

If you trade frequently on the commodity market and your IB is giving you sound recommendations for trading, negotiate a fair price. At the end of the day, an IB, like the FCM, is there to make money and will negotiate price based on your account size, trading volume, level of assistance needed and the specific markets you will be trading.

Investing is hard work, taking a great deal of research, energy and time. Trading futures can be even harder, as it may present complexities to the average investor that mainstream products like stocks and equities don't. That being said, a good IB can make the difference in many aspects, as they are your bridge to trading futures and commodities.

Examples of introducing brokers

An introducing broker can be registered through organizations like the National Futures Association. To register as an IB, the individual must accept orders to buy or sell futures, commodities, forex contracts, or swaps. However, no money is exchanged from the customer to support these orders.

Make sure you do your homework and ask the following questions before you choose an IB:

  1. How long have they been in business?
  2. What is their regulatory background?
  3. Do they only deal with one FCM, or can they offer you more than one? (The latter is a great advantage that only independent IBs offer.)
  4. What is their commission structure?
  5. What are their margin and day-trading margin policies?
  6. What type of trading platforms do they offer? Do they provide any added-value tools?

As part of your research, you should check reviews from other clients, which is easy through sites like Yelp and Elite Trader.

Note that trading futures, options on futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. You may lose all or more of your initial investment. Opinions, market data and recommendations are subject to change at any time.

Image Credit: Ivan-balvan / Getty Images editorial staff editorial staff Member
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