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Intelligent Investing: What is an Introducing Broker?

By Ilan Levy-Mayer, writer
Apr 21, 2016
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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.

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

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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 Broker and FCM's have to work in sync with one another, in order to run a smooth trading firm. FCM's are the behind the scenes task-force that:

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

Both IB's and FCM's support one another in the development of the futures exchange market. IB's lend their feet, to present the complexities of trading in a palatable, easy to understand way of thinking. FCM's, in a perfect business model, focus on: clearing trades, accounting, account statements, complaince and in general "make sure the behind the scenes is working smoothly". At first glance, it seems that FCM's receive most of the glory, however in this symbiotic relationship, the two (IB’s and FCM’s) make a solid partnership.

An introducing broker (commodity broker), is vital to the futures market, in that, they help those new to the commodity market, acclimate to the hectic environment. IB’s are like full service brokers, in that they are your middlemen, between individual tradesmen and the exchange market. IB's provide service to clients.

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

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When it is time to choose an IB, this question should be on your short list: "What is the total value the IB provides when taking into consideration commissions, support, knowledge, longevity and most important 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 businessman does not only look at one number, a savvy trader should take the time and effort to make a table which consists of the factors above.

IB's try to gain their money, through brokerage commissions. FCM's charge on average the IB $X/trade. As you look for a dependable IB, expect a markup; however this does not mean you have to shell out 100X/trade in order to get the direction and guidance needed to meet your financial independence. A good way to see how much involvement you need from an IB is how often you trade on the market.

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

Overall, investing is hard work and takes a great deal of research, energy, and your time. Trading futures can be even harder as it may present complexities to the average investor that main stream 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.

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Make sure you do your homework and ask the following questions:

  1. How long has the IB been in business?
  2. How is their regulatory background looks like?
  3. Do they only deal with one FCM or are they able to offer you more than one FCM? (great advantage that only Independent Introducing Brokers IIB can do)
  4. What is their commission structure?
  5. What is their margin and day-trading margin policies?
  6. What type of trading platforms they offer? do they provide any added value tools?
  7. If you are planning to work with a full service broker: How long has he/ she been in the business?
  8. Check reviews of other clients which is now easy through places like Yelp and Elite trader.

Disclaimer: 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.

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Ilan Levy-Mayer
Ilan Levy-Mayer
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Ilan Levy-Mayer has been a commodities broker for over 16 years, and holds an MBA in Finance and Marketing from Hebrew University in Jerusalem. Ilan is currently the Vice President and a Senior Futures Broker overseeing online future trading platforms and Commodity Futures Trading systems at Cannon Trading Company.
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