An Introducing Broker (IB) functions as an agent or extension of the Futures Commission Merchant (FCM). Essentially, the IB is a partner of the FCM. FCMs are typicallycorporations that solicit or accept orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any exchange and that accept payment from or extend credit to those whose orders are accepted.

Introducing Brokers (IB) can operate as an individual, partnership or company. They are engaged in soliciting or in accepting orders for the purchase or sale of commodities or OTC FX products. IBs do not accept any money, securities, or property to margin, guarantee, or secure any trades or contracts that result therefrom. They can operate on a full time or part time status. As with anything else, the more effort the Introducing Broker expends, the higher the reward he or she will receive. 

Since the mid 90s, when technology afforded the opportunity for small or medium size investors to participate in the Foreign Exchange market, entrepreneurs were given the chance to share in the rapid and ascending growth of this new industry.

Many investors are unaware of the fact that most brokerage houses, including both equities and commodities, are or act as an Introducing Broker. Very few are Broker Dealers or Future Commission Merchants. Equity firms who do not clear their own trades will use a third party. The same applies for commodities and Forex brokers. There are roughly 150 Futures Commission Merchants registered in the United States. Of the 150, approximately 25 are restricted to “making markets” in Foreign Exchange Market, which is referred to as FX Dealers.

Introducing Brokers simply refer business to the clearing firm or FCM. Based on the current trends in the Forex industry, Introducing Brokers offer four primary products and/or services as denoted below.

1. Introduce clients who trade their own funds. IBs are compensated in the form of “rebates” from the FCM.

2. Offer Managed Accounts Services for your clients. IBs who offer managed account services can be compensated in several ways: 1) profit sharing, 2) management fees, 3) mark-up fee and 4) commissions.

IBs who offer managed account services should have adequate training, a reasonable amount of trading experience and adhere to strong risk management. Spot Forex transactions carry a high degree of risk. Trading funds should only consist of risk capital or funds that an individual or an institution can afford to lose.

3. Provide educational services, such as workshops, seminars, webinars and one-on-one training. Many Introducing Brokers who possess the knowledge, experience and expertise offer educational packages to beginners in the form of CD/DVD or downloaded software.

IBs will charge a fee for their product and/or service. When an IB holds a seminar, the instructor might explain how to apply his or her trading strategy by executing a live trade on the electronic platform during real time market hours. Beginners will become familiar with the trading platform while the instructor is teaching his or her trading methodology. The next step is having your client demonstrate the platform, taking advantage of “paper trading” or demo accounts. Once your client is comfortable with the platform, the market and is prepared to trade real funds, he or she will be well prepared. Just as important, your client will feel confident. 

4. Signal services – in addition to offering Forex training services, many IBs who have considerable market experience and who are considered experts in their field, will provide signal services, informing clients when to enter or exit the market. Typically, IBs will charge a monthly or annual fee. In addition, they will be compensated in the form of rebates by referring the client to the FCM. Signal services are not widely promoted by Introducing Brokers. Unless the IB has automated the process using a sophisticated software application, it can be very arduous because the market operates 24 hours per day, 5.5 days per week. In the most simplest form, Introducing Brokers will set up some type of forum or instant messaging system, informing the clients when to enter and exit the market.

In order to do this effectively, you will need to design an automated application, based on your “trading system” or strategy, which notifies your clients instantaneously what to do. Realistically, you cannot just include entry and exit points. Failure to advise your clients to include a Stop, Limit or OCO order when placing a unprotected market order would be unwise and irresponsible. Obviously, there are many factors and variables to this service or product. If an Introducing Broker is “position” or “swing” trading, as opposed to “scalping” or trading short term, then a rudimentary method of communication could suffice.

Signal services can be very lucrative if you can develop a quality trading system, which has been back tested, proven in real time and incorporates prudent risk management within the model, regardless of the account size. Several existing Introducing Brokers charge $300-500 per month for their service. Your revenue stream will be very favorable if you have 100 clients ($30,000-$50,000/mo.) registered for your signal service. In addition, as the referring Introducing Broker, you still receive the standard rebate, anywhere from .5 to 1.0, depending on your broker.

The retail Forex market is relatively new. The four products and services mentioned above is what Introducing Brokers are currently offering in today’s market environment. Creative minds and skilled entrepreneurs can develop new products and offer unique services, potentially creating an entirely new market for your product and/or service, and ultimately gaining a huge competitive advantage.

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