There are several ways an Introducing Broker is compensated, depending on what products and/or services the IB is offering to their clients.

Most Introducing Brokers, specifically new IBs, will start out by referring business to the FCM. The IB simply introduces his or her clients to the FCM, acting as a referring agent. Fortunately, with the buying power or leverage that is offered by the FCM and the industry as a whole, Introducing Brokers, referring agents, are generously compensated.

IBs receive compensation in the form of “rebates”. Typically, the rebate is anywhere from .5 to 1.0 per round turn on one standard lot. The size of rebate will depend on how much business or volume the Introducing Broker generates per month. It will also depend on which FCM (broker) you’re introducing business for. If you’re new to the industry and need advice on which FCM offers a reasonable rebate and fair compensation, complete the Contact Form or Questionaire under “Getting Started” or feel free to email us directly at info@ibportal.com.

For example, an Introducing Broker refers 10 accounts to the FCM. Each account is $10,000. The IBs “book of business” is $100,000. Think of a book of business as a hedge fund. A hedge fund manager will not risk his entire portfolio. The hedge fund manager may only risk 10% of his portfolio on one trade. The same principle applies here. Therefore, hypothetically, on $100,000, all 10 clients may risk $1,000 (10%) each, or $10,000 for all 10 accounts. In order to place a trade of $10,000, the clients must buy (long) or sell (short) 10 standard lots (contracts). On average, Forex traders will place 3-5 trades per day. In this example, the IBs 10 clients will trade 30-50 lots per day, 150-250 per week and 600-1000 per month.

Based on this example, the IBs compensation will be as follows:

PIP Rebate	Number of Trades Monthly (600 Lots)	Number of Trades Monthly (1000 Lots)
.5	$3,000	$5,000
.6	$3,600	$6,000
.7	$4,200	$7,000
.8	$4,800	$8,000
.9	$5,400	$9,000
1.0	$6,000	$10,000

This example is based on the clients trading a direct currency pair, i.e. EUR/USD or GBP/USD. The value of a pip is $10.00. Indirect currency pairs could be higher or lower than $10.00, depending on the current price. For example, if the Canadian Dollar (USD/CAD) is trading at .9838/.9843, the pip value would be $10.16. Similarly, if the Japanese Yen (USD/JPY) is trading 103.29/103.34, the pip value would $9.68. Remember, the first currency in the pair is the “base” currency; the second is the “quoted” currency (See “Trading Forex” under “Forex Education”). For indirect pairs, the “base” currency is USD, which signifies the value of the pip is variable, not fixed. The value of the pip will depend on the current market price (See “Trading Forex” under “Forex Education”). The three major indirect currency pairs are USD/JPY, USD/CHF and USD/CAD. When the price of the currency decreases, the “quoted” currency increases in value. Therefore, if the USD/JPY trades from 110.50 to 108.50, the Japanese Yen has appreciated 2.00 or 200 pips against the US dollar.  For direct currency pairs, such as EUR/USD, GBP/USD and AUD/USD, where the “quoted” currency is USD, the pip value remains fixed at $10.00 – at all times. The calculation is 100,000 (contact size) multiplied by .0001 (smallest unit of measurement (one pip, which stands for Percentage in Point). For more information, visit “Forex Glossary” under “Forex Education”.

The example above is based on a $100,000 “book of business”. An Introducing Broker could have one client that opens $1MM trading account. Relatively speaking, a $100,000 “book of business” is rather small. Let’s add another zero to our example.

PIP Rebate Number of Trades Monthly (6000 Lots) Number of Trades Monthly (10000 Lots) .5 $30,000 $50,000 .6 $36,000 $60000 .7 $42,000 $70000 .8 $48,000 $80,000 .9 $54,000 $90,000 1.0 $60,000 $100,000

 The examples above are based on rebates, which is standard in the industry.

I can imagine what you’re thinking. How is this possible? Stockbrokers must raise $100,000,000 to see an annual income of $1MM. This is possible for one reason, and one reason only, LEVERAGE. The Forex market offers more leverage or buying power than any other market. Why? Liquidity. The Foreign Exchange market is so vast with so many participants; traders can enter and exit the market at will. From a stockbroker’s point of view, if he raises $100MM, he will earn a seven figure income. The same applies with the Forex market when factoring in leverage - $1MM controls $100,000,000.

The examples above are based on rebates, which is standard in the industry.

The other question you must be asking yourself, why isn’t EVERYONE in this market. They are. The daily turnover in 1995 was roughly $1.25 trillion, 2002, $2 trillion and today, according to the Bank for International Settlements, daily turnover exceeds $3.3 trillion.

Power of Leverage

All parties involved, the FCM, the Introducing Broker and more importantly, the client, is compensated on leveraged capital. Leverage, if not properly used, can work against you, just as easy as it can for you. Leverage is simply buying power, which is effectively credit. Clients will put up a 1% deposit and is given 99% credit. Another way to look at it, the client gives the broker $1 and the FCM or clearing broker puts up the remaining $99 in order to finance the trade. For a realistic example, just add three zeros to the example above, the client deposits $1,000, the FCM extends credit in the amount of $99,000.

Leverage (Continued) & Rollover Interest

Just like buying an automobile, a BMW costs $50,000. The buyer puts down a deposit of 20% or $10,000. The bank provides financing for the remaining $40,000. The buyer must pay interest on the loan. In the Forex market, the interest is the “rollover” fee, which is charged at 5PM EST. Lets revisit the auto loan example, if the buyer decided to pay off the balance ($40,000) or “settle” the outstanding loan, he would no longer be required to make interest payments. The same principle applies in Forex, if the client had an open position and decided to close the position before the end of the trading session (5PM EST), and then no rollover interest would be applied. Also, it is important to understand, depending on which currency pair is being traded, the client can also be credited interest, thus receiving any interest on open positions he sold or “financed”, just like the bank with the $40,000 note on the automobile loan. One more aspect to point out, rollover interest is just a fraction of the notional value of the standard contract size. For example, if you sold or bought 1 Standard Lot of EUR/USD you will receive and incur an interest debit/credit of $1-2 depending on the current LIBOR rate (London Interbank Offered Rate).

For more information, please revert back to “Trading Forex” under “Forex Education”).

As an Introducing Broker, it is your responsibility to convey to your clients the importance of proper and prudent risk management. Unfortunately, greed plays a large role in the trader’s downfall. Beginners will double their account in one week. When the market goes against them they will lose everything. .

Many Introducing Brokers specialize in education and training. Experts on the market can command hundreds, even thousands of dollars per hour. IBs create software programs on CD/DVD, conduct weekly webinars and hold workshops and seminars for novices to advanced traders seeking to learn how to trade the Forex market.

Recently, successful Forex traders have launched signal services based on the IBs proprietary trading system. Once the IB (trader) identifies an opportunity in the market the trader will issue an alert on their website or via email to enter or exit (buy or sell) the market. IBs will charge a monthly or annual subscription fee.

Introducing Brokers who offer Managed Account Services can charge additional fees to manage their client accounts. The standard in the industry is “20/2” – 20% profit sharing fee on new net profits monthly and 2% - annual management fee on total assets. If the Introducing Broker generates 25% returns from August to September on $1MM, the client will have made $250,000 (assuming after fees). The IB would receive 20% of $250,000 or $50,000.

Some Introducing Brokers will charge additional fees per round turn in the form of dollar commissions or mark up fees. For example, an Introducing Broker who spends time on educating their clients on trading and the market may charge $10-20 per round turn. Alternatively, IBs might “mark up” the spread X pips. For example, the EUR/USD is trading 1.5560/1.5563, and the IB marks up the spread by 2 pips. The EUR/USD has a standard spread of 3 pips. With the mark up, the spread will be 1.5560/1.5565. The implication for the client is he or she must overcome 5 pips to break even. Depending on the client’s trading style, this is very achievable. However, if the client is a short term trader, he or she might have difficulty profiting under these conditions. The additional mark up of 2 pips will generate an additional $20 in commissions. Based on the example of $1MM, the Introducing Broker’s compensation would be as follows:

PIP Rebate 2 PIP Mark Up Number of Trades Monthly (6000 Lots) Number of Trades Monthly (10000 Lots) .5 2.0 $150,000 $250,000 .6 2.0 $156,000 $260,000 .7 2.0 $157,000 $270,000 .8 2.0 $168,000 $280,000 .9 2.0 $174,000 $290,000 1.0 2.0 $180,000 $300,000

 

The Introducing Broker’s number one priority should be the client. A good Introducing Broker will be competent, demonstrate expertise in the FX market and provide his or her clients will every available tool and resource, in order for his or her client to profit in this market. If you plan on managing your client’s funds, we include a list of basic trading rules and tips in IB Insider.  

Clearly the Forex market is very lucrative for all participants. By the year 2010, the daily turnover will surpass $5 trillion. It is easy to understand why the Forex market is gaining so much popularity. Prospective and existing Introducing Brokers have a rare opportunity to be at the forefront of an industry that is still in its infancy stages.