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The Role of Introducing Brokers in Forex Trading
Written by: PaxForex analytics dept - Thursday, 25 May 2017 0 comments
In most financial markets there will be a broker involved to receive orders from retail and corporate customers. In the foreign exchange (FOREX) market, the broker acts as the intermediary between its customers and the inter-bank market where the currencies are actually traded. One of the means of getting the word out to retail and other customers is through individuals or entities acting as introducing brokers or IBs, for short. As the name implies, the role of the IB is to introduce the customer to a regular retail broker who proceeds to set the investor up with an account for trading.
An introducing broker is a customer catering arm for the dealing firm. The IB drives business to the clearing firm and provides additional customer support for both the client and the dealer. Introducing brokers are usually compensated as a portion of the spread on each trade their client makes. The dealing firm, in most cases, has a close relationship with the IB and provides them with multiple perks that are then passed on to the IB’s clients – assuming you work with a reputable IB.
Introducing Brokers offer valuable services for customers who open their accounts directly with the IB office. They provide help for new investors who may not fully understand the risks of the markets, training that can prevent a customer from making a costly mistake
during the order entry process, the experience that is necessary to evaluate market moves and spot opportunities for trading, access to research the public generally does not have, understanding of regulatory changes that may impact a customer’s trading plan, the expertise to help develop a strategy which meets a customer’s needs.
Many forextraders are skeptical of using and IB because it seems as though you are going through a middle man, when in fact you aren’t. Introducing brokers should never hold client funds nor interfere with the trading processes in any way (altering platforms or spreads). 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 clientele 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.