In a nutshell, introducing brokers are customer catering arms for Forex trading firms. An introducing broker is responsible for driving business to the dealing firm and provide additional customer support for the client and the dealer alike.
On each trade that a client makes, the introducing broker is rewarded with a portion of the spread. In most cases, the dealing firm cultivates a close relationship with the introducing broker or IB thus providing them with a variety of trading tips which are then passed on the IB’s client. This only happens if you are working with a reputable client.
Plenty of newbies to the foreign exchange market don’t really know who introducing brokers are and what benefit they may bring to the table. You can’t really blame them because most cursory explanations regarding foreign exchange don’t feature descriptions of more advanced elements such as futures and introducing brokers.
For this reason, the value of IBs is often invisible or diminished in the minds of first time traders. The irony of this is, newcomers in particular need the help of IBs because they have important contributions to make. Here are some of the benefits of using introducing brokers.
For instance, let’s assume that you have an account at a brokerage firm which is funded with $10,000. Keep in mind that even large firms make mistakes. With that said, imagine that your order is filled with outrageous slippage and you may need to call the firm. Ask anyone who trades Forex and they will tell you that customer care service at the ground level can be quite inconsistent. Additionally, you will most likely be at the bottom of the priority list if you have less than $20,000 in your account.
To combat this problem you need the help of a reputable introducing broker to introduce you to a clearing firm. This is because there is a good chance that the dollar amount under him or her is more than $500,000. Therefore, instead of being treated like a $10,000 client you will be looked at as a $500,000 client. Should you run into a problem with the clearing firm, you will have the weight and the support of the introducing broker to resolve the problem by backing your claim.
Volume based rebate trades
An introducing broker is compensated every time a client makes a round turn trade. Some introducing brokers especially ones with a massive client base offer their clients a rebate on every trade made.
By nature, the foreign exchange market has a high trade frequency per trader such that even a nominal rebate per trade easily adds up at the end of the month. For this reason, if you trade a larger volume of standard lots then you will be in a nice position to negotiate a higher rebate for yourself. Whether you look at this as a way of tightening the spread or as an instrument of preserving capital, it is free money that receive on every trade.
Value added services
Since IBs are paid for every client they bring to the brokerage firm, most of them offer other services to their clients for free. Some of the services may include a free eSignal or advanced charting software both of which can dramatically increase your potential in succeeding if you learn how to apply them. Such services can be of great value to a trader. However, if you are a new trader you should be cautious about some of the value added services given, do your own research and make sure that it is what you need.
A lot of traders are still skeptical on using an introducing broker since it seems like they are going through a middle man. However, this is not the case because IB’s are not supposed to interfere with the trade in any way or hold your funds. As you’ve seen, using an introducing broker can actually increase your potential for success in the foreign exchange market.