An Introducing Broker (IB) is an industry term for a commodity broker or futures broker. IB is a brokerage firm that manages the clients.
The trade execution and back-office work are the duty of a Futures Commission Merchant (FCM). Another term for an FCM is a clearing firm.
Each IB has a relationship with an FCM. The FCM has a direct connection with the futures exchanges to execute trades. FCMs supply trading platforms on which clients have the ability to place trades online.
FCMs are responsible for account management. One of the most important features of an FCM is that they deposit all customer funds in customer segregated accounts.
Work Environment
IBs operated out of smaller offices located all over the country. Many IBs are one-person operations, while others are larger and multi-location businesses.
IBs are better able to service their clients as they are local. Their primary goal is customer service. An FCM focuses on executing trades and the maintenance of trading infrastructure. Outsourcing the prospecting and servicing of clients to the IBs creates economies of scale for FCMs and the futures industry.
Most IBs do not have the financial resources to execute trades for their clients directly. Direct execution of trades requires a direct relationship with futures exchanges as well as the maintenance of daily accounting of client trades and balances, the creation and servicing of trading platforms and many other expenses that can become prohibitive.
Expenses
An Introducing Broker will add a profit margin to the amount charged by the FCM. The aim is to compensate for their services.
The amount of commission is a function of the trading volume. The more exchanges the less the per-trade commission rate. Rates are negotiable and larger IBs regularly charge lower rates than the smaller ones.
One of the main expenses of an IB is advertising. The local market is the focus of some brokers and also depends on the referral business. However, most brokers have to spend much money on advertising to bring in clients. In addition, it constantly replaces the clients who lose their money.
For more than six months, many commodity traders do not remain in the market. Brokers who make profitable trade recommendations tend to retain customers and make more money in the long-run.
Online futures trading has become more competitive among brokers over recent years. Those who trade online are typically short-term traders that do many transactions.
Overall, these activities traders tend to seek the lowest rates possible. For each trade, a few cents are got from some online brokers. As a consideration, the volume is the most important thing for online commodity brokers.
