Introducing Broker (IB) on the futures market
Introducing Broker (IB) - special term in futures industry, denoting a brokerage company working directly with clients and dealing with the front office. At the same time, the execution of client transactions and the back office are handled by another large, listed Brokerage Company (Futures Commission Merchant, FCM)clearing. You should not confuse these two concepts - when you enter the American or European derivatives market, you open an account with a Foreign Exchange Broker (FCM), but you communicate with an Introducing Broker (IB).
Each IB has a formalized relationship of cooperation with FCM. FCM brokerage companies work with many IBs; IBs themselves may also work with several stockbrokers. FCM has employees in exchange halls, conducts its own trades, provides trading platforms, maintains segregated client accounts and handles their management. But, as a rule, it does not have an extensive network of offices to work with private clients.
More often than not Introducing Brokers - are small offices or individual employees working over the Internet. Although there are exceptions, when IBs are a developed regional network. The main function of IBs is to work directly with end clients. It consists of a variety of assistance - in filling out documents, technical support, training and advisory functions. An FCM broker is only engaged in executing trades and maintaining trading infrastructure; all work with clients falls on IB's shoulders. Since the latter is interested in opening as many active client accounts as possible, the most expensive expenditure item for IB is advertising.
In terms of doing business, the FCM and IB relationship works as follows: The Exchange Broker charges the Introducing Broker a price for the transaction conducted through him, such as $5 per contract. A large part of it goes to pay the fees of exchanges and regulators - let's say $2. The Introducing Broker finds clients, opens them trading accounts and charges them $7 per trade with one contract. Thus, FCM gets ready clients and earns on carrying out of their deals ($3 per contract), and IB serves these clients and earns the mark-up to the brokerage commission ($2 per contract). Of course, these figures strongly depend on the total volume of client operations, which is directly related to the activity of clients and the size of their accounts.
The emergence of many IBs and their strong competition in recent years has led to a tangible reduction in commission fees. Clients who work "intraday" and make a lot of transactions in one trading session could not help but appreciate it. Now some IBs get a few cents from each client's transaction, but they take by volume - they win due to the large number of trades conducted through them.
Representing Broker can be considered an intermediary between a private trader and an Exchange Broker, but it is necessary. IB is one of the connecting links between a trader and an exchange. If you open an account with a large FCM you have to talk to any of its IBs.