What Is an Introducing Broker?
An introducing broker (IB) is a professional adviser in the futures markets who has a direct relationship with a client but delegates trade executions, typically to a futures commission merchant (FCM).
The introducing broker may be employed by a company that is a partner of the commission merchant's firm or a direct subsidiary of it.
Key Takeaways
- An introducing broker (IB) serves as a middleman, advising clients on futures investing and, as needed, referring them to brokers who work on the trading floor.
- The role of the IB is similar to that of stockbrokers in the equities market.
- The IB maintains the relationship with the investor while the commission merchant, or trader, handles the transactions and back-office operations.
Role and Responsibilities of an Introducing Broker (IB)
An introducing broker acts as a middleman, matching an individual or a company seeking access to the futures markets with a futures commission merchant who will take on the responsibilities of making the trade and handling the back-office operations.
Generally speaking, IBs make recommendations while the commission merchant executes the trade. The introducing broker andthe broker who executes the transaction split the fees and commissions.
Introducing brokers play the same role in the futures markets as stock brokers do in the equities markets. However, they are regulated by different authorities. Stock brokersare registered with the Securities and Exchange Commission (SEC) and are regulated by the Financial Industry Regulatory Authority (FINRA). Futures introducing brokers are registered with the Commodity Futures Trading Commission (CFTC) and regulated by the National Futures Association (NFA).
This arrangement allows for specialization, with the IBfocusing on the client while the FCM focuses on trading floor operations.
Today's FCMs provide trading platformson which clients can place trades online and take responsibility for account management. However, it would not be financially feasible for an FCM to open storefronts across the country to serve their customers. IBs can provide that local service.
The Relationship Between IBs and FCMs
Many IBs are one-person operations, though some are larger, multi-location businesses. In any case, their primary goal is customer service. Outsourcing the prospecting and servicing of clients to the IBs creates economies of scale for FCMs and the futures industry.
Most IBs prefer to outsource trading because it frees them of the substantial overhead involved in executing trades, maintaining accounts, and handling financial reporting responsibilities.
IBs allow FCMs to do business on a local basis while using the FCM's infrastructure for trading.
What Is the Futures Market?
The futures market is the exchange in which traders buy and sell derivative financial contracts. These are agreements to buy or sell a specific commodity or financial instrument at a specific price and date. The price is locked in, and the buyer will gain or lose depending on the market price when the contract reaches maturity.
Futures have long had a role in the markets for major physical commodities such as crude oil, gold, and wheat. Producers and buyers in volatile industries obtain reasonable prices in advance. Traders may be seeking a hedge against possible losses or making a speculative bet on the direction of commodity prices.
There are also futures markets for stocks, indexes, and currencies, among others.
Who Needs an Introducing Broker?
An introducing broker is a financial adviser who specializes in futures investing. An investor who is interested in futures but not inclined to dive in alone would consult with an introducing broker.
Futures investing is relatively risky and relatively complex, even compared to stock investing. Anyone determined to participate directly should have a good understanding of the ins and outs of futures trading before jumping into it.
How Much Money Do I Need to Trade Futures?
Many platforms for futures traders require a minimum deposit of $5,000 to $10,000 to get started. Trading futures also requires margin deposits that can range from as little as $300 to more than $7,000 depending on the type of commodity being traded and the amount of the contract.
Keep in mind that a margin account is a type of collateral required in return for borrowing cash from the broker to finance trading. The collateral could disappear with a losing investment.
The Bottom Line
The introducing broker is best understood as the equivalent of a stockbroker in the futures market. A stockbroker maintains a relationship with clients and may recommend investment strategies or specific investments to their clients over time. They, like introducing brokers, are usually the middlemen. A trader on the floor actually executes orders for the clients. In the futures markets, that is the futures commission merchant or FCM.
FAQs
An introducing broker (IB) serves as a middleman, advising clients on futures investing and, as needed, referring them to brokers who work on the trading floor. The role of the IB is similar to that of stockbrokers in the equities market.
What is an example of an introducing broker? ›
TradeStation: Another example of an introducing broker is TradeStation, a company that offers brokerage services for active traders and investors. They deliver advanced trading technology and educational support but the execution, clearance, and settlement of transactions may be performed by other broker-dealers.
How do you introduce a broker? ›
To become an introducing broker, it is important to understand the market, choose a reputable partner, obtain licenses and build a loyal client base. Although it requires time, effort, and dedication, becoming a successful IB can be very rewarding.
What is an example of a broker? ›
A broker's prime responsibility is to bring sellers and buyers together, and thus, a broker is the third-person facilitator between a buyer and a seller. An example would be a real estate broker who facilitates the sale of a property. Brokers can furnish market research and market data.
What is an IB for a broker? ›
An introducing broker (IB) is an individual or organization that solicits or accepts orders to buy or sell futures contracts, commodity options, retail off-exchange forex contracts, or swaps but does not accept money or other assets from customers to support these orders.
What is the role of an introducing broker? ›
An introducing broker (IB) serves as a middleman, advising clients on futures investing and, as needed, referring them to brokers who work on the trading floor. The role of the IB is similar to that of stockbrokers in the equities market.
What is a good example of a broker role in social work? ›
A broker may help a client obtain emergency food or housing, legal aid, or other needed resources.
What is the difference between a broker and an introducing broker? ›
Aside from clearing brokers, other types of broker-dealers do not have the authority to clear transactions. Therefore, other broker-dealers will generally have one clearing broker with whom they work to clear their trades. An introducing broker, meanwhile, introduces their clients to a clearing broker.
How do introducing brokers get paid? ›
How do IBs get paid? Introducing brokers earn commissions from their broker partners based on the client activity they facilitate. Common compensation models include percentage of spread, fees per trade, or a portion of monthly charges.
What is the best way to describe a broker? ›
A broker is a person that facilitates transactions between traders, sellers, or buyers. Think of a broker as a middleman who ensures transactions can run smoothly and that each party has the necessary information. Brokers exist in many industries, including insurance, real estate, finance, and trade.
Key Takeaways. A broker is an individual or firm that acts as an intermediary between an investor and a securities exchange. A broker can also refer to the role of a firm when it acts as an agent for a customer and charges the customer a commission for its services.
What is a simple definition of a broker? ›
A broker is a person or company authorized to buy and sell stocks or other investments. If you want to buy stocks, you will almost always need a broker — essentially, a middleman — to place those orders on your behalf.
What is an example of a broker in marketing? ›
Brokers, most commonly found in the food, real estate, and insurance industries, may represent either a buyer or a seller and are paid by the party who hires them. Brokers often can represent several manufacturers of noncompeting products on a commission basis. They do not carry inventory or assume risk.
Can an introducing broker dealer accept trades? ›
An IBD, otherwise known as an introducing firm, will accept a client's order for a buy or sell. However, it will have an arrangement with a clearing broker dealer, also known as a clearing firm, that will execute the order and maintain custody of a client's securities and other assets.
Is IB broker safe? ›
Interestingly enough, your assets in USD with Interactive Brokers are protected by the Securities Investor Protection Corporation (SIPC). This means that in the event of bankruptcy, customers are protected for amounts up to $500,000. This is a lot more than your assets held in €.
Is IB actually worth it? ›
The benefits you get from doing IB isn't something the other high school curriculums such as A level or AP lack. Sure, IB has a lot of perks but education-wise, all three (A levels, AP, IB) are pretty much seen as equivalent by universities (if my own research has proven correct).
What is the difference between carrying broker and introducing broker? ›
The Introducing Broker brings its securities business to the Carrying Broker for processing. Carrying Broker services may include receipt, custody and delivery of securities, for which it charges the Introducing Broker a fee.
What is the difference between introducing broker and affiliate? ›
The IB's emphasis on customer growth and advancement defines them as partners who care genuinely about their client's well-being. An affiliate may promote many brands or brokers simultaneously, covering a wide range of services. An IB, on the other hand, usually focuses its attention on one or two brokers.
