An Introducing Broker (IB) is a futures broker who delegates the work of the floor operation, trade execution, accounting, etc. to a Futures Commission Merchant (FCM). In this relationship, the FCM maintains the floor operation and the IB maintains the relationship with retail clients. This is efficient because the work of a floor operation vs. the work of maintaining relationships and meeting the needs of retail customers have different requirements.
Another way to think of an IB is that of a segmented firm. The IB is not a middleman, but is in a partnership with the clearing firm. The clearing firm manages the floor and back office ops, and the IB is free to concentrate on his/her customers and their trading.
Several myths concerning IBs need debunking. First of all, the notion that an introducing broker is a “middleman” or that fees or commissions are necessarily higher is wrong. It’s also wrong to say that an IB is a branch office. Yes, an IB may have branch offices, but an IB is not a branch office of a FCM. The IB is in a business partnership with an FCM, each handling their own piece of the work.
When it comes to ordering, if you are trading through an IB, it need not be any less efficient than trading with a vertically oriented firm that does everything. When you call an IB with an order, s/he can relay that order directly to the trading floor, or even give clients direct access to the floor themselves. If you call one of the big, vertically integrated firms your order is likely to take as many or more steps than it would with an IB.
In terms of commissions, an IB may maintain a low overhead and that lets him/her charge reasonable fees while maintaing a lot of support and specialized service that a big discount firm simply can’t provide. There’s more to trading than commissions, although most novices don’t understand that.
I would say that the bottom line in choosing a broker depends on several factors:
- The type of trading you do
- The level of assistance and support you require
- Your ability to watch the markets all day
Pick someone you are comfortable with. Make sure you know who the clearing firm is. Call the NFA and ask about any complaints or the disciplinary history of the firm. Don’t ever let yourself fall victim to a high pressure sales pitch; that is in fact illegal. There are a lot of brokers out there, take your time and make sure that the one you choose is a good fit for you. There are plenty of good brokers out there.
There is one wrinkle, however. Your trades may experience price improvement — or may not — depending on the large brokerage firm that executes the trades you submit via your introducing broker. See the article on price improvement in this FAQ for more details.
Article Credits:
Contributed-By: Craig Harris