What Is an Introducing Broker?
An introducing broker (IB) is a broker in the futures markets who has a direct relationship with a client, but delegates the work of the floor operation and trade execution to another futures merchant, typically a futures commission merchant (FCM). The merchant firm is usually a close partner of the broker firm, if not part of the same firm.
Understanding Introducing Broker (IB)
Generally speaking, introducing brokers make recommendations while delegating the task of executing trades to someone who operates on a trading floor. The introducing broker and whoever executes a transaction split the fees and commissions according to some agreed upon arrangement.
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 brokers are registered with the Securities and Exchange Commission (SEC) and are regulated by the National Association of Securities Dealers (NASD) or 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).
Introducing brokers help increase efficiency and lower the work load for futures commission merchants. The arrangement allows for specialization where the IB focuses on the client while the FCM focuses on trading floor operations.
FCMs supply trading platforms on which clients have the ability to place trades online and are responsible for account management. However, the majority of FCMs would find it financially impossible to open offices around the country to serve their customers. This is where IBs excel since they typically operate out of smaller offices located all over the country.
Examples of Introducing Brokers
Many IBs are one-person operations, while others are larger, multi-location businesses. IBs are better able to service their clients as they are local, and 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 do not have the financial resources to execute trades for their clients directly because that requires a direct relationship with futures exchanges and the large overhead of maintaining accounts, trades, and reporting, as well as developing and maintaining trading platforms.
IBs allow FCMs to do business on a local basis while using the FCM's infrastructure for trading.