The Foreign Exchange Market is a niche market that always has new phenomenon cropping up in every corner one looks. One such phenomenon is that of the Introducing Broker (I.B). In definition, the IB is an agent whose work is to introduce new clients to the Forex brokerage firm that they work for. They are also responsible for receiving orders that come from retail and in other instances corporate customers. Traditionally, the role of a Forex broker was to act as an intermediary between the clients that solicit their services and the inter-bank market where the trading of currencies would take place.
The Forex brokerage firms often give the Introducing Broker a lot of information about the referrals that they are to deal in. This information is provided solely to ensure that the Introducing Broker facilitates in the fostering of good working relationships with the clients. This is in contrast with Forex affiliates who are often given very little information about the undertakings of those clients that signed up underneath them using their affiliate link. This scenario puts the I.B in a position of responsibility, responsibility that entails the fostering of good relations with the clients in order to ensure that they choose the Forex brokerage after setting up their live accounts.
Apart from fostering good relations with the clients, the Introducing Broker is responsible for sending customs to the brokerage firm. In return for this business gesture, the Introducing Broker receives a certain fee that is usually a share of the commission that is charged by the brokerage firm. It is important to note that the brokerage firms operate within regulations such as the National Futures Association (NFA) in the United States of America (U.S.). These regulations ensure that the brokerage firms check up on their Introducing Brokers regularly to ensure that in every action they undertake, they are promoting the firm in a way that is within the regulations set.
Why the rise of Introducing Brokers?
The main rationale of brokerage firms in creating these Introducing Broker programs was to significantly reduce the cost that was involved by them acquiring new customers. The marketing side of things has thus left to the companies that were associates and those brokers who were providing their services on the commission only basis.
This new system operated on the basis of the Introducing Brokers earning commissions that were based on the particular volume that had been traded by their clients. This created a situation where the Introducing Brokers would always wish for the success of clients, considering this would means more commissions for them. A ‘win-win’ situation was thus created.
Additionally, this system became very popular due to its system of rebates. The Introducing Brokers could share a part of their commission with anyone who had decided to sign up under them. These rebates would amount to a significant sum overtime and by so doing create an interest in more people being interested in signing up due the perks provided.
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