The most straightforward explanation of an IB is a company or salesperson that refers retail customers to brokers or futures commission merchants (FCMs) for a commission. This changing industry environment has resulted in more specialized firms who concentrate on particular products and solutions for their client base. Thus, clients who receive rebates from IBs and brokers are saving money on each trade and reducing their transaction costs. Developing a comprehensive understanding of what customers need allows the service-based IB to identify the right broker for a client as well as additional services they might need to achieve their trading objectives.
Service-based IBs also serve as advocates for their clients when there are trading issues, often allowing traders to solve a problem with just one phone call to their IB. Clients who use white labels get access to a new class of smaller more nimble brokerages potentially able to provide tighter spreads, client services, technology and the trading parameters that clients want.
For those traders who decide that working with an IB is good solution, there are factors to help make the correct choice. Firstly, consider what services or offers are most important for trading: initially perhaps the client is most concerned about getting the lowest trading costs possible. While the basic idea has been around for some time, there remains confusion as to the value of using an IB and its role in forex trading – ultimately to be beneficial along the supply chain.
Typically there is no cost to the retail client when using an IB as they are compensated by brokers.
Competition for clients has led the IB to expand the services they offer to include rebates, trading signals and an enhanced customer service. As the FX industry handles the sweeping regulatory changes which are a result of the global financial meltdowns, introducing brokers have been forced to adjust their business models.
Rebate programs can be beneficial especially for electronic and automated (EA) traders because of the larger volumes generally traded with automated systems. Generally a service-based IB’s relationship with brokers also benefits retail clients since the IB can help clients secure bonuses and other offers they would otherwise be unable to access. These clients derive value from having a dedicated point of contact and the ability to reach them for problems and questions.
An FX client should contact both price-based and customer-service brokers to determine the value package when shopping for a broker. The signals can come from any number of traders, both new and experienced, and can allow for clients to diversify into multiple automated and discretionary programs. White label firms are brokers who outsource their liquidity from an FCM and act as their own entity. If the FCM that is behind the white label goes out of business or is closed down there could be issues with delays in the transfer of funds and new trading conditions associated with the FCM or brokerage to which they transfer existing client accounts.
It may be the client would prefer to use a professional's advice about what for investing or perhaps prefer to follow money manager trades.
The brokers benefit from this outsourced sales force by gaining clients and IBs are able to generate income from their leads.
Brokers could just reduce the spreads paid by clients initially instead of having the clients pay a larger spread and then returning a portion. They service all aspects of the client accounts just as a true broker would, including an operations department, trading account parameters, technology solutions, firm strategy and marketing. Clients should be aware of the brokerage actually clearing the trades so that they can evaluate these conditions. This model was started by IBs to attract clients with lower-cost offerings, but as the market evolves rebates are now also directly offered to clients by brokers and FCMs. Clients would save the same amount of money in fewer steps and there would be less work for brokers. Service-based IBs can be a great asset for clients in terms of broker access and general market knowledge. The difference from an genuine broker is that a white label firm does not actually clear trades or, in most cases, hold client funds.
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