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Introducing Broker Overview


A changing environment


Tis changing industry environment has resulted in more specialized firms who concentrate on particular products and solutions for their client base. In a market where brokers/ FCM’s are seeing consolidation, IBs (along with the technology support firms) serve as the main innovators and developers of new products and trends. In order to better understand the options available to clients, the IB market can be broken into general categories that describe the focus of an IB:


• Rebate brokers • Customer Service Firms • Trading Signals • Social Media sites • White Label Services


Rebate introducing brokers


Rebate IB’s are the largest and most saturated category in the IB space today. Rebates are the return of a portion of the IB’s commission earned from the broker to the retail clients on a ‘per-trade’ basis. Paying clients rebates essentially reduces the spread, or their cost of trading. Tis 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.


An example of how a rebate from an IB might work is as follows:


• A client places a 1.0 standard lot of EUR/USD trade and pays a spread of 1.8 pips


• Te IB is compensated for the trade by the broker who gives the IB a portion of the spread paid by the client


• Te IB then pays the client a portion of their IB compensation


Te rebate would be calculated like this:


• Te client receives $4.00 back per standard lot traded (standard lot = 100K of base currency)


• If the client trades 85 standard lots in a month, they would receive $340 in rebates


Tus, clients who receive rebates from IBs and brokers are saving money on each trade and reducing their transaction costs.


Rebate programs can be beneficial especially for electronic and automated (EA) traders because of the larger volumes generally traded with automated systems.


However, IBs that are rebate- focused are generally competing on price and do not have attentive customer service or other value-added offers. Akin to low cost airline carriers, customers get what they pay for. Rebates are an interesting marketing tactic. Brokers could just reduce the spreads paid by clients initially instead of having the clients pay a larger spread and then returning a portion. Clients would save the same amount of money in fewer steps and there would be less work for brokers.


Tis rebate model persists likely because clients are accustomed to it, and also because it may be more attractive to clients to feel like they are getting paid, rather than just ‘saving.’


Client service firms


A service-based IB can be thought of as a “forex concierge” for its clients, focusing on finding solutions that fit a client’s individual trading requirements. Tese types of IBs will typically offer other add-ons such as


INSTITUTIONAL FX SERVICES - THE BROKERS HANDBOOK 2012/2013 | 31


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