Last week, I gave a helicopter view of the FX business in China, and this week I’ll go more into more depth about the Introducing Brokers, or IBs, in this exciting market.
We have just finished 3 successful days at the Shanghai Moneyfair – the biggest expo related to FX in China, with an estimated 200,000 visitors over the weekend, and with just a few exceptions, all brokers focusing on China were present on a big scale. At the event, roughly 50% of our meetings were with existing or aspiring IBs, showing the major importance of this distribution channel.
IBs in China
An IB is an individual or company that refers clients to a broker, and in exchange earns a referral fee. The referral fee can be a one-off fee per client, or a share in the broker’s profit throughout the lifetime of the referred client, also referred to as a rebate.
There are many different types of IBs in China, but most fall into one of these categories:
People with Connections
People who can open doors and introduce a handful of traders to the company, may not provide any other value-add than the introduction, and does not have any kind of organization around them. The introduced clients rely on the broker’s sales and support organization.
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Ranging from local asset management companies to offline educators, the offline IBs will typically have medium to large organizations around them, including marketing, sales and support. They are typically geographically limited, so they will have a significant presence within a city or a province but do not reach out beyond that. These IBs will typically bear the brunt of the support burden, and liaise with the broker on a more B2B level.
These IBs will typically be content creators; this can be financial news and analysis or trading ideas and recommendations. Their IB relationship with a broker can take many different forms, either by allowing the broker to advertise through display media on the site, or by content-sharing of broker generated analyses, or even trading competitions and the like. Much of the Chinese FX media space used to operate in this manner, but given the increased competition between brokers, the media has changed towards pure media deals rather than IB setups, as they have proven more lucrative.
Online Rebate Websites
Rebate websites will take the rebates earned from introducing clients to a broker, and share these with the clients themselves, effectively offering retail clients a better spread by going through them rather than going to the broker directly. It’s a model that has been resisted by many brokers for a long time, since it ultimately just reduces the broker’s profitability, but the sales and support burden is unchanged as the rebate websites simply refer traffic to the broker. They have gained popularity though, and these days most brokers are represented on their sites.
The Future of IBs in China
As I wrote last week, trust is a big issue in the Chinese market. Most Chinese traders will be reluctant to outright trust a foreign broker, and instead prefer to follow the recommendations of an IB. This is not much different from how the more mature markets looked years back, but here the influence of the IBs has reduced over time. So the question is whether this is going to happen in China as well? Certain brokers are betting on this, reducing their spread in an attempt to cater directly to end-clients.
I believe the IBs will continue to maintain their influence in the market for the long run, given the amount of brokers operating here, while the individual traders will continue to look to the IBs for recommendations as to who to trust. On a positive note, we see many IBs offering substantial additional services to their clients, generating a true value-add for going through this channel.
We decided from the beginning to focus mainly on these kind of partnerships when building our organization. We wanted to build a partnership offering where we work with the IBs in building the businesses, and sharing the experiences we ourselves had from running the retail teams at the global brokers, so that individual IBs may optimize their own sales process as do the big players in the industry.