We have watched the industry change over the years and with it the Introducing Broker has become less relevant. Initially IBs could run a real business receiving rebates in the 1-2 pip range. As the larger brokers were determined to compete for market share, they began to reduce spreads. This strategy was very successful for onboarding the retail client.
Unfortunately for the IBs, however, this crushed their business. As margins became slimmer and the cost of marketing increased, profitability was diminished and there was no room left (outside of markups) to pay IBs the commissions they were used to. Given these developments, how do IBs survive and (perhaps even more to the point) why should a retail trader open an account through an Introducing Broker?
The idea of better service could be an angle, yet would anyone really open an account with a broker who doesn’t offer good service in the first place? Probably not. IBs need to find new ways to add recognizable value. Teaming up with quants and technology firms may be the answer. New trading products and systems have always proven to be a successful sales strategy. Having multiple offerings is one way to stay relevant – and in business.
By teaming up with quants to create algorithms, indicators and trading strategies, IBs can add value. Although as we all know, systems have their good and bad markets.
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Another effective strategy to build a sticky client base which has worked over the years (and still works to some degree) is to team up with a technology company and build new front-end trading systems. MT4 dominates the market as a whole but there is room for additional modern front ends. One firm that has done a great job keeping and growing their client base is a U.S. based company called FAST Brokers.
FAST Brokers built an interesting platform that enables traders to open accounts at multiple brokers and aggregate their feeds into one tradable price, essentially creating an ECN style front end. The platform tracks your net position as well as the positions at each retail broker. There are other value added features to the platform which retail traders enjoy. After speaking with the CEO of FAST Brokers I learned that he had upwards of 10,000 retail customers at his peak. The customers would only trade at the firms to which his platform is connected.
The example of the FAST Brokers business model is where the IB industry needs to go if it is to survive and flourish. IBs must create value for clients to build customer loyalty thus creating an advantage over a direct relationship with the retail forex broker. Once the loyalty is there, the IBs have a valuable asset which brokers will cater towards. IB’s will then be able to charge customers for the value add. Increasing the spread upwards of 1 pip should be easy to ask for. People in general don’t have a problem paying for things that help make them money, especially when it can be clearly demonstrated.
In closing, IBs need to move toward relationships with strategic partners such as technology firms or quants. They should reach out to their customers and find out what’s missing (if they don’t already know it), do some research and create a plan. The next step would be to self-finance or reach out to the many venture capital firms focusing on financial technology. VCs are on the constant search for new products. IBs have the best access to the end user and an immediate client base should they roll out new products. Perhaps we will see some IBs with new technology filing for IPOs in the coming years.