The FX Middle Man – An Effective Sales Tool for Brokers
New websites dedicated to rewarding active traders are on the rise, is it a short-term spike or a genuine business
New websites dedicated to rewarding active traders are on the rise, is it a short-term spike or a genuine business model?
On-line Foreign Exchange trading has been gaining momentum over the years as investors’ understanding of financial markets is evolving and access to financial products is readily available through the internet and mobile phone. Forex brokers have been spreading their message through many mediums including offline and online sources as they attempt to benefit from the promising growth in FX.
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Traditionally, a banner advert was placed on a popular website and the broker was charged through a variety of options such as; cost per impression, click-through rate or once a live (funded) account was opened. Forex related words are heavily searched on google and the number of Forex related websites boomed. This has resulted in a congestion of information on the main FX portals, many of them have over 15 brokers all trying to fight for the most prominent positions. It seems the portals were losing their charm and traders weren’t finding good content on their sites that help them in their trading.
Consequently, a new type of portals has arisen providing brokers with their new ‘bate’, enter the cash back or rebate portals.
The concept which started a few years back is based on the traditional introducing broker/ agent model where an entity (the IB) is rewarded for making introductions (clients) to brokers. In this model the cost the end-user pays (spread) is shared between the IB and the end-user, thus benefiting the client, the IB and the broker. The model is very useful for brokers because it is focused on active traders thus filtering out novice or one-off traders and generates healthy volumes.
The procedures are very simple, the trader trades with their appointed broker that the cash back/ rebate website has an IB relationship with. All rebates that are accounted for by the trader are input to the IB’s merchant account. At the end of the month the IB passes back the set amount to the client.Tobias Dijkstra a trader from Netherlands trades FX regularly via a cashback site comments: “I have received my payment from them in my Paypal account on time”. Apart from the rebate element traders are anxious about getting funds paid back as it shows the IB is genuine.
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The rebate sites are an excellent enhancement to the traditional news sites as users are active traders, thus eliminating the information seekers. Furthermore the rebate sites have included many features like; live news, brokers review and forums thus providing the user useful information which keeps them hooked to the cash back website. The rebate sites can support a broker’s sales strategy and provide a regular flow of clients. Owen Kerr, Director of Pepperstone an Australian FX broker says “Rebate providers are great advocates for our business, they help clients avoid the pitfalls of selecting a broker, including steering clients away from some of the more unscrupulous operators in the Retail FX marketplace”. Traders in FX markets use websites, forums and review sites to assess brokers, Owen adds “Having a 3rd party endorse your firm gives clients confidence in their broker and generally results in higher deposits”.
How much of a competition are these sites for FX brokers? There are two sides to this point; on the one hand rebate / cash back sites bring in the high-end clientele – active traders who are looking for brokers that are willing to share a piece of the cake, this could mean an influx of 5 to 10 live funded accounts per month.
On the other hand, brokers and rebate sites are both competing against the same client; consequently this has led to brokers offering clients rebates on their trades. With pricing already shrinking on major instruments like EUR USD and FTSE the key question is; how far brokers will stretch their offerings, rebates of >50% of the spread?
Nonetheless, rebate sites will continue to be popular as FX traders are always keeping up to date with the industry in general.
Alex Ivanov of FXRebateGurus, a popular rebate site, shares his experience of what attracts traders to rebate sites “We find that many clients would simply go with the highest rebate offered, even if it means they will pay more in transaction costs overall. So psychologically the client loves to get a great deal”. In addition, the larger rebate portals have direct relationships with managers at many brokerages, this is useful for clients because if there are any issues or concerns the rebate portal acts as an intermediary to resolve the issue, an added service Alex’s team provides.
Rebate sites will need to ensure they have a selection of tools and resources for traders as the number of rebate sites grows and traders look for useful add-ons apart from the simple cash back offers, signal services have become very popular as they complement the new copy trade concept thus giving retail traders more of a reason to continue trading.
FX brokers should take the rebates sites with a pinch of salt as these relationships can change dramatically. The friend can easily turn to foe as rebate sites hold a handsome database of live, funded, traded – active accounts. In this context we can reflect on a famous quote by Edward Dahlberg “A strong foe is better than a weak friend”. Advancements in technologies, (full front to back platforms), reduction is set-up and operational fees and consultancy services (regulations, company formation) for start-up brokers have made it easy for new firms looking to get established in the world’s most liquid asset class and who is positioned better than cash-back sites to make this step?
Hi Adil,
Nice post! – It is tougher to be an Introducing Broker now a days. Part has to do with regulation, but also, FDMs are competing with Introducing Brokers for the same market. The only Introducing Brokers around are those with a good solid product.
I like the cash rebate business model. Traders however seem to be demanding a lot. FDMs are providing traders with fairly good value for cheap. Hard to compete with that. So in my opinion, this business model should be complementary to a better bread and butter innovative product.
Personally I dont see this being sustainable for very long though I suppose it is a great gimmick to get IB business quick (at the expensive of your own sales team). If its a true “active trader” than I’d rather have the tightest spreads to begin with by going direct and not through a 3rd party (which adds cost) and then have to wait a month for a promise I’ll receive my rebate back (another risk) – for what exactly? Seems like a product for the uneducated active trader that any broker could easily match if they wanted to with… Read more »
I agree Lup, however if you look at the nature of an IB’s business it’s changing as the market evolves, introducers use to be semi-professional financial guys sitting in a 2 ft squared cleaning cupboard at the back of a market (kiddin), now you have the influx of signal providers,EA makers, education providers etc etc, all potential IB’s. I think IB’s still have a place in our market as there are many untouched places. Th education providers from Singapore went to Malaysia and generated healthy client numbers, now they’re targeting virgin markets like the Philippines, in the UK senior traders… Read more »
But Matthew we have to appreciate that there are many traders who dont have the high balances to open accounts with pro spreads, plus getting some money at the end of the month is a confidence boost
Types of deals like this really depend on the broker. If the broker is catering to B2B customers, than they will generally have wider spreads to compensate for their IB’s, affiliates, etc. Therefore, traders going directly to broker may not be able to pull of a 1 pip spread reduction that would have gone to the IB instead. I agree though that these rebate deals do appeal to the less experienced. However, by the amount of people I have been asked these systems by, it really seems that a large percentage of clients aren’t going shopping for better rates or… Read more »
The broker’s could offer lower spreads if they wanted to, but they wont. I think GoMarkets and FX Open ECN was one of the few brokers to do this. I guess it’s how wholesale vs retail works.
The rebate industry as a whole is a huge negative on retail FX. -Brokers are nearly forced to use some sort of IB system that includes the rebate providers since traders are now expecting rebates (that is, they can’t shun rebate providers through their IB program.) -The rebate providers are taking a slice that could have been passed onto the trader in terms of a lower transaction cost. -Traders have to give up their personal and account info to the rebate provider who can then use it for marketing purposes. -ISVs and other ‘value add’ business models that rely on… Read more »
Ok, maybe that last line was a bit over the top… I just feel pretty strongly about this subject and the article was very one-sided (there was zero balance in this article, biased and lacking of any ‘counter view’ talk, kinda promotional in nature.)
a bit over the top yes 🙂 but i see where you are coming from, indeed it lacked ‘negative’ feedback but the idea was to talk about the industry which not many talk about and as it was quite broad and initial article we didn’t look for the negative side, yet. it’s like writing about forex brokers in general and what they offer and not let traders give their negative feedback – which would be overwhelming right? people always will write more negative things than positive ones, that’s how the world works
@Michael Greenberg Right, I understand that providing information about an industry that could otherwise be unknown to the reader within a controlled medium is a good method of spreading the right message without distractions. However… I do feel that journalists and news sources have to strike a balance between pleasing their sponsors and servicing their readers. So when I read articles like this, my mind searches for the objective of the message over what information is being presented, and if, as a reader, that message is in my best interest or someone else’s. Further, if we compare this to talking… Read more »
i appreciate the comment and i accept your point, the article could have been more balanced, though i feel it’s not totally out of balance even now.
but why would you say we are pleasing our sponsors? what rebate sponsors do you see advertising with us that we supposedly pleased? coming from journalist’s angle i can tell you that readers like you are too quick to press the ‘you operate on hidden agenda, you please sponsors, you are imbalanced, etc’ trigger. not all news sources are corrupt, yet.
Gah, I was afraid that might be taken the wrong way. I was speaking very generally about all news/media agencies with the ‘sponsor’ comment. I wasn’t trying to suggest the article was ForexMagnates working a sponsor.. just that readers have to be aware that sometimes a journalist’s views might be suppressed should it conflict with who pays the bills. It’s not even about corruption.. every news source plays to it, especially the ones that are very focused on a niche subject. I get that and I’m not saying it to put anyone down. “readers like me” don’t charge others with… Read more »
i know 🙂 just heard it so many times when someone doesn’t find an article perfect that i had to respond… i know it wasn’t your intention.
thanks for the feedback, any feedback is of value to us, and liking our site, hope to see more of your comments going forward
Jack appreciate your comment and as Mike said we are grateful for the feedback, I like the rebate industry as a whole, I think its innovative and creates a new sort of buzz for the industry, and if you look at the type of rebates retail traders get back its quite promising. Your main concern about pricing is correct however in a way we can say that about other industries, look at the prices discount stock brokers charge in USA as compared to the full service. Same thing applies to the car industry the Japanese car makers entered and tried… Read more »
It costs money to acquire a customer and every firm is looking to manage it. A broker provides a service in bringing together two parties who otherwise wouldn’t have met. Without them the onus is on the dealer to be the marketer. If the IB is willing to bear the expense of the initial customer acquisition, they deserve to be compensated. It’s nothing more than an outsourced sales team. IBs used to earn a commission (fully disclosed) now it’s a rebate (usually concealed). No FX firm will expose their cost and add a commission like is done in some (not… Read more »
The argument that brokers could offer lower spreads if they didnt pay a rebate to cashback sites is….not correct. If they didnt pay IBs, they would pay a substantial marketing cost elsewhere and would still need to absorb that cost into their spread. (The cost per acquisition is very high in this industry and the net value of each client can vary considerably). A ‘cashback trader’ gets an on-going monthly reward (reduced spread) and the broker gets a loyal trader for free rather than pay a large initial sum for a ‘promotion incentivised’ client who usually leaves the moment the… Read more »
@Mac – was thinking of your comment as I was posting the article. Props on the call. Although, still am not seeing that brokers are moving clients away from MT4. If anything its at least going both ways. In terms of costs, most brokers that own their platform are paying less for trades executed on MT4. There are always the total lifetime revenue comparisons between using different platforms to consider, but very few firms are conducting that analysis.
@Mac – was thinking of your comment as I was posting the article. Props on the call. Although, still am not seeing that brokers are moving clients away from MT4. If anything its at least going both ways. In terms of costs, most brokers that own their platform are paying less for trades executed on MT4. There are always the total lifetime revenue comparisons between using different platforms to consider, but very few firms are conducting that analysis.
this is actually a very good point, however do really brokers make this distinction and offer lower spreads to cashback clients? i doubt.. they just pocket what they can
IB’s have an important role in every broker’s marketing strategy. There are also a type of IB which is called local representative that’s extremley useful for startup firms who don’t have it’s website available in many languages. These local reps can help spread the word of the new broker both offline and online in their native language, help people with account opening procedure and all kind of stuffs a new trader needs.
Just to be candid, I work for a Forex rebate provider, which I will not name here, since it is irelevant to my response. In response to what Jon wrote, I would like to say that I have heard this point of view many times, and I feel it is a skewed view of how the rebates system works in general. I can see how a person could arrive at this conclusion, but allow me to fill up the gaps for you. Brokers are not paying rebates, IBs are. Brokers pay IBs out of their marketing budget. The IB model… Read more »
I will give my opinion as having been in the rebate business for over 2 years. The forex rebate model has become a big part of the forex retail market, and is here to stay. Brokers are able to acquire clients for no money up-front which is a great advertising tool. The truth is that the forex market has a really high turn-over, traders get wiped out quickly, which is unfortunate but true. So this creates a need for constantly having to advertise and capture the newcomers to the business. To the comments that brokers should lower their spreads instead… Read more »
Alex makes an important point about not wanting t The rebate provider I align with makes sure that they receive the same pricing as everyone else; that those accounts with IB agreement are not being fed artificially inflated spread. The rebate provider will actually kick out a broker if they catch the broker using deceptive practices. It’s also good to be able to contact an honest rebate provider and ask them if there are reports of slowed execution, reversed trades, etc. This is where the social media aspect can be helpful…..similar to other forex forums other traders can share ideas.… Read more »
Forex Rebates websites and Middleman (Ibs) are very important in the Forex Retail market as they provide alot of infromation and advice to retail clients. In certain markets, they make the retail cleint feel more comfortable to trade and open an account with a broker, It is alot harder for Ibs to work due to all the regulations but still they bring alot of business if you treat them right and pay their rebates and commission on time as I have worked with many brokers and IBS can bring lots of business and especially in emerging markets such as India,… Read more »