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An introducing broker (IBs) represents an entity that is facilitating the relationship between the clients and the broker or futures commission merchants (FCMs).
Introducing brokers are generally seeking to provide an added value to the relationship between the parties by offering support or specific services.
These may or may not be a subsidiary of the broker.
Introducing brokers do not hold client money, execute orders or provide any trade-related services to the clients.
In developed markets such as the United States or United Kingdom, the business of introducing brokers is also strictly regulated.
Traditionally their primary function is to provide customer service.
Introducing brokers can operate out of offices located globally. They solicit business for brokers, though many of these can even represent single-person operations.
By extension, other introducing brokerage operations can scale to be much larger, traversing multi-location businesses.
What Roles Do Introducing Brokers Execute?
Traditionally, introducing brokers are better able to service their clients as they are local, with their primary goal being customer service.
Brokers usually focus their efforts on executing trades and the maintenance of trading infrastructure.
Consequently, outsourcing the prospecting and servicing of clients to introducing brokers creates economies of scale for brokers.
Many introducing brokers lack the raw financial resources to execute trades for their clients directly.
This is due to multiple factors, the main deterrent being that direct execution of trades requires a direct relationship with exchanges.
One of the primary expenses of an introducing broker is advertising. To help address any pain points in cost, some brokers focus on their local market and depend on referral business.
In the FX industry, like any other, brokers routinely use a large portion of their budget on advertising to bring in new clients and replace any clients who incur losses.
This helps create an additional window of utility for introducing brokers in the overall relationship with brokers.