An introducing broker (IB) is an individual or organization that solicits and/or accepts orders to buy or sell futures contracts, forex, or commodity options, but that does not accept money or other assets from customers to support the orders. The Introducing Broker has a direct relationship with its clients, but partners with a merchant that handles the trading floor and trade execution operations. In the U.S. most brokers will not partner with an Introducing Broker unless it is registered as an IB with the CFTC and NFA. (For more on forex options, see Getting Started In Forex Options.)
IBs provide specialized customer support and usually earn commissions on each of their clients’ trades. To stimulate business, IBs are often provided with perks that can be passed on to clients, including access to value added services, such as advanced charting software, and volume-based trade rebates. Some IBs, particularly those with a very large client base, offer their clients a rebate on every trade. Since many forex traders make many round-trip trades each month, the rebate savings can be substantial.
CFDs, Oil and Metals
Not all forex brokers allow clients to trade the CFD, oil and metals markets. A CFD is a “contract for difference” where differences in settlement are made though cash payments instead of the delivery of physical goods. If a trader wishes to participate in these markets in addition to forex, he or she should confirm that the broker offers access to all of the markets. At times, the trader may need only open a different account with the same broker to provide the ability to trade in all of the markets. Due to the close relationship between oil, metal and currency prices, and because many currency traders actively follow the price of oil and commodities, many forex brokers have chosen to add these markets to their product offerings.
Traders can use hedging as a means of reducing risk. A forex hedge exists when a currency trader enters a trade with the intention of protecting an existing or anticipated position against an unwanted move in exchange rates. A trader who has bought a currency pair (entered a long position) can use a hedge to protect against downside risk, and vice versa. Direct hedging occurs when opposing trades are entered simultaneously; for example, a trade to buy a currency pair entered at the same time as a trade to sell the same currency pair. The net profit is zero while both trades are open, but the idea is that one of the trades eventually will make money and the other position can be closed. Brokers will state if they allow direct hedging. If not, more complex hedging methods, such as forex options, might be used. (For related reading, see A Beginner’s Guide To Hedging.)
A scalp is a very short-term trade that can be applied to the forex markets. These trades can last from a few seconds to a few minutes, and are intended to take small pieces out of the market on a frequent basis. Scalpers often trade using very small chart intervals. A challenge with scalping is that, since a typical winning trade is small, depending on the size, one or two losses can wipe out dozens of small wins. But with the right trading system, scalping can be a profitable means of participating in the forex market, especially for traders who like fast-paced action. A scalper should only trade the most liquid markets during times of high volume, using a broker that provides fast and reliable quotes, as well as an easy-to-use trade entry platform. (We look at what scalping is, how to do it and the characteristics of a successful forex scalper. For more, see A Beginner’s Guide To Scalping In The Forex Markets.)
In the foreign currency markets, a dealing desk is the location of a financial institution’s forex dealers. A dealing desk may, in reality, be a large facility staffed by dozens of traders who specialize in specific currencies and who offer support and assistance to traders. The dealing desk executes trades on behalf of the firm’s clients. A drawback to dealing desks is the chance that a trader will receive a re-quote – the rejecting of a client’s original order that is followed by a new, worse price that the client can either accept or reject. In fast markets, re-quotes could happen multiple times, resulting in losses.
A more direct method of accessing the forex markets may be the no dealing desk broker (NDD). This is a preferred method for many professionals and one that allows traders to access the interbank market directly without the need to go through a dealing desk. NDDs work with market liquidity providers, such as global banks, financial institutions, and other market makers, to get the most competitive bid and ask prices. A computer typically selects the optimum buy and sell prices from amongst the NDD’s liquidity providers, and the prices are shown to clients via the trading platforms. NDDs provide an automated process that is generally considered to be fast, transparent and fair.
Whether a trader uses a dealing desk or no dealing desk is a matter of preference, but either way, the method by which a broker handles trades should be investigated and understood.