What Is an Introducing Broker Dealer?

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An Introducing Broker-Dealer, usually just called an Introducing Broker, or IB, is one who does not hold customer funds or securities but who guides customers and transactions to a clearing broker.

Functions

The functions of an Introducing Broker (IB) may include: attracting new clients to an asset management company; helping with the marketing; conducting specialized seminars and lectures; advising clients on the use of software; explaining the structure and function of the company's website to clients; and providing clients with the necessary technical and training support.

Benefits

Many traders regard the Introducing Broker as a "middleman," and they would prefer to work directly with the clearing broker. But Alexander Nekritin, the CEO of a forex IB, writing in Trading Markets in August 2010, listed three benefits of using the Introducing Broker: leverage (the "clout and support of your IB" can assist you in case "you run into a problem with the clearing firm"); value added services; and the volume-based trade rebates many IBs offer.

History

In the 1990s there was a good deal of litigation over the role of Introducing Broker, especially as it related to the arbitration clauses into which the clearing broker and the customer conventionally enter. Such agreements may provide, for example, that "all controversies that may arise between us concerning any transaction or the construction ... of this or any other agreement between us ... shall be determined by arbitration." That language comes from the contract that was in dispute in Arrants v. Buck Jr., a dispute resolved by the Fourth Circuit Court of Appeals in 1997.

In that dispute, the Introducing Broker and its employees argued, after customers Frankie and Danette Arrants had filed suit against them for securities fraud, that the Arrants were required to proceed to arbitration rather than to the courts. Prudential Securities, the clearing broker, was explicitly a party to the contract with the Arrants' and that contract has an arbitration clause. F.N. Wolf and its employees, Buck and Hubbard, argued that there was an "established course of dealing between it and the customers" that established that Wolf had become a party to the Prudential Agreement.

Decision

The Fourth Circuit, following a trend by this time well-established in the federal courts, rejected the course of dealing argument. "F.N. Wolf was simply not a party to, and was not covered by, the Prudential Agreement. As a result, there was no agreement to arbitrate between the customers and F.N. Wolf," wrote Circuit Judge James Michael.

CFTC Rules

The U.S. Commodity Futures Trading Commission's rules require IBs in the futures markets to register as such, unless they qualify for quite narrow exceptions.

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