IB Compensation

Information on agent compensation would normally go under the Broker section (below). The reason we decided to include it in a separate section is because it is probably what the novice IB obsesses over most, and that's what can easily lead to their downfall.

The ABC's of Agent Compensation

abc's of agent compensation

The way Forex Introducing Brokers get compensated is very simple. Transactions = Compensation. Whenever a client that an agent directs to a brokerage firm executes a round-turn transaction (meaning he opens a trade and then closes it), that agent receives a commission or rebate. This is similar to the futures industry. The amount of this payment is stated on the agreement the IB enters into with the brokerage company, but in general, varies between $1 and $10 (or approximately 0.1 pip to 1 pip) per standard lot of currency traded; where a "standard" lot represents an amount of 100,000 units of the traded or "base" currency.

Typically, at the end of the month, IBs receive an amount of compensation that's proportional to the total volume (or lots) their customers have traded for that month. Introducers can check their payments, client volume, and other statistics by logging into the "back office" interface or software of the brokerage firms with which they work.

Because the success of an IB depends on client volume, IBs should naturally go to the broker who pays the most for that volume if they want their businesses to prosper, right? 

WRONG!

Making Rebates a Priority Over Customer Needs – An IB's Downfall

making rebates priority customer needs

When we speak to a potential referral agent for the first time and we get questions like, "Broker A pays me X pips per trade. How much can you pay?" we begin to worry. Why? Well, first of all, when IBs make their level of compensation their top priority, they are firstly showing a lack of concern for their customers, and secondly, they are putting the long term success of their business in jeopardy. Here's why.

When IBs sign up with the firm that offers the highest payout, 10 out of 10 times that firm is the one that rapes the customer by delaying trade executions, manipulating prices, trading against the customer, hunting stops, etc. In other words, in order to make up for the "high" rebates they are paying their agents, the brokers run clandestine dealing desks and make a market against their clients. And who winds up paying for all of this? You guessed it. Mr. Customer!

The problem with this business model is that the customer eventually gets tired of experiencing the excruciating pain of horrible execution quality, withdraws whatever funds (if any) he has left, and leaves. The Forex IB then needs to find the next customer (or should we say, "victim?") to start the process all over again.

So initially, introducing brokers may think they are going to make more money with firms who promise the world, since their commission rates will be higher; but eventually, reality sets in and the IBs find out that they are actually making less because of the shorter "life expectancy" of their client accounts.  Introducers who feed their customers to the sharks like this cannot grow their businesses very fast and usually will not be in the foreign exchange business for very long.

In conclusion, if the brokerage firm the agent works with does not offer a high quality of execution (one of the most important benefits for customers), no level of compensation would be sufficient to make the IB business successful (more on execution quality later).