Forex traders, beware the Introducing Broker

It is common among forex brokers to rely on introducing brokers, or IBs, to acquire new clients. OANDA does not. Even though it costs us business. Here’s why:

Most IBs are marketing experts, not market experts. They don’t really understand the forex market in depth and the vast majority do not act in a trader’s best interest. IBs attract customers—preferably people with little experience in trading forex—and do one of two things: They either sell that customer contact information to a forex broker without the person’s knowledge or consent, or they subtly push customers towards a specific broker, often through a white label arrangement.  It almost goes without saying that IBs bring customers to the broker that pays them the most.  

Most often, the IB gets a portion of the broker’s spread on any trades executed by referral clients. Typically, this compensation arrangement is not disclosed to the clients. Worse, the broker usually marks up the spread by the amount they are obligated to pay the IB. The customer ends up paying a higher spread because they lack a full understanding of their broker’s business model. In fact, often the customer doesn’t even know that their relationship with their broker is saddled by a side arrangement with an IB. 

We believe this is highly unethical. Hence, OANDA does not use IBs or other referred agents in any way.

Raising the red flag on IBs

IBs today are a holdover from the pre-internet era, before the widespread accessibility of information opened up trading to the masses. The IBs of the past played an important and legitimate role. They advised their customers and helped clients navigate the complexities of the forex market. They considered a customer’s trading needs and then recommended a forex dealer that would provide the most benefit based on those needs. Or they provided market insight and helped the customer make the “right” trading decisions. Or they helped them fine-tune a trading strategy. IBs were clearly on the side of the customer and they added value. In return, they were paid for their services. 

But that was in the past. Consider today, when one forex broker says on its website in an attempt to recruit IBs:

Whether you have many personal networks, a high traffic website or are a good online marketer we can work with you to develop a program and remuneration scheme to suit your strengths.

Note there is no mention of the need for expertise in the forex markets.

Another broker web site stresses that becoming an IB is a way to make money in the forex market for those who cannot make money by trading. Imagine the value-add such an IB would provide to clients!

Being an IB has degenerated into a way to make easy money. So much so that the IB landscape has become crowded. This has led to even more perversion. Some IBs offer rebates to the customer from the money they earn from the dealer. In essence they are "paying" back a portion of the money the customer unwittingly paid to the dealer for the IB's "services".

Professional traders are not immune to IB scams. It's not unheard of in the forex industry for IBs to recruit traders at businesses and smaller institutions by offering them kickbacks to trade through a particular broker. Such deals are made without the knowledge of the business/institution that employs the traders and are, like all secret kickback arrangements, highly unethical due to the one-sided self-interest.

Who benefits? The individual traders, the IB, and the broker. Who is screwed? The businesses and institutions that have no say in the matter.