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Again, sorry about your experiences. But there are some points to clarify. I'm not doing this to pick on you -- people new to futures trading often do not understand the ins and outs of the firms and their relationship to their customers, and this is an opportunity to help make some of the situation more clear to traders who aren't sure about what they are getting into.
Margins are up to the FCM, not the IB. In essence, an FCM is your broker and processes all your transactions and holds your money. An IB just finds customers for an FCM. Sometimes they provide additional services that the FCM does not. Generalizations are, as always, risky. Don't do business with someone you don't know anything about.
I am also sorry to tell you, but $500 margins, generally speaking, are insane, and a cause of customer losses because of the higher risk. IB's may push them, but they don't provide them. If they are pushing them, they're pushing the FCM's margins. Many FCM's offer them because of customer demand from new traders who don't understand risk. You may have been lured into starting an account by the IB based on the margins, but if you had contacted the FCM directly, they would have told you about the same margins, since they are the ones who set them.
Not exactly. It's a little complicated, but has no actual direct relevance to you as a trader.
There is a group of firms formally called "clearing firms," but you as a trader will never deal with them. Every FCM has a clearing broker and a few also are clearing brokers themselves. The clearing brokers are part of the basic infrastructure of the futures market. The term "clearing" is often used loosely (sometimes by FCM's or IB's). But it's a very specific function. https://www.cmegroup.com/company/membership/clearing/cme.html
Most FCM's use third party software (software development is a separate business and is not that easy), and most IB's just get you access to the software the FCM provides.
This may have been a legitimate concern based on your experience, but the IB never had your money in the first place. It was always with the FCM.
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This could go on and on. Bottom line: an IB's business is to get customers for one or more FCM's they represent. They get paid for it, which is built into the commission you pay, based on their deal with the FCM. An account opened directly with an FCM may or may not have different commissions.
If they provide something of value to you, that's great, and you should know about that going in, because it's basically the only reason you should have them open an account for you in the first place. Most FCM's will happily open the account directly, although not all of them will. Some FCM's are not that into providing customer service and some are. Some IB's are and some are not, either.
Although it is all confusing when you're new to it, it's actually pretty simple once you know a few basics.
Sorry to have gone on so long, but maybe some of this will help someone understand all this a little better.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
First off I am not shy of my ignorance but I am shy if being ignorant so please never apologize about setting me straight.
I do have a few relevant points to add.
Yes thank you. A subtle but important difference is that yes, the FCM holds the money, conducts the transactions, charges commissions, sets margins, but I would assume the IBs hold the responsibility for THEIR customers losses, customer support ect?
I know thats a simplification but important distinction.
Also not everyone INCLUDING me has access to all FCMs (obviously).
I am in Canada which severely restricts the FCMs I have direct access to in relation to ones available.
I have, and always was with, Interactive Brokers. Which I love, but hate the platform.
So my setup is Interactive Brokers API'd through Ninjatrader.
No issues EVER!
Then I get a call one day from Mr. IB explaining that because I use Ninjatrader he can offer me access to an FCM that has $500 margins on the emini S&Ps.
In his calls he was a VERY good salesman but I explained I thought $500 margins were ridiculous and that I am a very happy long time customer of Interactive Brokers.
Next thing I knew $500 margins where floating in my head like heroin. Just a couple of good trades a day I thought... I'll still have my main account this will just be a burner account.
I ended up calling him back and putting a few thousand in thinking if its gone I'd already accepted that.
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I went through my emails to prepare for this post for accuracy.
Here are a few snippets after the first few calls...
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"Also as I was looking into this on ********* I noticed they DO NOT SUPPORT NINJATRADER.*
I am clueless about your actual commissions and fees as they are mindblowingly confusing and I'm just assuming Im just going to have to try and decide if it works for me or not.
I have been comfortable with Interactivebrokers and see why now. I am using ninjatrader trader with IB beautifully.
Your staff has been great but its definitely confusing and not smooth.
Also a little confused on the relationship with you me and **********.
Hope you can clarify.
Thank you"
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Another...
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"Hello **********. I am setup now. I am having some issues though.
Your chat ALWAYS says open so I dont know what your customers service hours are?
Also where can I get a copy of trades. This is my big problem. Ninjatrader is mot giving me any true numbers. Just added up P&L from points. How do I know margin? Commissions? Live P&L?"
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And another....
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"Ok I'm just getting angry now. Tech support is very spotty. Doest return questions and wont tell me what I need."
ILL DO ALL MYSELF but where can I ACCESS MY OWN RECORDS? WHERE IS MY ACCOUNT!!!*
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It just went down from there. But I did get a full explanation of what they do and how they do it.
As I said before I only added enough to try thier service with the knowledge that the money might be gone forever.
Other than options I've run the gamut of trying instruments and platforms.
Now...
IN MY CASE ONLY...
They use Ninjatrader as their third party platform.
They offer MANY different FCM access points.
They did provide a broker service that I could NOT get elsewhere. $500 emin S&P margins.
And thats the key. They are only brokers!
Thats what they are... service brokers NOT exchange BROKERS!
And thats the difference.
So they sign you up and make the difference on commissions (whether or not it's the same as the FCM as the could get wholesale)
(Tech actually told me their cost)
So yes in some cases they can provide a service that someone might need and cannot access elsewhere.
So there is a need in some cases for these firms.
Im quite happy sticking with the ridiculous large margin requirements set out by Interactive Brokers from now on.
Again I don't think they are all bad or all good.
I wouldn't just caution know why you need them. How they work. And again do your homework lol!
Thanks for all the responses, but not sure I really got an answer. I am reading that I don't really need an IB unless they are offering something I need. I would love a few specifics of what that may be. I don't feel like I need a whole lot more than a basic charting system, a DOM and a feed. Tutorials are good, but I don't need an IB for that. I don't use a whole lot of signals on my charts other than the basics and I won't usually ask a broker for input on my trades, so I am kinda getting the feeling that I don't need an IB. Unless they can offer something else I am not seeing, hence the reason for the original question.
I am relatively new to trading the correct wayand I am trying to understand several things.Right now my question is, what is the purpose of an introducing broker? from what I can see right now is it enables lower margins. Is there another benefit or …
If the question is whether you need an introducing broker to trade futures, the answer is "No."
To sum up, because this thread did wander around in discussing the topic, and I want to be sure that @mrizzo and anyone else has their questions satisfied, at least to a reasonable extent:
1. Introducing brokers don't add anything essential to futures trading, speaking generically about the group. They find customers for FCM's, and receive compensation from the income stream generated by commissions for the trades the FCM's process.
2. In order to differentiate themselves in the marketplace, some will build in additional services and products in order to attract trader interest. These may be of value or they may not, and are individual characteristics of particular IB's, not characteristics of the general class of firms that are introducing brokers.
3. Sometimes these additional services are worth it. But to know whether they are or not, the trader must look at what they are and evaluate them for him/her self. This is highly individualized and cannot be speicified generally. It may be something like a superior charting/trading platform, or customer service, or some technical tools or training or support services -- basically, anything related to trading, other than getting the trades done, which is the job of the FCM. (FCM's may do everything that IB's do as well... it depends on the firms in question.)
But nothing supplied by an introducing broker is essential to trading.
Many traders do not have an IB. I do not, and never have. Think of them as additional players in the market for trader services, and see if you find one that gives you something extra that you can put to use. But if they do, it will be on top of the basics required to simply get your trades executed, which is supplied by an FCM.
I hope you have found your answer now.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote