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Introducing broker

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  #1 (permalink)
mrizzo
Gainesville, Fl
 
 
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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 a reason I can't live without one? Probably not asking the question right. just trying to understand the purpose ofan IB.

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  #2 (permalink)
 bobwest 
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mrizzo View Post
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 a reason I can't live without one? Probably not asking the question right. just trying to understand the purpose ofan IB.

This is an excellent question for a new futures trader to ask, and to get the answer to. Basically the question is about the different kinds of futures brokers and the roles they play.

There are "introducing brokers" and "FCM's ("Futures Commission Merchants" -- yes, a strange name). You must have an FCM, which in a sense is your "broker" (they hold your money and get your trades routed to the exchange for execution), and you might or might not have an "Introducing Broker," which is a firm that "introduces" traders to FCM's.

IB's are service organizations that basically are oriented to providing services to traders that an FCM might not provide. However, many FCM's have full customer service staffs that also do this job, so what you get depends on the individual firms. Some FCM's essentially depend on their IB's to find and set up their customers and many will happily do it themselves, and many will have customers that have been "introduced" to them by an IB as well as customers who have contacted them directly and opened the accounts with them directly. If you open an account through an IB, it will open your account with the FCM.

An introducing broker has nothing to do with margins. For day-trading, margins are up to the FCM; for trades lasting more than the current trading day, the exchange (CME) sets the required margins.

There are IB's that provide serious value to traders, and there are those that are just account-openers for FCM's. Some IB's, for instance, provide their own trading platform or some other unique services to their customers. Again, it depends on the individual firms involved.

Here is a simple definition of an FCM: https://www.nfa.futures.org/registration-membership/who-has-to-register/fcm.html

Here is a discussion of what an IB does, in relation to an FCM: https://www.cmegroup.com/education/files/IBhandbook.pdf

For a more detailed discussion, click here:



Bob.

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  #3 (permalink)
mrizzo
Gainesville, Fl
 
 
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Thanks Bob. I guess that post didn't come up when I searched because I used "Introducing".

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  #4 (permalink)
 SBtrader82 
Rovigo (ITALY)
 
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mrizzo View Post
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 a reason I can't live without one? Probably not asking the question right. just trying to understand the purpose ofan IB.

In my experience they are useful to take a cut of your money and nothing more, and to make the whole process of opening an account very slow and inefficient.
Last years I wanted to open an account and I decided to contact an Introducing Broker, I won't mention him but he is very well known he has tons of post in this website, seminars and youtube videos etc...
I tried to call him several times at different times of the day and on different days... no one ever answered the phone.
I sent several emails and I never had an answer back.

Imagine having a technical problem with an introducing broker like that and needing some immediate support. You will lose your account before he even answer the phone. He will probably be busy doing youtube videos and advertisement everywhere.

Forget the Introducing broker, call a real broker (FCM) and they will set you up in a couple of days.

Just to make it clear, at first I was more that willing to work with an introducing broker and not get married with one broker straight away but I found out that they are useless.

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 Sandpaddict 
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SBtrader82 View Post
In my experience they are useful to take a cut of your money and nothing more, and to make the whole process of opening an account very slow and inefficient.
Last years I wanted to open an account and I decided to contact an Introducing Broker, I won't mention him but he is very well known he has tons of post in this website, seminars and youtube videos etc...
I tried to call him several times at different times of the day and on different days... no one ever answered the phone.
I sent several emails and I never had an answer back.

Imagine having a technical problem with an introducing broker like that and needing some immediate support. You will lose your account before he even answer the phone. He will probably be busy doing youtube videos and advertisement everywhere.

Forget the Introducing broker, call a real broker (FCM) and they will set you up in a couple of days.

Just to make it clear, at first I was more that willing to work with an introducing broker and not get married with one broker straight away but I found out that they are useless.

I had the same experience. No idea where profit and loss for the account was at times as they had no backend.

Commissions weren't updated till the next day.

Technical help literally told me "what do you want me to do? I'm the only one here"... then went on about his life story for 25min where he said some things he probably shouldn't have. Lol.

I should have closed my account right there. Nope I waited until I was close to needing to add funds only to wake up to a "Your account is in arrears. PLEASE MAKE PAYMENT NOW"

I brought my account back up to zero and closed the account... all on that day.

Never to do that again.

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  #6 (permalink)
Koverland
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my advice to you is : try to read about risk management before trading.

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  #7 (permalink)
 SBtrader82 
Rovigo (ITALY)
 
Experience: Intermediate
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Sandpaddict View Post
I had the same experience. No idea where profit and loss for the account was at times as they had no backend.

Commissions weren't updated till the next day.

Technical help literally told me "what do you want me to do? I'm the only one here"... then went on about his life story for 25min where he said some things he probably shouldn't have. Lol.

I should have closed my account right there. Nope I waited until I was close to needing to add funds only to wake up to a "Your account is in arrears. PLEASE MAKE PAYMENT NOW"

I brought my account back up to zero and closed the account... all on that day.

Never to do that again.

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wow!! that's really incredible!
I also forgot to mention that once I managed to talk to an introducing broker and I explained him that I needed to see the full market depts of 300+ levels. He said "this does not exist, normally you see only 10 prices", so I mentioned to him Rithmic and other datafeed that offer the full DOM view. He said that it's illegal to see the full DOM....I didn't want to argue so I did not insist.

He then mentioned that he could offer me a solution with Rithmic datafeed and SierraChart. That was in July 2020 when Sierrachart had already stated basically everywhere that it did not accept working with Rithmic anymore. The introducing broker had no idea about that.
He insisted to me that Rithmic was working perfectly and smoothly with Sierra, which was not true since I had had problems before with the combination Rithmic+ Sierra.

To conclude, the Introducing broker had no clue about technology either.

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 Sandpaddict 
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SBtrader82 View Post
wow!! that's really incredible!
I also forgot to mention that once I managed to talk to an introducing broker and I explained him that I needed to see the full market depts of 300+ levels. He said "this does not exist, normally you see only 10 prices", so I mentioned to him Rithmic and other datafeed that offer the full DOM view. He said that it's illegal to see the full DOM....I didn't want to argue so I did not insist.

He then mentioned that he could offer me a solution with Rithmic datafeed and SierraChart. That was in July 2020 when Sierrachart had already stated basically everywhere that it did not accept working with Rithmic anymore. The introducing broker had no idea about that.
He insisted to me that Rithmic was working perfectly and smoothly with Sierra, which was not true since I had had problems before with the combination Rithmic+ Sierra.

To conclude, the Introducing broker had no clue about technology either.

Yes. I only reason I posted that was for anyone interested in going that route to...

PLEASE DO YOUR HOMEWORK.

Trading is hard enough without these vultures preying on the novices (we are all somewhat novices relatively)

Also...

I WAS SOLICITED!

I was contacted and told that they had $500 margins on the mini S&P. (I knew that was already just stupid but they prey on greed)

The first document they sent to me to sign was a letter stating that I WASN'T SOLICITED.

Red flag number #2

It just kept going down from there.

I'm not saying their ALL bad. This was only my experience but dip in... don't jump in... and do your homework.

Cheers

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 bobwest 
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Sandpaddict View Post
...do your homework.

Indeed.

However, introducing brokers are not necessarily going to be small fly-by-night or unreliable operations. It depends on who they are, and so your homework is important, just as it is when choosing an FCM. I'm sorry about people who had bad experiences, but there are some that add something.

For example, NinjaTrader Brokerage is an introducing broker for Phillip Capital and Dorman Trading, its FCM's. NinjaTrader is a major name in the futures world, and the added value they provide is the NinjaTrader platform, which is only available to a few brokers without going through the Ninja brokerage. So you would open an account with them not to get to Phillip or Dorman, but because you wanted the NT platform. (A few other brokers can offer NT as well, including Interactive Brokers. But very few.)

Tradovate is an introducing broker for Phillip and Dorman also. Tradovate has its own trading platform and a unique fee structure -- I'm not plugging either, and don't know much about either, but that's another example of something added uniquely by an introducing broker.

There are many others. You need to have a reason, in my opinion, to choose an IB or to have one at all. But the same goes for FCM's: you need a reason to pick the one you do. It should obviously be that they provide you with something that is at least as good or better than you can get somewhere else. In general, if an IB doesn't add something to just having an account directly with a particular FCM, there is no point in using them.

But, do your research. They are not all bad, and not all good either.

Bob.

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 Sandpaddict 
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bobwest View Post
Indeed.

However, introducing brokers are not necessarily going to be small fly-by-night or unreliable operations. It depends on who they are, and so your homework is important, just as it is when choosing an FCM. I'm sorry about people who had bad experiences, but there are some that add something.

For example, NinjaTrader Brokerage is an introducing broker for Phillip Capital and Dorman Trading, its FCM's. NinjaTrader is a major name in the futures world, and the added value they provide is the NinjaTrader platform, which is only available to a few brokers without going through the Ninja brokerage. So you would open an account with them not to get to Phillip or Dorman, but because you wanted the NT platform. (A few other brokers can offer NT as well, including Interactive Brokers. But very few.)

Tradovate is an introducing broker for Phillip and Dorman also. Tradovate has its own trading platform and a unique fee structure -- I'm not plugging either, and don't know much about either, but that's another example of something added uniquely by an introducing broker.

There are many others. You need to have a reason, in my opinion, to choose an IB or to have one at all. But the same goes for FCM's: you need a reason to pick the one you do. It should obviously be that they provide you with something that is at least as good or better than you can get somewhere else. In general, if an IB doesn't add something to just having an account directly with a particular FCM, there is no point in using them.

But, do your research. They are not all bad, and not all good either.

Bob.

Thank you bobwest. As always you make some very good points.

My intent was not to dissuade anyone from accessing an IB if one suits thier needs.

It was just my experience. I had to learn the hard way.

If I can just say to anyone to make sure you know what your getting into before getting into it, I'd be happy.

I added very little of my overall capitol and and drove them nuts with questions as I did not understand exactly what they did and how they did it.

They are like a reseller. A reseller of commissions.

Some, like Ninjatrader are very value-added and have established services as you mentioned. And they use an FCM. I think some FCMs use other FCMs for clearing as well just to make it more confusing.

Some like the one that contacted me with $500 margins for e-mini S&P as thier hook may have been around for awhile (or not) but do not have infrastructure.

This one relied on third party software, offered limited documentation (which is why I bothered them so much), and limited customer support.

But my main concern the whole time was... this company is going to go bust with my money!

Thier business is built on selling very low margined accounts to as many people as possible.

They make money by adding a percentage to the commissions they get charged and charge you the difference for their service, and risk, they take for offering you this service.

Right, wrong or indifferent. That's business.

Some people dont have access to an FCM and have to choose another source and they can't all be bad as you kindly pointed out.

As you highlighted anyway my main point was do your homework FIRST.

If anyone notices errors in my understanding please let me know.

Cheers.

Joseph

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  #11 (permalink)
 bobwest 
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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.


Sandpaddict View Post
Some like the one that contacted me with $500 margins for e-mini S&P as thier hook may have been around for awhile (or not) but do not have infrastructure.

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.


Sandpaddict View Post
I think some FCMs use other FCMs for clearing as well just to make it more confusing.

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

A very few FCM's are also clearing brokers, but the roles are different. Here is a list of the clearing firms, and your FCM has a relationship to one of them, if they aren't one themselves. But you as a trader will never know or care: https://www.cmegroup.com/clearing/financial-and-regulatory-surveillance/clearing-firms.html

Yes, it's confusing.


Sandpaddict View Post
This one relied on third party software, offered limited documentation (which is why I bothered them so much), and limited customer support.

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.


Sandpaddict View Post
But my main concern the whole time was... this company is going to go bust with my money!

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.

--------------

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.

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 Sandpaddict 
Langley
 
Experience: Intermediate
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Broker: IB
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bobwest View Post
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

A very few FCM's are also clearing brokers, but the roles are different. Here is a list of the clearing firms, and your FCM has a relationship to one of them, if they aren't one themselves. But you as a trader will never know or care: https://www.cmegroup.com/clearing/financial-and-regulatory-surveillance/clearing-firms.html

Yes, it's confusing.



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.

--------------

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.

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.

‐---------------
I went through my emails to prepare for this post for accuracy.

Here are a few snippets after the first few calls...
---------------

"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"

-----------------
Another...
----------------

"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?"

--------------
And another....
--------------

"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!!!*
----------------------

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!





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  #13 (permalink)
mrizzo
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Koverland View Post
my advice to you is : try to read about risk management before trading.

I have to ask, before I go off down a rabbit hole, what does risk management have to do with using an IB? Are they somehow going to limit my risk?

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  #14 (permalink)
mrizzo
Gainesville, Fl
 
 
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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.

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 Sandpaddict 
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mrizzo View Post
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 would go back and read bobwests post. I think he coved it pretty well.



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 bobwest 
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mrizzo View Post
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.

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
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