The five key risks faced by Introducing Brokers

The idea of becoming an Introducing broker may seem like an appealing one, but success here is way more than a simple matchmaking exercise. There’s a complex landscape that needs to be understood and then navigated successfully to ensure your own business is sustainable, that you maintain a cordial relationship with your broker and that your clients’ interests can also be prioritised.

To help put this challenge into context, Scope Markets outlines the five risk priorities that Introducing Brokers always need to be mindful of when seeking long term success.

Counterparty risk is the most obvious consideration that needs to be made. Ensure you do your due diligence on the broker that you are looking to partner with. How long have they been trading for, what do other introducing partners have to say about them, where are they regulated? It may also be worth digging a little deeper to find out who the ultimate beneficial owners are – do these people have a good track record when it comes to looking after their business network???

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Market risk. Whilst the Introducing Broker is simply passing the trades through from their client to the executing broker, meaning that they aren’t adopting any direct market risk, if events turn against them then it could prove ruinous in terms of future revenue streams. That’s why it’s important to engage with your clients to ensure they are adopting a managed and proportionate approach to risk that in turn will enable them to continue trading in the long term, regardless of any short-term deviations. It’s also worth keeping a check on the broker’s ability to execute trades in a timely manner and at a fair price, especially in fast-moving market conditions. You as the IB have the ability – and the responsibility – to ensure your clients are being treated fairly.??

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Liquidity risk. This again stems back to the due diligence that you will have conducted before first engaging with a counterparty but is a matter that should be subject to regular review. This is especially important if you are building a successful client book who collectively are placing ever larger trades. Is the counterparty able to meet the capital adequacy requirements here which will be vital in ensuring they in turn can access sufficient market depth to fulfil the orders on behalf of your clients. Making a diary note to keep a regular check on this has the potential to be highly productive because if your clients suddenly find orders being unfilled, you will be in the firing line.??

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Operational risk reflects the fact that your counterparty needs to have the necessary internal reporting, management and audit structures in place to ensure they can always operate in an appropriate manner. These processes require investment and need to be scalable, so if you’re finding a small, lesser-known broker offering what appears to be a great deal, is it because they are taking short cuts with their own operations? And again, as your business grows, can they support that rising burden???

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And finally, we have regulatory risk where the burden straddles both you as the introducing broker as well as your executing counterparty. So, to start with, are you acting within the necessary guidelines when it comes to financial promotions? Are you giving your customers access to the necessary reporting and management systems to allow them to stay abreast of their own risk position? And are any client funds being held in an appropriate and secure manner? Equally it’s important to always maintain oversight of the executing broker’s regulatory position – do they have the credentials that they claim, are these up to date, how quick do they seem to be to respond to regulatory change and keep you informed of their progress here? There’s the potential for a host of red flags to be raised here and whilst you need to have a collaborative relationship with your counterparty, they should have no cause for concern over your desire to remain engaged here.????

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Becoming an Introducing Broker may seem easy, but building a client network and a sustainable business model for yourself off the back of the relationship is no easy feat. Working with a globally recognised and well-established broker like Scope Markets means you can operate with confidence that the counterparty risk factors are all in hand, leaving you to focus on the vital element of building client success.

To find out more about how Scope Markets already works with Introducing Brokers via our global reach of regulated entities, visit our website or contact the partners team at [email protected] .

Stay tuned for our next issue, and join us on this journey to unlock new potentials and drive your business forward. Together, let’s expand horizons and achieve greater success!

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