How the IB model works · Lesson 1 of 3
What an introducing broker is
4 min read
Draft lesson — under editorial review
An introducing broker, usually shortened to IB, refers new clients to a broker and is paid by that broker for the business those clients bring. Before you think about commission, it helps to understand who does what, where the money comes from and why the arrangement exists at all.
Three parties, three roles
| Party | What they do | What they do not do |
|---|---|---|
| Client | Opens an account with the broker, deposits funds and makes their own trading decisions | Pay the IB directly (in most arrangements) |
| Broker | Holds the client's account and funds, executes trades, handles identity checks and is regulated for that activity | Usually provide personal education or local community support |
| Introducing broker | Educates, supports and refers potential clients to the broker | Hold client money or execute client trades |
The client's contract is with the broker, not the IB. The IB sits beside that relationship: it introduces the client and may continue to provide education or support, but the account, the funds and the trades all sit with the broker.
Introductions are usually tracked with a unique referral link or code. When a client signs up through it, the broker records that client as belonging to the IB's account.
How a broker earns money
To understand IB commission, you need to know where the broker's revenue comes from. The main sources are:
Spreads
The spread is the difference between the buy and sell price. On a "standard" account with no separate commission, the broker's charge is built into the spread. For pairs quoted in USD, such as EUR/USD, 1 pip on 1 standard lot (100,000 units) is worth 10 USD.
Commissions
On "raw" or low-spread accounts, the broker charges a separate commission per lot traded instead of, or as well as, a wider spread.
Swaps
A swap, or overnight financing charge, is applied when a position is held past the daily cut-off. It reflects the interest-rate difference between the two currencies plus the broker's charge, and can be a cost or, occasionally, a credit to the client.
The broker's business model
Some brokers pass client trades on to other liquidity providers and earn mainly from spreads and commissions. Others act as the counterparty to some or all client trades, in which case client losses can also be part of their revenue. Many use a mix. This matters later, because how an IB is paid can be linked to these revenue sources.
Worked example: trading costs on one client
This is an illustrative example. Real costs depend entirely on the broker, account type and instrument.
Suppose a client trades EUR/USD on a raw-spread account with an average spread of 0.2 pips and a commission of 3 USD per lot per side (so 6 USD for opening and closing one standard lot — a "round turn"). In one month they open and close a total of 10 standard lots.
- Spread cost: 0.2 pips × 10 USD × 10 lots = 20 USD
- Commission: 6 USD × 10 lots = 60 USD
- Total trading cost to the client: 20 + 60 = 80 USD, before any swaps
That 80 USD is broadly the pool of revenue from which a broker covers its own costs, earns a margin and may pay an introducer. If the client does not trade, there is no trading revenue at all.
Why brokers pay for introductions
Winning a new client costs a broker money — through advertising, sponsorships and sales teams. An IB can be an efficient alternative because:
- Trust. People often prefer to learn from someone who speaks their language, understands their region and answers their questions.
- Education. A client who understands leverage, risk and the platform is more likely to stay with the broker and less likely to need costly support.
- Paying for results. Brokers typically pay IBs only when referred clients actually trade, or meet set conditions, so the broker's cost is tied to real activity.
From the broker's point of view, paying part of its revenue to an IB can be cheaper and more targeted than general advertising.
A healthy relationship versus an unhealthy one
The model works best when the IB's interests point the same way as the client's: well-informed clients who trade sensibly and stay for years. It goes wrong when an IB is rewarded for volume at any cost — for example, encouraging over-trading or high leverage to increase commission. Most retail CFD accounts lose money, and an IB who pushes clients to trade more is likely to accelerate those losses and damage their own reputation. The rest of this course looks at how payment structures work and the limits an IB must respect.
Key takeaways
- An IB refers clients to a broker; the client's contract, account and funds are with the broker.
- Brokers earn from spreads, commissions and swaps, and some also act as counterparty to client trades.
- IB payment comes out of the broker's revenue, which depends on clients actually trading.
- Brokers pay for introductions because trusted, educated clients are valuable and costly to win otherwise.
- The healthiest IB businesses are built on client education, not on encouraging more trading.
Educational content only — not financial advice. Trading leveraged products such as forex and CFDs carries a high risk of losing money.