Introducing Brokers play an important role in the futures markets, serving as independent intermediaries, connecting customers with futures commission merchants and providing access to derivatives markets without holding customer funds themselves.
Thirty-five years ago, however, IBs had no dedicated industry association to represent their interests. The National Introducing Brokers Association (NIBA) was founded in 1991 to give the community a voice, as well as a forum for education and networking.
Since then, the business has been transformed by electronic trading, FCM consolidation, regulatory change and an increasingly global marketplace.
As NIBA marks its 35th anniversary, MarketVoice spoke with founder Melinda Schramm about how the Introducing Broker community has evolved, the challenges it faces today and where opportunities may emerge next.
MarketVoice: NIBA is celebrating its 35th anniversary this year. What prompted you to found the organization, and what need was it intended to address?
Melinda Schramm: In 1991, Introducing Brokers had no unified voice. Other registration classes and industry participants had organizations that enabled them to take part in their own regulation, but IBs had no association focused on advocating for the specific needs and issues affecting their community. There was no place for IBs to network and share experiences. There was no place for IBs to get the education about markets, marketing and the many other areas they need to understand in order to service their customers well, stay in compliance and grow their businesses.
MV: How has the Introducing Broker community evolved since 1991, and what does a typical IB look like today?
MS: In 1991, the majority of IBs were handling ag-oriented transactions for their customers, such as grain and cattle. Many firms had registered as IBs after years of experience working with those same customers at the grain elevator or feedlot. Today, IB customers’ trades are much more diverse. Although there are still firms trading most heavily in agricultural markets, IBs offer trading in all markets to all types of customers. Many regularly trade on non-domestic marketplaces. While a few smaller IBs exist today, with up to four or five individuals working in the office, several IBs have branch offices throughout the US and even outside the US.
MV: Looking back over NIBA’s 35 years, which events and challenges have had the greatest impact on the association and the Introducing Broker community?
MS: I would say some of the biggest challenges for the IB community have included the advent of electronic trading, the failures of MF Global and Peregrine Financial Group, and COVID.
Electronic trading opened a whole new way to access the markets that some believed would do away with the need for intermediaries. IBs responded by learning to use new technology and reinforcing their value-added customer benefits.
The failures of MF Global and Peregrine Financial Group had arguably the biggest negative effect on the IB community since 1991. Many IBs cleared through and/or were guaranteed by these two FCMs. Customers lost trust in the markets and their representatives, while IBs themselves were missing earned commissions.
NIBA advocated in the courts and with the CFTC and the NFA for transparency during the customer transfer and bankruptcy processes, and worked for rule changes aimed at preventing similar failures from happening again. NIBA also provided seminars and newsletters that helped IBs define their role in the marketplace to their customers and rebuild trust in the system. During this time, IBs learned the importance of having more than one clearing firm.
During the COVID pandemic, many new rules and new ways of using technology emerged out of necessity. NIBA worked with the NFA to help shape regulation that was practical under the circumstances and then helped educate the community on the new rules and ways to communicate using technology.
MV: What are the biggest issues facing Introducing Brokers today?
MS: The cost of regulation is a significant issue, particularly the expense of hiring compliance officers and providing qualified supervision. At the same time, mergers and acquisitions among FCMs have left IBs with fewer choices when it comes to clearing.
There are also more products to consider and longer trading hours to manage. IBs want to be able to offer new products to their customers, but they first need to understand those products themselves and be able to explain their value to customers.
Extended trading hours create a particular challenge. Most IBs feel that 12/7 trading is almost beyond their capability. Smaller IBs simply don’t have the personnel, while larger firms may be able to hire additional staff but still face the challenges of a continuous operation, including finding downtime for testing and ensuring proper supervision.
MV: What opportunities and challenges do you see for Introducing Brokers over the next decade? Could developments such as prediction markets create new opportunities for the IB community?
MS: An ageing community is a significant challenge for the IB registration class. Many IBs have been registered for more than 25 years, with owners having been in the business even longer. Without the trading floor, traditionally a training ground for brokers, it is difficult to find younger, entrepreneurial individuals to take over or establish businesses.
On the flip side, that also creates an opportunity for younger brokers to learn from more experienced IBs and maybe even take over their operations as owners phase out their involvement.
AI is another challenge, both in understanding how to use it and how it is already being used. Many IB owners are still learning about the potential benefits of AI for communication and other purposes, while regulation and compliance in this area are still developing.
Prediction markets could present another opportunity, although existing IBs have not yet seen a great deal of customer interest. In general, IB customers don’t see the same purpose in these contracts as they do in more traditional contracts. As regulation becomes clearer and more FCMs offer the ability to clear trades, there may be more opportunities for IBs in these markets.
MV: You have been involved with NIBA from the beginning. What has surprised you most about how the association and the industry have evolved over the past 35 years?
MS: The resilience and flexibility of the IB community are not a surprise to me, but they are something I’m very proud of. The markets serve essential purposes – price transparency and risk management are indispensable to all market participants.
IBs have met the challenges of a growing, increasingly global and highly regulated industry and found new ways to make sure their customers can access the marketplace. I’m proud that NIBA has been a part of that.
Melinda Schramm is the founder of the National Introducing Brokers Association and president and owner of MHS Capital Resource, a Chicago-based derivatives and legal consulting firm. She also serves as a court-qualified opinion witness and NFA arbitrator and is the author of The Complete Introducing Broker Handbook, circulated by CME Group.
