PIP Sharing with Forex Dealer Members (Pip Rebates)
The forex industry has many supporting players in addition to managers and investors. One group which tries to hook investors up with managers or managers up with forex dealer members are what are called “introducing brokers.” The way that many introducing brokers are compensated, with specific reference to off-exchange forex transactions, is through a pip sharing or a pip rebate arrangement.
What is a pip?
A pip is a unit of measurement which represents the spread between the bid and the ask on any currency paid. For major currencies (________) the pip spread is relatively low (2-5 pips) but for lower volume currencies (_______) the pip spread is large (12 pips). The pip spread is essentially the commission which is paid to the futures commission merchant / forex dealer member.
What is a pip sharing or a pip rebate arrangement?
In consideration for introducing investors or managers to a Futures Commission Merchant (FCM)/ Forex Dealer Member (FDM) , the FCM/ FDM will rebate a portion of the pip spread for each round turn on a certain currency. This means that on a purchase and sale of $100k of a currency the FCM will take a 3 pip spread and then rebate 1 pip back to the manager.
Legal information on pip sharing arrangements
Forex hedge funds which have a manager participating in pip sharing arrangements need to disclose all information about the relationship in the fund’s offering documents. Additionally, there are likely to be additional issues if there are ERISA assets in the hedge fund. Managers with ERISA assets should discuss any pip rebates with an attorney (see ________).
Do you need to be licensed as an IB to participate in pip rebate arrangements?
There is no requirement that a person be licensed as an introducing broker (IB) in order to participate in pip rebates; however, based on the introducing activities, the introducing broker may need to be registered. Currently the regulations do not require a person to be licensed as an introducing broker (IB) to introduce clients to FCMs or FDMs if those clients only trade off-exchange forex. It is expected that such persons will need to be registered as IBs in the future. If the introduced client trades any on-exchange forex products with the FCM or FDM, then the introducing broker will need to be registered.
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3 Responses to “PIP Sharing with Forex Dealer Members (Pip Rebates)”
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Very informative article on Pip sharing/pip rebates. Its not the newest industry in the world by any means, but I would say it is a fairly untread one. Not as many traders are getting or bothering to get rebates on their trades. This may be due to an aprehensive outlook on rebates or IBs themselevs or just because they are unaware that it is available to them. We at PipthePip have tried to position ourselevs as the best and most transparent rebates provider in the industry and will continue to do so moving forwards.
Our company, PipthePip.com provides such rebates and service to their clients. We started this business after the rules changed with MIFID (Europe) in Nov 2008. We welcome any direct discussion about the changes in the rules and your comments and perspectives on its ongoing applicability.
It is normal to barter when you buy something. Why shouldn’t it be normal in Forex.