U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5438 

Facsimile: (202) 418-5547 

jcarley@cftc.gov

Division of Clearing and 

Intermediary Oversight

James L. Carley 

Director 

CFTC letter No. 04-34 

September 16, 2004 

No-Action 

Division of Clearing and Intermediary Oversight

 

Re: Section 1a(23) and Regulation 1.3(mm) -- No Action Position Concerning the 

Definition of an Introducing Broker 

 

Dear : 

This is in response to your letter dated March 10 2004, and emails dated May 25, 2004 

and June 10, 2004, to the Division of Clearing and Intermediary Oversight (“Division") of the 

Commodity Futures Trading Commission ("Commission"), as supplemented by telephone 

conversations with Commission staff. By your correspondence, you requested, on behalf of 

“X”, that the Division confirm that it will not recommend that the Commission commence any 

enforcement action against “X” based solely upon its failure to register as an introducing broker 

(“IB”) under the Commodity Exchange Act ("Act"),1 in connection with its marketing of a 

software program with the ability to access the order-entry system of the futures commission 

merchant ("FCM") or IB of the endusers’ choice, as described in your correspondence. 

Facts 

Based upon your representations, we understand the relevant facts to be as follows. “X” is 

an affiliate of a software development company, “Y” that controls the rights to a “trade orderentry” software program (the “Software Program”). “X” has entered into a marketing 

arrangement with “Y”. “Y” receives compensation from “X” based on the number of Software 

Program units that it licenses, regardless of how many trades are placed using the software. The 

Software Program allows institutional customers to gather and analyze third-party market data to 

“test investment strategies against real-time or recorded market data.” The data feeds containing 

market information are provided by unaffiliated third parties who do not give compensation to, 

or receive compensation from, “X” or “Y” for providing market data to “X’s” customers. 

Neither “X” nor “Y” provides market data to its customers. The software assists “X’s” 

customers in making trading decisions, but does not provide express “buy” or “sell” signals. 

 

1

 7 U.S.C. § 1 et seq. (2000).
Page 2 of 5 

You represented that “X” plans on licensing the Software Program to institutional 

customers that are “accredited investors” for their own use and to IBs and FCMs for their own 

use and for the use of their clients that are “accredited investors” to permit these customers to 

access the order-entry system of the FCM or IB of their choice.2 You represented that “X’s” 

customers that will use the Software Program will select their own FCMs or IBs and negotiate 

any and all fees for executing trades between themselves and the FCM or IB. 

The orders will go directly from the end user to the executing FCM or IB without “X” or a 

third party seeing details of an individual order. The Software Program software would reside on 

the customers’ computers and “X” would have no network connection to the Software Program. 

Periodically, the FCM or IB would generate reports to “X” detailing how many times the 

customer has used the software to place orders with the FCM or IB of their choice. 

“X” will not recommend, propose, or encourage customers to use any particular FCM or 

IB, even in response to a customer inquiry, nor will it solicit customers for an FCM or IB in any 

other manner. The customer will inform “X” of the FCM or IB with which it has an account or 

with which it wishes to trade and “X” will work with the FCM or IB to implement the required 

technology to provide the customer access to the FCM's or IB’s order-entry system.3 

When the technology has been implemented, the customer will be able to directly access 

its selected FCM's or IB’s order-entry system through the the Software Program screen, without 

opening a new application. The customer will log into the FCM’s or IB’s system and enter its 

trade in the FCM's or IB’s system as it normally would, except that it would be trading through 

the Software Program screen. As a result, the customer will log-on and place orders with the 

FCM or IB directly through the Software Program screen. The Software Program would provide 

a method of entering trades without opening a separate application, which would facilitate orderentry in a more efficient manner. 

You have represented that this software will be available to all of “X’s” customers, except 

natural persons, that are accredited investors and that “X” is not involved in any way with the 

selection of an FCM for any customer. 

 

2 “X” will only license The Software Program to entities that are “accredited investors” as 

that term is defined in Securities and Exchange Commission Regulation D, 17 C.F.R. § 230.501 

(2003), but it will not license the Software Program to natural person accredited investors. 

FCMs and IBs, by a licensing agreement with “X”, may also market private label versions of the 

Software Program to their customers that are non-natural person accredited investors. 

3

 You represent that the The Software Program will use the Financial Information 

eXchange Protocol (“FIX”) to transmit customers’ orders to the FCM or IB of their choice. You 

represent that FIX is a standardized protocol used to transmit financial data and that it is widelyused in the financial services industry. 
Page 3 of 5 

“X” does not have a right or ability to view a customer’s orders, positions or the types of 

contracts traded or the times or prices of these trades. The orders go directly from the customer’s 

computer terminal to the FCM’s computer (without passing through “X’s” computers). “X” 

receives a flat monthly fee payment directly from its customers for the use of the the Software 

Program, except in the event that a customer’s usage exceeds a certain maximum amount, in 

which case the customer will be liable for the excess usage fees that may be negotiated with the 

customer.4 The excess usage fee is based on the number of contracts executed using the Software 

Program that exceed a certain maximum and is not associated in any way with fees the customer 

might pay to the FCM for executing the trade. 

Analysis 

Section 1a(23) of the Act defines an IB as: 

[A]ny person (except an individual . . . registered as an associated person of a 

futures commission merchant) engaged in soliciting or in accepting orders for the 

purchase or sale of any commodity for future delivery on or subject to the rules of 

any contract market or derivatives transaction execution facility who does not 

accept any money, securities, or property (or extend credit in lieu thereof) to 

margin, guarantee, or secure any trades or contracts that result or may result 

therefrom.5

 

The Futures Trading Act of 1982,6 amended the Act to require persons known as "agents" 

of FCMs to register as IBs, so as to "resolve[ ] any existing uncertainty as to the status of [these] 

agents."7 In creating the separate IB registration category, Congress intended to "protect the 

public" from the "sales abuses" of such agents for which FCMs "frequently disavow[ed] any 

responsibility."8

 

4 The first _____ trades per month are included in the flat monthly fees. “X” may, 

separately, contract with customers to provide software technical support, but such technical 

support will not involve buy/sell recommendations and customers. No portion of the excess 

usage fee will be shared with the FCM or IB.

5

 Rule 1.3(mm) similarly defines an IB, 17 C.F.R. § 1.3(mm). Commission rules referred 

to herein are found at 17 C.F.R. Ch.1 (2004). 

6

 Pub. L. No. 97-444, 96 Stat. 2294 (1983). 

7

 H.R. Rep. No. 97-565, pt. 1, at 49 (1982). 

8

 Id. 
Page 4 of 5 

In establishing the rules relating to IBs and their registration, the Commission noted that 

the intent of the Futures Trading Act of 1982 was "to require those persons who performed the 

type of activities traditionally engaged in by agents to register with the Commission as an [IB]."9

 

The Commission indicated that "[h]istorically, agents . . . carried all of their accounts on a fullydisclosed basis with an FCM which provided 'back office' services for those accounts."10 The 

Commission further stated that "the phrase 'soliciting or accepting orders,' . . . must be construed 

to encompass not just the literal solicitation or acceptance of customers' orders, but also the 

solicitation of customers . . . for referral to an FCM for the institution of a trading relationship 

and the execution of those orders."11

“X's” central business activities are the marketing and distribution of software services. 

“X” does not solicit customers or orders for an FCM or IB or the trading of futures contracts. 

Customers indicate to “X” the FCM or IB with which they have an existing relationship or with 

whom they wish to trade. Even in response to a customer inquiry, “X” does not recommend, 

propose, or encourage that customers use any particular FCM or IB, or place any orders for 

futures contracts. “X” is compensated by fees that are paid to it by the customer, and are not 

associated with the fees charged by the FCM or IB for the placement of customer orders. “X’s” 

fee is paid by the customer based on a flat monthly rate, with an additional charge for excess 

usage based on the number of contracts executed with the FCM or IB, not based on the FCM’s or 

IB’s commission or the price of the contract traded. 

 Because “X” is collecting an excess usage fee based on the number of contracts executed 

with FCMs using the Software Program, and to which customers wish to establish a link, “X’s” 

net income may be affected by its providing this service. “X”, however, is not accepting 

customer orders, since it has no involvement with the placing of customer orders and does not 

recommend a particular trade or an FCM, even if asked to do so by the customer. “X” is simply 

providing technology that connects the customer to its FCM's order entry system. The customer 

is submitting its order to the FCM and not to “X”. The Division, therefore, will not recommend 

that the Commission commence any enforcement action against “X” based solely on its failure to 

register as an IB, provided that it operates in the manner described herein.12

 

9

 48 Fed. Reg. 35248, 35250 (August 3, 1983), quoting 48 Fed. Reg. 14933, 14935 (April 

6, 1983).

10 Id. 

11 Id.

 

12 The Staff has only twice previously opined as to the registration requirements under the 

Act as they relate to data service providers, such as “X”, that provide technology to facilitate the 

order entry process and do not engage in activities that would otherwise require registration. In 
Page 5 of 5 

This letter does not excuse “X” from compliance with any other applicable requirements 

contained in the Act or in the Commission’s rules issued thereunder. For example, it remains 

subject to the relevant antifraud provisions of the Act and Commission rules. This letter is 

applicable to “X” solely in connection with the activities described above. 

The position taken herein is based upon the representations that have been made to the 

Division and is subject to the conditions set forth above. Any different, changed, or omitted facts 

or conditions might render the positions taken herein void. You must notify the Division 

immediately in the event the operations or activities of “X” change in any material way from 

those represented to us. Further, this letter represents the position of this Division only and does 

not necessarily represent the views of the Commission or any other division or office of the 

Commission. 

If you have any questions concerning this correspondence, please contact Peter B. 

Sanchez, an attorney on my staff, at (202) 418-5437.

Very truly yours, 

James L. Carley 

Director 

 

CFTC Staff Letter 02-91, July 30, 2002, the entity involved did not receive a per-contract 

compensation from the FCMs. In CFTC Staff Letter 04-15, March 22, 2004, the entity involved 

received a per-trade compensation fee directly from the FCM that was not related in any way to 

the fees charged by the FCM to their institutional customers. If in the future the Commission 

determines that such entities must be registered under the Act, “X” may have to comply with the 

applicable registration requirements at that time.