Start a brokerage

To start a brokerage firm, you must familiarize yourself with all the links that make up a forex broker’s structure. For over a decade, we supported both experienced and non-experienced investors enter the FX arena, not only by setting up their brokerage, but also by educating them on what it means to run a forex brokerage.

In this article, we will be outlining the basic steps but also attempt to get into more specific components, that comprise the overall forex brokerage structure.

It’s important to note that to start a brokerage, you can either start from scratch or become a networker through programs that allow great payouts but don’t involve the costs associated with registrations, regulations, technology, hr and marketing. We are of course referencing Forex IB programs and Forex White Label programs.

If you decide to start a brokerage from the beginning, you still need to familiarize yourself with the Introducing Broker and White Label programs, because they will be a big part of your income after your start onboarding traders.

Almost all other steps following this one, are straight forward since they are all about integrations and technology, with choices readily available. This first step though, requires knowledge, expertise, following industry standards, and must be planned thoroughly to allow flexibility, A/B testing, quick recovery if needed and finally produce the maximum possible return on the investment.

Once finalized, it must be communicated to all key stakeholders in order to align their expertise, networks, targets and overall mind frame, to bring the plan to fruition. A forex brokerage is as weak as its weakest link, so all links must buy-in to the plan and commit to its effective execution.

Budgets
Before you start a brokerage, the amount allocated should meet the goals set in the business plan. Unfortunately many providers sugar coat the real expenses a brokerage incurs and end up in non-feasible territories that render the business unprofitable. Making some of the funds back from selling the business (license/ client base / data base) is not enough to cover what’s lost. This doesn’t mean not allocating big budgets because they might be lost, quite the contrary. There should be big budgets to compete with thousands of other brokers but attached to a purpose and a plan for returns on the investment.

Whether its own funds, seed funding, pooled investors, whatever was decided to put down can change when the final plan is drafted and agreed upon.

Target market
A clear definition of the target market, the types of clients the brokerage will attract, the way the markets will be penetrated, responsibility assignments and product ownerships, will dictate the jurisdiction of business establishment and of course the hr required to meet the language requirements.

Language
There is nothing worse than communicating / marketing / selling a product or service in a country or region, and not knowing the norms, the culture, the ways of doing business and most importantly the language. Most call centers fail in this regard because they use reps with broken accents, that are hard to understand and end up confusing potential forex traders more.

Asset classes
To start a brokerage, you will only include the bare-minimum financial instruments required. It might make sense in the beginning, but moving forward you must expand the list to accommodate the needs of today’s beginners and more sophisticated investors. With this article, we might be referencing the start of a forex brokerage, but today most brokerages are multi-asset providers, expanding their product lists to hundreds of available options.

The common asset classes include forex, stocks, bonds, indices, ETFs, cryptocurrencies. Funds are less common in our industry, but we cover them extensively on our website as well. Visit our expanding Asset tab at the top of our website, to access videos, snippets, visuals and content related to all the asset classes.

Brokerage type / model
Its important to understand the differences between the 2 main types of brokerages because they will affect the running cost as well as the final income produced by the business. These are the Dealing Desk (DD) and the No Dealing Desk (NDD) models. The target market mentioned above will include sophisticated / knowledgeable traders, and they are well aware of how this business profiteers, as well the possible conflicts of interest in between.

No matter the model you choose, there are pros and cons in both types, which is the reason why sophisticated traders still trade with both types irrespective of the risks involved. The NDD model can be broken in more parts, the Straight Through Process (STP), the Electronic Communication Network (ECN) and the Direct Market Access (DMA).

A Market Maker is a dealer in securities who is a trader’s constant counterpart (buys/sells at your requested prices) at all times. The operation model is known as DD or Dealing Desk model. A Market Maker’s profit is derived mainly from their Risk Management (how they offset their risk). A very aggressive market maker is therefore in conflict with the interest of the clients/traders, hence the needed regulation. Unregulated brokers as well as some offshore regulated brokers work with really aggressive models, so caution is always required.

An STP broker, operates a no-dealing-desk model (NDD), and directly connects a trader’s order with a liquidity provider (or more than one). The broker therefore acts only as broker (not as a counterpart) and profits from the spreads of the transactions. In many cases, one of the liquidity providers can be an investment firm that belongs to the same group, making the operation no different than a MM. Since trades are matched through various LPs rather than the open market, there can be inconsistent speed and processing.

An STP-ECN broker, also operates a no-dealing-desk model (NDD), but instead of connecting orders with liquidity providers, they connect them with the open market (also known as the Interbank Market). All trades are anonymous and pricing can get more expensive than MM and STP. Since the trades enter the open market, spreads can not be added to the Bid/Ask. Instead a commission is charged, that can add up significantly with high volumes of transactions.

A Direct Market Access (DMA) broker, is the third type of NDD broker. They also provide access to the Interbank Market but in a more limited manner. While ECN trades are anonymous, DMA trading is not. Depth of Market (DoM) is also not as detailed as with ECN. DMA is in between STP and ECN brokers in terms of characteristics.

Hybrid models, allow the use of both internal execution of orders as well as external execution of trades deemed “risky”. Small brokerages especially, might bite more than they can chew and quickly raise the business in a systemic manner. This means that they don’t have the capacity internally to manage the risk function, and therefore pass the flow on to an external liquidity provider.

Choosing a jurisdiction to start a brokerage, will play a significant role in what type of business you will attract as well as how far you can go with it, so it’s important to consider the reasons you’re choosing it as well as your limitations. Everything mentioned in step one above, should provide a clear path of starting with only a registration, a regulation in an offshore low-level jurisdiction or a tier one regulation to establish the business.

If you are already a Forex IB or Forex White Label and are expanding into a full brokerage structure, you already know your target market, what they need and want, what makes them feel secure. Very important information, that completely new entrants (without a client base) have to “guess” based on current industry information, competitive analysis and industry standards.

We cover most of the important jurisdictions through our website, with country information, brokers currently registered / regulated in each jurisdiction and forex license application requirements. We mostly cover Cyprus (CySEC license requirements), UAE (SCA, DIFC, ADGM), Malaysia (Labuan), Seychelles, Mauritius, Belize and Vanuatu.

Forex brokerages are classified as high risk businesses by banks across the world. Other high risk industries include online gambling & casinos, pharmaceuticals & nutraceuticals (Supplements), travel & tourism, debt collection & credit repair, online auctions & marketplaces to name a few.

The high risk classification for the forex business is an unfortunate byproduct of broker bad practices that made banking nearly impossible for everyone. This gave rise to online payment service providers that became the bridge between brokers and banks. A single broker cannot provide the same guarantees as a number of them that work under a single payment service provider.

Brokerages must maintain 2 accounts at least (segregated accounts) for their corporate expenses and their clients funds. This avoids the use of client funds to cover corporate expenses and is used as a safety precaution for traders. The first one, the corporate account with the right network can be provided while the second one is almost impossible to get.

Forex consultants like allFX-Consult maintain a global network of banking and payment service providers to accommodate to their needs, so make sure you speak with your contacts to map out a plan before you start a brokerage. Without banking solutions in place, you can’t receive deposits or make withdrawals, which is the key function of a forex brokerage.

Websites are the virtual offices of any business today. When looking to start a brokerage, you should make sure that your virtual office is impeccable, its easy to navigate, it has the necessary information readily available, its as deep as is required to inform/teach/train but not flooded with unnecessary fillers that discourage browsing, its educating on how to properly use the technology and understand the capital markets.

The website should answer important questions the trader didn’t even think about, it should be bookmarked as an authority in its field with no errors or 401 returns. It must be updated regularly to meet the growing demand of traders and optimized for user experience and search engines.

We can’t stress enough the importance of a great first impression, since a lot of business is conducted automatically without any contact (registration, document upload, deposit and trade). Traders that feel secure, educated, connected with their broker are more likely going to open an account and be retained without overpromises and aggressive sales practices. Probably the most important item for anyone looking to start a brokerage.

Since 2000 and onwards (remember the dot com bubble that burst in March of 2000?), technological advancements made trading possible for all of us. Before the rise of trading platforms, trading was reserved for the select few that could afford it. Throughout the years, platforms became more and more sophisticated, they integrated seamlessly with bridges, liquidity providers, Customer Relation Management systems (CRMs) and broker websites.

The best technology providers today are recognized by traders for their work and they are sought after when choosing a forex brokerage. You must take this into consideration before you decide, since disregarding what the market wants can result in lost market share. We’ve seen this failure multiple times, not only by new entrants that we’ve helped to start a brokerage, but also established brokerages that refused to listen to the market.

The final choice therefore, should not be based on cost but market needs, upgrade potential, use of the provider’s network, depth of market understanding and scalability. Your traders will thank you with their participation, engagement, reviews, retention and recognition.

We briefly mentioned in step 3 above, how important payment service providers are when starting a forex brokerage. Not just for the beginning but also while expanding and adding new geographical locations, you should be adding more payment service providers. We have a whole page dedicated to payments on our website, so be sure to check it out as well.

Depending on the size of your current business (if you’re in the process to start a brokerage from scratch, you probably don’t have any), but if there are significant transactions conducted, you might not be charged with setup fees. Processing fees vary between providers and there are many choices depending on your needs. Make sure you differentiate between aggregators, acquirers and merchants.

Nothing is more important than the people we’re surrounding ourselves with. Their networks, experience, promotions, psychology, work attitude are invaluable to any forex business. We’ve been proud partners of many startups around the world and we can attest to the fact that without the teams chosen in the beginning, the brokerages would have not seen the success they’ve seen in such a short period of time.

People are not to be disregarded as replaceable and must be treated with respect. Their continuous professional development is paramount not only for strengthening your forex brokerage, but for them as individuals/professionals. They will reward you with loyalty, push, numbers. People are your first and last line of defense against targets, business growth, competition, they are your eyes and ears in an overcrowded space, they are your partners.

Talk to your hr, feel their frustrations, understand their needs both on personal and corporate level, empathize with their work/life balance and above all, treat them with respect. Businesses come and go but people stay behind so the relationships you will nurture, can support you to start a brokerage, grow and scale, but also in other ventures you might endeavor in the future as well.

Invest in your team, not because the regulator enforces CPD hours but because you want them to excel in what they do. Education can be generic, specific, targeted according to the needs of the department. This being said, all departments should speak the same language to ensure uniformity in decision making.

Starting a forex business is all about capital markets. Strong understanding of all markets offered (and the ones that might be offered in the future) is a requirement for customer service officers, sales and marketing departments that have direct or indirect contact with a trader.

Run your people through courses that are relevant, especially in the early stages when you start a brokerage. Avoid courses that can’t be applied in daily work schedules. Capital markets training can be provided by universities, associations, training centers but very little information can be actually applied in our industry.

Starting a forex brokerage can be as easy/difficult, as the partner you choose makes it for you. You must take into account that technology providers push their own agendas and act upon their own profitability so you might not be directed according to the best possible scenario. One-stop-shops might sound great at first, but you’ll start to notice complexities and hidden costs not explained in the beginning since they weren’t needed at the time.

Choosing an independent solutions provider is also a risky business since there are many actors with different games at play. Verify information through second and third opinions, be transparent with your intentions, be specific with what you’re looking to accomplish, be realistic with your expectations and most importantly keep an open mind.