FINANCIAL ISSUES WHEN STARTING YOUR FOREX BROKERAGE
To some extent, the amount that you will need to reserve for Net Capital (Net Cap) will be dependent upon where you have chosen to regulate your forex brokerage. Minimum Net Cap requirements vary between jurisdictions, and can range from zero to several million dollars.
Because regulation helps to establish credibility, you may wish to compromise by setting up in a locale which offers traders a proven level of protection but which will not force you to tie up too much of your funds. The type of Forex brokerage that you plan to open can also have implications for your minimum capital requirement, as some jurisdictions ask for higher amounts if your Forex brokerage will be acting as a market maker.
When looking for a bank, you should choose one with a long history of solvency and expert management. Even if your account is held in a jurisdiction which provides guarantees for deposits, these guarantees may not be sufficient to cover your entire net capital investment. And even if a bank failure does not lead directly to a financial loss, there still can be negative implications due to the administrative costs associated with finding a new banking partner.
Take the time to weigh the benefits and disadvantages of both small and large banks. Small banks can often devote more time to building a relationship with a new Forex broker, and may be willing to negotiate in order to win your business. However, larger banks may be able to provide more convenient access to services, especially if regulatory considerations lead you to incorporate in an area that is situated apart from your primary physical location.
Because the global business environment also requires banks to thoroughly investigate clients prior to providing banking services, your banker will ask you to provide detailed information regarding your business structure and your management team in. Ultimately, the best bank for your Forex brokerage is the one with which you can build mutual trust while still paying reasonable fees for services rendered.
LEGAL ISSUES WHEN STARTING YOUR FOREX BROKERAGE
There are several good jurisdictions to choose from when deciding where your FX business will be based. Brokers typically opt for either more established countries which inspires a high level of trust, such as the U.K. or Australia, or choose an offshore option such as Cyprus or British Anguilla, which usually have lower initial capital requirements.
While creating a business presence in a more well-known locale can increase your client base, certain countries have additional requirements regarding Net Capital (Net Cap) minimums and regulation that can make opening a brokerage more complicated.
Regulation helps you gain traders for your brokerage by substantiating your credibility. Regulated companies must meet strict guidelines in terms of having enough funds set aside to separate client deposits from the brokerage’s operating budget. Additionally, regulated brokers need to undergo thorough audits and have procedures in place to address client concerns. With the introduction of all of these safeguards, traders are more comfortable doing business with a regulated company.
Much like jurisdiction, Forex regulation plays a large role in attracting traders by building trust. However complying with regulatory procedures will add extra upfront and rolling costs, both in terms of capital requirements as well as personnel needed to confirm compliance.
You might decide to start your Forex business in a region with lower total costs, including incorporation fees, regulatory charges, Net Cap requirements, and staffing. You can then focus on growing your business, and once your brokerage has gained an active client base, you can switch to a prestige jurisdiction or become regulated once you have begun to realize profits.
CHOOSING A BUSINESS MODEL FOR YOUR FOREX BROKERAGE
There are a variety of business models, which don’t have to be mutually exclusive. Below are some simple overviews:
BENEFITS OF STRAIGHT THROUGH (A-BOOK) PROCESSING
Straight Through Processing (STP), also known as the A-Book Forex brokerage model, is the simpler method of the two options. With STP, clients place trades through your Forex platform, and these positions are sent directly to the liquidity providers with whom you have a relationship. Each liquidity provider gives their best avail price available for the desired instrument, and the trader’s order is processed using the liquidity provider who has the lowest spread, which is the difference between the buy price and the sell price. In return for providing the trader with access to the liquidity provider, the broker charges the trader a small portion of the spread, a per transaction commission fee, or a mixture of the two.
BENEFITS OF DEALING DESK (B-BOOK) PROCESSING
Dealing desk, or B-book, brokers take a more active role in the market, by taking the opposite position of their traders. This can result in larger profits than A-Book trading, because you stand to gain nearly the full amount of the trader’s position, instead of only a small fee, and this strategy is popular, as Forex industry leaders report that the percentage of losing traders over a long-term horizon is between 80-95 percent. However, you run the risk of losing money by being caught on the wrong side of a trade. While a B-Book Forex brokerage requires more technical knowledge, as you have to watch out for high-volume traders and scalpers, you are able to attract more traders by offering very low spreads, since your primary source of profit is countertrading.
HYBRID FOREX BROKERAGE MODELS
Many successful brokers capitalize on the advantages inherent in both A-Book and B-Book trading, run their brokerage as a mix between the two. Some traders are wary of working with Dealing Desk brokers, because they are aware of the conflict of interest present if your brokerage only makes a profit when the trader has a losing position. For traders such as these, you can offer STP trading, while traders who are only looking for the lowest possible spreads can be serviced on the B-Book model.
CHOOSING A trading platform FOR YOUR FOREX BROKERAGE
METATRADER 4 FOREX TRADING PLATFORM
Metatrader 4, commonly referred to as MT4, is the most popular Forex trading platform. It is designed to work with automated trading software systems called Expert Advisors, or EAs. Offering access to the MT4 trading platform increases the number of traders you can attract, since most traders are familiar with how to use this platform. However, fees associated with using MT4 can significantly increase your operating costs.
ALTERNATIVE FOREX TRADING PLATFORMS
Your Forex brokerage can also offer a different Forex trading platform, based on your budget, and on the needs of your traders. Alternative Forex trading platforms may be better suited for traders who wish to trade using the mobile and tablet devices, or who want access to a web-based platform for use with multiple computers. Alternative Forex trading platforms may also offer improved customization options, and are typically less expensive.
There are three common methods for obtaining a Forex trading platform.
Buying a Forex trading platform offers you full control, and grants you the right to add, remove, or edit components of the platform as needed. While this route requires the largest initial financial investment, over the life of a successful brokerage, this is usually the least costly option.
With a White Label arrangement, you use a Forex trading platform that has been provided by a third party, and simply change the branding to that of your own Forex brokerage. This is the least expensive choice; however, you would have little control over the underlying trading platform, and would need to share revenues with the Forex platform provider.
Leasing a Forex trading platform provides you with a customizable Forex trading platform with a lower initial fee. While this may be a good short term option to reduce the costs of starting a brokerage, as your business grows, leasing fees may eventually add up to a higher total than that of a purchase arrangement.
WHAT TO LOOK FOR IN A FOREX TECHNOLOGY SOLUTION PROVIDER
In light of the large number of steps that need to be properly completed in order to start your own Forex brokerage, considering the speed at which the Forex industry is continually evolving, there are several advantages to outsourcing development and oversight of your Forex technology to a third party.
Technology companies which offer a one-stop shop package already have the expertise required to avoid the most common pitfalls a new broker will encounter. Additionally, the tech providers know how the individual components will work together, reducing time lost to incompatibility issues.
The best Forex technology companies offer you support as your company grows. When you add more customers, your solutions provider should be able to quickly scale your infrastructure to keep pace with the increase in demand.
Sometimes you’ll have an issue come up outside of business hours. A top tier technology solutions provider will be able to provide you with access to professional support team who can understand and resolve questions about any of your software platform components whenever your brokerage is open for business.
New ideas such as social trading and digital currencies are introduced into the Forex market on a frequent basis. A company specializing in forex technology is able to research and design forex trading systems that incorporate the best new ideas, and will be able to advise you on when and how begin offering these options to your clients of your forex brokerage.