Becoming a Forex Broker 101: Everything you need to know
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The Forex market, or the international foreign exchange market, is the largest and most active financial market in the world. Its daily turnover exceeds $5 trillion, more than all national stock markets combined. Financial analysts and economic experts are predicting that the foreign exchange market will grow exponentially due to globalization and the popularization of remote employment. Under these conditions, the online brokerage domain looks quite promising in comparison with conventional enterprises, which are easily knocked out of balance by inevitable economic fluctuations and crises. However, for all that, launching an online brokerage business involves significant challenges which can be fatal if the level of preparation is insufficient.
So, how to create your own competitive FX trading company in this day and age? What do we need to know to create a sustainable business under the right regulation? How to set up a robust software architecture for our newborn brokerage business?
This publication is a comprehensive guide on how to create a Forex broker. It takes into account all aspects of this industry, as well as the experience of Soft-FX experts. Each section of the article includes links to more detailed related reading concerning different points of launching an FX business. Feel free to explore this additional information, or ask our advisors any questions as you progress through the reading.
1. Advance preparation: marketing and allocation of funds
Forex market participants are not limited to banks and investment funds, but also include private traders trying to make money on exchange rate differences. All of them are using the services of such companies as FX brokers, but online traders are quite a motley crowd. You can't set up a business that would cater to every known type of trader’s needs; instead, you need to decide on your target audience and the value you plan to bring. Therefore, to start a Forex brokerage business, you should absolutely include a preliminary preparation and break it down into several stages.
Market analysis
To start your own brokerage company and run it at a good pace, it is important that you study competitors in advance and determine your target audience. It is desirable to define such parameters as age, gender, hobbies, income level, country, among others. This will largely determine your company’s legal address, the approach to the platform’s promotion, the number of languages supported, and so on.
Explore promising marketing strategies for modern brokerage companies.
Startup capital estimation
To create a Forex broker that is robust and sustainable, and then establish scalability budgets for several years to come if the launch is successful, you need to be clear about what expenses you are ready to inject in the coming months. This means defining the size of the operating and trading fund and replenishing both of them.
Activities such as market research and starting capital formation are typical of any business. However, certain steps required to set up a Forex trading business are unique and require careful consideration.
Explore promising marketing strategies for modern brokerage companies.
2. Registration and licensing
Why is it so vital to become a licensed Forex broker? A license issued by a reputable regulator will give you additional trust points and serve as an extra marketing tool to attract traders. Thanks to the Internet’s global reach, online brokerage companies can be registered in any jurisdiction — depending on what costs you are targeting. Here, however, you will have to bear in mind another important aspect: the level of the license. For example, when you create a Forex broker in recognized finance centers, such as the United States, Great Britain, Switzerland, or Australia, you immediately raise your reputation by orders of magnitude and gain an unbreakable competitive advantage, and gain access to markets with the largest turnovers.
Explore a comprehensive guide on Forex regulations and licensing costs compiled by Soft-FX legal experts.Why is it so vital to become a licensed Forex broker? A license issued by a reputable regulator will give you additional trust points and serve as an extra marketing tool to attract traders. Thanks to the Internet’s global reach, online brokerage companies can be registered in any jurisdiction — depending on what costs you are targeting. Here, however, you will have to bear in mind another important aspect: the level of the license. For example, when you create a Forex broker in recognized finance centers, such as the United States, Great Britain, Switzerland, or Australia, you immediately raise your reputation by orders of magnitude and gain an unbreakable competitive advantage, and gain access to markets with the largest turnovers.
To speed up the registration process and save money, you can look at an offshore zone, but just so you know, since the early 2000s, regulatory authorities of large economies have been imposing restrictions on offshore companies and their partners. Thus, an offshore license may become a limiting factor in choosing banks to open an account and process payments.
But note that a license from a reputable regulator requires significant funds. For instance, to obtain a license from the US and operate in the Forex market, a business must allocate at least USD 20 million of equity (not including funds raised from customers) and be prepared to comply with strict reporting requirements. The cost of a European Union license ranges from $70,000 to $1.2 million… and can take up to two years to obtain.
To speed up the registration process and save money, you can look at an offshore zone, but just so you know, since the early 2000s, regulatory authorities of large economies have been imposing restrictions on offshore companies and their partners. Thus, an offshore license may become a limiting factor in choosing banks to open an account and process payments.
3. Connection of payment solutions
To become a Forex broker that would be popular with traders, you need to equip your platform with widespread payment solutions. The number of options for connecting payment solutions will greatly depend on the type of license, which we have mentioned above. However, when you start a Forex brokerage firm with the expectation of reaching the maximum target audience, make an effort to offer your customers the widest possible range of options for depositing and withdrawing funds. Select the payment providers that are most popular in the region where you provide services, and integrate them into your trading business.
You should also remember that you are responsible for the safety of client funds. To become a Forex broker that is reliable and safe to trade with, make sure that your platform utilizes the latest payment security procedures, including KYC/AML, the anti-carding system, monitoring accounts for suspicious activity, ID verification, etc. The loss of client data or funds is one of the most devastating reputational risks an online brokerage company can face.
4. Building the software infrastructure
In addition to the website, the development of software infrastructure for a Forex brokerage company involves both mandatory and optional components.
Main components
Trader's room, or Client’s Personal Area
This component represents the main hub for a client on the website of your brokerage company. A trader's room allows clients to deposit and withdraw funds to their trading account, monitor trade history, invest in a PAMM account (if the service is available), etc. A robust trader’s room is distinguished by a variety of connected payment solutions for deposit and withdrawal, the ability to deploy a multilevel referral program, and a high level of protection.
Trading platform
This is a trader's main instrument, the system used to place buy and sell orders for assets. To start a Forex brokerage firm clients can rely on, ensure your trading platform functions without failures and delays in execution, especially during periods of liquidity swings. User-friendly UI and UX are also important, as well as the option to access the platform through web and mobile terminals.
Optional components
In theory, a company can function without components from this category, but we want to emphasize that the vast majority of reputable FX brokerage firms use these services in one form or another.
A bridge, or its advanced version — a liquidity aggregator
A bridge connects you to external liquidity providers, while an aggregator allows you to aggregate liquidity from unlimited external and internal sources, and switch between them on the go; generate market depth (L2), match trades, and execute orders.
PAMM or any other investment service module
The service enables the mechanism of investing in expert traders who have experience in trading confirmed by statistical data. This allows you to expand the number of clients of your FX brokerage firm, and attract individuals with little or no experience in Forex trading.
Learn more on how to bring more value to your Forex brokerage firm by adding advantageous services and features, and become more competitive.
Approach to development
In cryptocurrency trading, the diversity and relative novelty of technology encourage you to develop the components in-house. When it comes to Forex trading software, this approach would make little sense because traders have historically gotten used to having a specific set of features and tools, especially when working with a trading platform.
Of course, there are unique cases, but as a rule, it is more advantageous for the vast majority of businesses to acquire a white label license, and allocate the remaining resources and funds for website development and marketing. When you choose software from a trusted vendor, you get a complete set of necessary components for a fixed cost. This makes it much easier to plan your budget and associated costs for software infrastructure support.
Forex Broker Turnkey from Soft-FX is a one-stop portal to the FX business market. Take advantage of multi-layered liquidity, a versatile trading platform, and a convenient back office.
5. Defining a business model
In this section, a business model refers to a model of operations, which ultimately affects the way a Forex brokerage business generates profits. This is a very important aspect determining both budgeting issues and possible risks.
B-book model (market maker)
Forex brokers that operate on the market maker, or B-book model, essentially create dealing centers and provide arbitrary prices for certain currency pairs. When a user places an order at such platforms, they are playing against the broker, as the trader's gain is the platform's loss, and vice versa. For this reason, traders are often wary of such platforms, because there are concerns (and confirmed precedents) of possible manipulation of the exchange rate by B-book brokers to the detriment of traders.
A-book model
Under this model, brokers work as intermediaries that send their clients' trading orders to liquidity providers or arrange real market conditions on their platform. If you want to be a Forex broker that clients trust, it’s a good model to implement. Now we're going to look at methods that ensure this type of operation.
STP (straight-through processing):
the broker sends all orders to external execution without interfering with the process, and all transactions are performed at maximum speed. For this method to function smoothly, you need to establish good relationships with liquidity providers.
ECN (electronic communication network):
liquidity on the trading platform is generated by all participants in the network with the help of internalization technology. Don’t confuse it with the aforementioned market maker execution model where the quotation flow is basically imitated.
ECN/STP:
takes the best of both worlds, allowing to generate quality internal liquidity and opening access to risk hedging from external sources.
Hybrid model
As the term implies, a hybrid operating model combines A-Booking and B-Booking methods. This is achieved by placing profitable traders and trades on the real market (A-Book) and putting unprofitable traders and their trades on the internal execution (B-Book). The hybrid model opens up more flexible risk management options to a Forex brokerage.
How do you become a Forex broker implementing the hybrid model? Forex Broker Turnkey includes the hybrid model and the trading multiplier system, which allows determining the percentage of the requested volume that goes to the external market for each trading account on your platform.
6. Establishing relationships with liquidity providers
If you choose to go with the A-book model, you have to think about exactly how you want to work with liquidity providers. Two possible ways are available to a Forex brokerage business.
Prime of prime method
This method can now be referred to as traditional for the industry. It involves connecting the services of a single company providing an FX broker with Tier 1 liquidity that would not otherwise be available. In this case, the company becomes dependent on the provider, both technologically and financially.
NBLP, or non-bank liquidity provider method
This method entails utilizing software (namely, a liquidity aggregator) that makes it possible to create a Forex broker providing the necessary bids at the best prices collected from different liquidity providers. Compared to the prime of prime method, the NBLP method provides technological and operational independence, automation of price flow processing, and the possibility to build an internal trading network involving every platform member.
Risk management perspective
Working with external liquidity providers gives your company an important advantage, namely risk hedging. To benefit from it, it is crucial to constantly analyze the market and well-performing clients, so that market surges do not put the company out of business altogether. In this case, a correct assessment of your client’s behavior is the key.
Read more on how to comply with the proper risk management procedures and start a Forex brokerage firm with robust sustainability strategies.
7. Wrapping up
After the launch, you will have to constantly adjust your business plan to the changing market conditions. Remember that although the foreign exchange market gives access to a huge turnover of funds, the competition is incredibly high. However, there are three surefire strategies you can employ at the initial stage and gain a foothold in a highly competitive environment.
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Thorough customer supportOne of the principal factors that affect your reputation as an FX brokerage firm is customer support. A high-quality customer service that responds to inquiries on time can serve as an extra marketing tool. -
A professional teamAny FX brokerage firm is a complex structure, which consists of a whole set of services, including risk management, customer service, trading desk, compliance, and finance operations. Each of the components you include in your trading platform should only be administered by professionals with domain expertise. For this reason, recruiting qualified personnel should be emphasized. -
Budget managementHow much does it cost to start a Forex brokerage? The answer to this question depends on the type of license and business model you choose, but either way, you need to remember the importance of budgeting. How you set your budget and correct estimation of costs will largely determine the success of your venture.
Thorough customer support
One of the principal factors that affect your reputation as an FX brokerage firm is customer support. A high-quality customer service that responds to inquiries on time can serve as an extra marketing tool.
A professional team
Any FX brokerage firm is a complex structure, which consists of a whole set of services, including risk management, customer service, trading desk, compliance, and finance operations. Each of the components you include in your trading platform should only be administered by professionals with domain expertise. For this reason, recruiting qualified personnel should be emphasized.
Budget management
How much does it cost to start a Forex brokerage? The answer to this question depends on the type of license and business model you choose, but either way, you need to remember the importance of budgeting. How you set your budget and correct estimation of costs will largely determine the success of your venture.