How to Start a Forex Brokerage
There are many important considerations when setting up your own Forex brokerage. While exploring this exciting opportunity we aim to break down some of the most important decisions.
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There are many people who work in the Forex industry that at some point believe they are ready to launch their own broker. They might be an introducing broker who has good client outreach, a sales manager who has their own book of clients or simply a high net worth individual who understands that the Forex industry can be a lucrative business.
But what should one consider when setting up? How much capital do you need? Which regulation should you start with? Do you need your own trading platform? Where will you acquire clients?
Lets look at some of the key considerations when setting up a Forex brokerage.
Regulation is one of the most important considerations when deciding to open a Forex brokerage. It can be broken down into two separate areas – Onshore and Offshore.
Onshore regulation is definitely the way to go to achieve more credibility with your clients. The main onshore regulators are as follows:
- NFA (National Futures Association) – United States (USA)
- FCA (Financial Conduct Authority) – United Kingdom (UK)
- CySec (Cyprus Securities and Exchange Commission) – Cyprus
- MFSA (Malta Financial Services Authority) – Malta
- ASIC (Australian Securities and Investments Commission) – Australia
- SFC (Securities and Futures Commission) – Hong Kong
- MAS (Monetary Authority of Singapore) – Singapore
- JFSA (Japan Financial Services Agency) – Japan
Now, while these jurisdictions may give more credibility with your clients, it is much more expensive when setting up in these countries. The capital needed is based on the minimum capital requirement in each of these countries which varies. It can be as high as $20M in the United States to a lower 125,000 Euros for the FCA and CySec.
Onshore Forex license applications tend to take more time to be approved than offshore as the regulator tends to do more due diligence. Applications can take anywhere from 6-12 months depending on the regulator.
Many start-up brokerages tend to start with offshore licensing and then move to an onshore jurisdiction once their client base has grown.
Offshore regulation is seen to have less credibility and protection for clients but the barriers to entry can be lower in many cases. The cost of setting up also tends to be lower. In comparison with onshore, offshore regulations tend to be a little looser. Despite this, some offshore regulators are now beginning to increase their due diligence to gain more credibility in the financial regulatory stakes.
Lets take a look at some of the more prominent offshore regulators:
- FSP (Financial Services Provider) – New Zealand
- FSC (Financial Services Commission) – British Virgin Islands (BVI)
- IFSC (International Financial Services Commission) – Belize
- SFSA (Seychelles Financial Services Authority) – Seychelles
- CIMA (Cayman Islands Monetary Authority) – Cayman Islands
- MFSC (Mauritius Financial Services Commission) – Mauritius
- VFSC (Vanuatu Financial Services Commission) – Vanuatu
- SVG FSA (Financial Services Authority) – St Vincent and the Grenadines
In some offshore regions the minimum capital requirement is still quite high ($500,000 for Belize) while in St Vincent there are no minimums.
Application times can vary between 6-9 months to as short as one week, quite a large variance.
The quickest and easiest entry to market is to register a St Vincent company. Some offshore jurisdictions can make it tricky to get a bank account. The more credible the regulator, the more likely one can achieve a bank account for the business.
2: Launching a Forex Platform
Many start up brokers tend to use a MetaTrader platform when starting their business. There are a few options when launching with MetaTrader:
- Buy your own MetaTrader 4 or 5 server at a cost of approximately $100,000
- Take a MetaTrader white label from a technology company or another broker
- Take a MetaTrader grey label from a technology company
There are also other options to MetaTrader. cTrader is another popular platform as is ProTrader. There are also some very nice mobile platforms hitting the market, Hummingbird Trading and Pelican Trading. These can be used as a white label mobile solution for your business.
Once you have chosen your platform, you will then need a solid team to manage the platform for you. This team will be able to create client accounts, clients groups, different mark-ups and provide the full maintenance around the platform. Choosing a strong technology team is key.
Check out our article: MetaTrader: Grey Label Vs. White Label
3: Choosing a CRM and Customer Portal
While not essential, having a CRM and customer portal can make running a Forex broker so much easier. A customer portal allows clients to access all the information about their trading account, make deposits and withdrawals, make requests and provides a centralised place for a much more organised Forex business. There are a number of customer portals on the market which can take the place of numerous employees.
A customer portal is a cost efficient way to save money on employees and a centralised point where all clients can go to access their information. It is highly recommended to launch a brokerage with a strong CRM and customer portal.
4: Choosing a Liquidity Model – A or B book
Having the right liquidity model is critical to the success of a new broker as this is essentially your revenue. There is a big decision to be made here – do you send all trades to market (A Book), take the opposite side of client trades (B Book), or a hybrid of both? There are two critical components to understand when making that decision – how big is your balance sheet and how well do you understand risk.
Many start-up brokers think that running a B book and taking the other side of a trade is easy, when in fact it is not. What happens when a client with $100,000 gets lucky on a trade and makes $100,000 profit? That comes out of the brokers pocket, quite a big loss when the trades could have been sent to market thus removing all the market risk.
When running a A book model there is no market risk and profit is made on a mark-up on spread or commission charged after taking into account the liquidity providers costs.
When running a B book model there is market risk and most of the profit is made through taking the opposite side of client positions. It can be a risky business however as most retail clients lose money, it can quite a profitable strategy for the broker.
The key to a successful brokerage is understanding how to manage risk and getting a good balance of A and B book. This requires trading desk experts to assist with this to fully maximise the profit and loss.
5: Have a Good Business Plan
This is obviously an important step before launching any business. Having a business plan before a Forex brokerage launch is no different. What will be your edge? Which regions will you target? How many employees do you need? What is your marketing plan?
Running a Forex brokerage is no easy feat and not for everyone. However if you get it right the rewards are very lucrative. Understanding where your target market and edge is are the two most important however there are numerous other considerations to be made.
- Starting a Forex brokerage requires many important decisions before launch.
- When choosing where to be regulated there are multiple options onshore and offshore.
- Most startup brokers choose MetaTrader and decide between a grey or white label.
- A good client portal can make running a Forex brokerage a lot easier.
- The most critical part of success is choosing an efficient liquidity model – this is the cornerstone of maximising revenue.