How to start a forex broker – Complete Guide

A quick market overview

In the last decade, the forex market has gained great popularity. It is difficult to define all of the factors influencing its rise. However, we can cite some of the main reasons for its growth:

• currency investment has become more accessible for retail traders;
• the currency market is more dynamic than the stock market (bigger opportunities, faster order execution);
• the regulatory environment has become friendlier;
• people have developed a greater interest in private investment.

The number of brokers offering their services has also grown considerably. The variety of financial instruments has become greater and greater. Nowadays on the market, you can find currency pairs, indices, commodities, CFD, and other leveraged instruments. In this situation, you face the problem of having to choose between the offers of dozens of companies.

Basic questions while starting a forex broker

Before the start of a forex broker, here are a lot of questions you should ask yourself. Whether you are an entrepreneur, a head of the equity brokerage, or a head of a bank, similar questions will come to your mind quickly. 

What do I do first while starting a brokerage business? How do I become the best forex broker in my market? Which forex regulation do I choose? Which forex white label provider should I choose. Etc etc. There is, however, a good, basic list worth going through to make sure you have all major things figured out. An online forex brokerage is not only about having the best liquidity provider or setting up a regulated company as much as these tasks are crucial. Below you may find an experience-driven to-think-over list before you move ahead.

• How to choose the right people to start a forex business?
• How to choose the right target group?
• What type of strategy you should choose while starting a brokerage business?
• How select the right regulatory environment for a new forex broker?
• What are the types of the execution strategy, and how to select the right solution, for a starting forex business?
• How to choose the trading platform provider
• What is the most important while choosing a liquidity provider?

How to choose the right people to start a forex business with?

It is the most important thing to start with – who will be doing this? Getting the right people into the equation can be more important than vast amounts of funding, as these people will be spending it. It might be enough to do it as a single person when all planned activities will be outsourced – but here it is important to check if you have been enough time into the business to avoid pitfalls. Suppose you are planning to expand the business. In that case, another thing to consider is if to take over experience people from your competitors, who have been in the forex brokerage services, or start with an experienced team out of a different field of finance. The former will give you a bigger chance to get on top of what matters now, the latter will allow you to take a non-standard approach to the business. With the former, you might avoid common mistakes, with the latter you might conquer a market with a “blue ocean strategy”.

Selecting your market and target group

In theory, it is enough to prepare a good PPC campaign (pay-per-click), put enough budget from a credit card, and let it go. Unfortunately, marketing to a general audience will be very expensive and unsuccessful. Currently keywords like “mt4 broker” or “forex trading” will be very expensive in google auctions and the client might not necessarily consider you as his/her ultimate choice. That is why it is important to define the market first. It might be even better to try finding an even smaller market for a proof-of-concept, where you will spend a defined small amount of money and see if your strategy works. Sooner or later you will need to attack your market, and it is good to know which one it is. Is it your local community, HNI’s from your district, or maybe middle class from the whole country? The better you define it, the easier it will be to craft a customized solution for them using proper white label providers, a well-designed website, and properly targeted campaigns. This will also allow you to answer further questions regarding technology providers, offer for the clients, and the type of marketing campaigns.

Setting up your initial business strategy

Once the market and target group is defined, creating a strategy should be the next step. The strategy should incorporate many aspects but Marketing, Client offer, and Risk management would be the key points.

a) marketing

How is the target group going to be reached? Considering the costs offline strategies might not work in certain countries, while in others this will be the main way to reach your local community. Sometimes it might be enough to do marketing to your existing client group, while in other cases a branding campaign is necessary so that potential clients start recognizing your trademark before they are approached by sales. The more detailed the strategy the easier it is later, so defining specific media and researching their prices is important. Also, plans for the creation of websites, landing pages, gadgets, and promotions should be taken into account.

b) client offer

While reaching the customer is important, you also need to know what your target group will be offered. Will they trade on a few instruments or will they appreciate a whole array of them? Will they want to trade on fixed or floating spreads? It is good to do a market comparison with competitors and check their spreads and quality of execution. The same applies to any affiliates you might need to approach. Rebates for introduction need to be defined and conditions to get them to protect you from unfair business partners.

c) risk management

One of the most important issues is how you are going to make money and what type of risk will the brokerage take. There are as many risk management practices, as there are brokers on the market. The most popular are full A-book or full B-book, but hybrids are usually the most common. These hybrids allow you to make the most of the market’s potential. In this case not only your risk appetite needs to be taken into account. Defining your client groups, their experience, and your cash levels should also take place. It might also be worth considering taking one approach in the beginning when risk is not what you seek while starting a new venture, while gradually taking on additional risk when developing the enterprise.

Selecting the regulatory environment for a new forex broker

The regulatory environment is another very important aspect that should be considered. An investor wishing to find the best forex broker solution should find out whether the company is registered and supervised by the Financial Supervision Authority.

At the moment, we are facing a situation in which a forex broker can be regulated by:

• CySEC
• KNF
• FCA
• Others

CySEC

Recently, the number of companies in the forex market has been growing rapidly. These companies often are registered in Cyprus and maintain headquarters there. This Mediterranean island has become one of the world’s biggest currency trading centers. This is because companies registered in Cyprus are subject to EU financial rules, thus theoretically guaranteeing the full legality of the activities of such companies. This country is also attractive due to its combination of highly-skilled professional services, modern infrastructure, and a wide variety of investment opportunities.

KNF

KNF is the Financial Supervision Commission, the Polish body controlling and supervising the companies operating in the financial market and offering their services in Poland.

FCA

The application procedure for this type of forex license is quite complicated and time-consuming. The Financial Conduct Authority has a different mandate from the others; it is primarily concerned with the regulation of firms that provide financial services. Any organization that provides both banking and other financial services is required to be regulated by this financial organization in the UK.

To learn more about choosing a forex regulation, visit this blog post.

Considering types of trades execution

The most important part of working with a brokerage house is choosing the right type of order execution. This has a significant influence on the ultimate outcome of your investment. On the forex market three of the most popular types can be distinguished:

• MM (market maker)
• ECN (electronic communication network),
• STP (straight-through processing).

MM

A market maker is the oldest and most common type of order execution. Its popularity seems to derive from yielding the highest possible profit for such a model for the broker.

Key features:

Brokers, in most cases, occupy a position opposite that of their customers and thus earn profits when investors lose. This usually raises awareness of the obvious conflict of interest.

Brokers execute orders at exactly the price indicated by the client, but this depends on the particular procedure in use. Brokers do not automatically hedge positions in the open market; instead, they use other methods to cover their exposure, such as offsetting trades against other traders, buying options, warrants, or futures, or even buying shares on the open market.

In this case, brokers spend a lot of effort on marketing strategy. Their marketing plan is usually based on expensive promotions, such as bonuses and competitions to encourage potential customers to open accounts.

ECN

ECN brokers are on the other end of the market spectrum when it comes to kinds of order execution. Features of this type of order execution include:

1. Brokers never take an opposing position in relation to their clients.
2. Brokers do not guarantee the execution of orders at exactly the price indicated by the client because in this case, investors place their orders on the interbank market, where guaranteed orders do not exist (a general feature of the forex market that investors must know and understand).
3. ECN brokers do not usually run additional promotions, such as bonuses or contests.
4. Initiation of trading usually requires a large first deposit, for example, $10,000 (US).
5. The leverage of ECN brokers is also often limited (for example, 1:5).

So, as we see in this case, people who decide to trade through an ECN broker actually gain access to the interbank market, where brokers do not take positions opposed to their clients in the hope that they will lose. The ECN trading model, however, is reserved for individuals with huge investment portfolios who are prepared to make long-term investments.

STP

Forex brokers offering straight-through processing execution of orders fall somewhere between the MM and ECN models. Features of the STP model include:

1. Brokers, as in the case of ECN, act only as intermediaries, transmitting client orders. Brokers, again as in the case of ECN, do not offer guaranteed orders. Rather, the execution of orders depends exclusively on the current situation in the financial markets.
2. Brokers, unlike in the ECN model, typically offer a very wide range of promotions.
3. Initiation of trading is possible with minimum deposits as low as $50 (US).
4. Leverage is also high, up to 1:1000.

Brokers of this type, as we can see, combine the qualities of ECN (access to real market conditions) with the positive elements of an MM offer (interesting promotions, minimum deposits, high leverage on accounts). Therefore, they afford access to the most favorable market conditions while offering very interesting promotions and types of accounts available even for individuals with minimum capital contributions. Therefore, STP-type brokers should be selected by experienced investors seeking proven solutions on the market.

To learn more about different types of execution, visit this blog post.

How to choose the trading platform provider?

The second most important topic is the number and types of available investment platforms. The number of solutions that a broker offers can indicate the credibility of the brokerage house.

The platform should enable your clients to manage their trades from wherever they are, whenever they want. The trading platform should allow your clients to trade via web or desktop applications as well as IOS and Android apps.

The ideal trading environment is one in which all traders can develop their trading strategies and carry out transactions on their preferred instruments.

Depending on the individual investor’s preferences, the best trading solution can mean different things to different people. We can, however, highlight the most important characteristics you should take into account before selecting the platform.

The following conditions should be met by the trading platform:

• good user experience
• essential trading tools and additional features
• broad branding possibilities

To learn more about choosing a forex platform provider, visit this blog post.

Liquidity selection for a starting forex broker

Liquidity is the fundamental factor that any new brokerage business should look for. Choosing a valuable and trustworthy liquidity provider should be the main step taken before creating a new fx business.

The main features concerning liquidity solutions are:

Pricing: If tight spreads are obtained, the probable earnings are bigger. Tighter spreads help a broker to become more competitive in the market and reduce trading costs.

Trust: If you are planning to enter the fx market, you should plan an association with a liquidity provider.

This is always a long-term agreement and relationship. A company’s reputation and reliability are the main subjects on which you need to focus. Choosing an unstable partner that might go out of business may cause you a lot of problems and inconveniences.

Instrument selection 

Without a doubt, this is a major factor. Not all brokers offer the same variety of trading instruments. If you have a certain style of investing and your trading depends on certain instruments, make sure that your broker of choice offers them, and don’t give up your most suitable instrument for other features.

Segregation of funds

Another sign that you are dealing with a credible broker and that your money is safe is when your broker offers segregation of funds. This means that clients’ money is kept separated from the broker’s own equity and, in case of liquidity issues, clients’ money does not go into the pool to pay off the broker’s creditors.

To learn more about selecting a liquidity provider, visit this blog post.