FOREX MARKET – How to start a forex broker
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, binary options, and other leveraged instruments. In this situation, you face the problem of having to choose between the offers of dozens of companies.
Development of technology
Forex technology has become more and more sophisticated. Every fx brokerage wants to stand out from the competition by creating its own technology. The most popular is MetaTrader; as an alternative, one can mention XOH Trader.
This post is an attempt to answer this question. The article has therefore been divided into the following parts:
1. EXECUTION OF ORDERS
2. REGULATORY ENVIRONMENT
4. TERMS OF TRANSACTION
6. PRODUCT SELECTION
7. SEGREGATION OF FUNDS
EXECUTION OF ORDERS
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).
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.
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 promotion, such as bonuses and competitions to encourage potential customers to open accounts.
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 which 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.
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, execution of orders depends exclusively on the current situation on 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 favourable 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.
REGULATORY ENVIRONMENT FOR 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:
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 centres. 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 is the Financial Supervision Commission, the Polish body controlling and supervising the companies operating in the financial market and offering their services in Poland.
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 which 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.
OTHERS CHECK : FOREX LICENCING
TERMS OF TRANSACTION FOR THE NEW FOREX BROKER
When considering the best possible trading solution, you also need to focus primarily on terms and costs of transactions. It is wise to consider the following elements:
• types of accounts
TYPES OF ACCOUNTS
The first very important issue when it comes to trading conditions is the number and types of available accounts. Many companies offer only 2‒4 types of accounts; this is obviously insufficient for professional investors seeking diversified trading conditions.
Professional investors need more than 2‒4 types of accounts, depending on their preferences.
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. Applications for smartwatches and other wearable devices constitute another great area of opportunity. This type of solution is provided by the XOH trading platform.
• browser platform
• desktop platform
• mobile platform
The availability of the right type of spread in the account is one of the most important parameters that affect the overall cost of our investment strategy, especially if we use strategies such as day trading. The most commonly available types are:
• fixed spread
• variable spread (floating spread)
• bid-offer spread
• varying lower spreads plus a fixed commission per trade
A swap is one of the types of fees charged by a broker; it is hidden to a certain extent and thus not fully obvious to novice investors, many of whom ignore it or are completely unaware of its existence.
A swap is a fee charged by the broker for keeping open positions overnight. It is expressed in pips, and its nominal value depends on the size of the position for which it is calculated.
The swap can be very large, depending on the broker.
Another charge of whose existence some investors are unaware. Commissions are charged in several different cases:
• in accounts with the spread on the market;
• in the case of CFD on futures;
• in the case of CFDs on stocks.
LIQUIDITY FOR FOREX BROKER
Liquidity is the fundamental factor that any broker or White Label 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 on 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.
Check also: LIQUIDITY PROVIDER LIST
Without doubt, this is a major factor. Not all brokers offer the same variety of trading instruments. If you have 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.
WARRANTIES OF SOLVENCY
A guarantee of solvency is another very important element that all the best forex brokers include in their offers. The biggest brokerage houses in the world market are members of a compensation system which will compensate investors (to some extent) for withdrawn money in case of a member’s bankruptcy.
It is absolutely unacceptable to entrust your funds to a company which is not a member of the compensation system.
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.