How To Start A Forex Brokerage
The online forex and CFD industry continues to grow and attract more and more business owners looking to capitalize on the rise in popularity of online trading. This has lead to the rapid increase in the number of forex brokerage operations online today.
While the information on the precise numbers of active brokers can be difficult to tie down, going by the number of active platform licenses, we can reach some rough estimates.
Metatrader 4 and Metatrader 5 alone have close to 1,500 issued licenses. This number includes white label, full-service brokers, and IBs. Of course, these numbers aren’t exact figures but, as we mentioned before, rough estimates.
On top of the MT4 and MT5 brokerages, we have operators running other platforms, such as CTrader.
Many of these brokers will be inactive, which we must consider in our calculations.
The publicly available information suggests a reasonably safe number would be 1,600 active brokers. But, again, that’s across all jurisdictions and all trading platforms. To be clear, this number is purely an estimate.
The pool of potential clients is deep, with close to ten million active traders worldwide. This number continues to grow as internet penetration statistics improve. The COVID lockdowns also had a big part to play in this increase, with people looking online for alternative sources of income.
The bottom line is that while online forex and CFD trading is big business, the barriers to getting your brokerage up and running aren’t that high. You don’t need to reinvent the wheel. All the technology you need is already available, tested, and proven to work.
So how do you go about starting your forex brokerage?
The process starts with checking off the characteristics of your operations. These include:
- Execution Model
- Jurisdiction and Licensing
- Trading Platforms
- Broker Modules
- Technical Support
Let’s look at these in more detail.
Depending on their execution model, we can divide brokers into A-Book and B-Book with A-Book brokers using an ECN/STP execution model and B-Book brokers using a Market Maker model.
A-Book Trade Execution
ECN or Electronic Communication Network describes a forex brokerage directly connecting to a network of liquidity providers. These brokers aggregate the Bid/Ask prices for the various symbols, which typically means lower spreads.
Under the STP or Straight Through Processing model, the broker doesn’t aggregate the Bid/Ask prices, so there is no intervention in the order execution. As a result, spreads tend to be higher than ECN, but execution speed is markedly higher.
As ECN and STP forex brokers transmit all client orders to their liquidity providers, there is less risk theoretically. The chance of a conflict of interest with client trades is also lower, as brokers operating under these models do not take any counterparty risk.
B-Book Trade Execution
Under the B-Book or Market Maker model, brokers don’t transmit client orders to liquidity providers, keeping all client trades in-house and covering these from their own liquidity.
While an increased level of risk is involved, this goes hand in hand with the potential for higher profits since most retail forex traders lose money in the long run.
However, this B-Book model has a higher potential for conflict of interest. Under this model, the market maker forex or CFD broker loses money if the client makes money. Caveat Emptor!
Brokerage Jurisdiction and Licensing
While no central exchange exists and forex is characterized as an OTC (Over The Counter) market, local authorities license and regulate broker operations.
Depending on the requirements of these local authorities, we can grade the various jurisdictions according to how difficult obtaining a license is.
We’ll use a 1 through 5 scale, with one being the strictest and five being the most accessible jurisdictions for new brokers.
Level 1 Jurisdictions
These include countries like the United States, the United Kingdom, and Switzerland. These countries have mature and extremely stringent regulators, open disclosure of forex brokerage ownership, and strict banking requirements.
Level 2 Jurisdictions
Countries like Germany, France, and Belgium make up the B Jurisdictions. While they have mature regulators, as EU member-states, they abide by the ESMA regulatory framework, which does allow for considerable lee-way in some areas.
Level 3 Jurisdictions
These would include Cyprus and Latvia, for example. As EU member-states abide by the ESMA regulations, but with less mature regulatory oversight, licensing tends to be merely procedural.
Level 4 Jurisdictions
Examples of these would be the British Virgin Islands and Belize. While brokers registered in these jurisdictions have to follow a regulatory framework, oversight and reporting are minimal, with no investor protection. These licenses are off-shore.
Level 5 Jurisdictions
Seychelles and St. Vincent would be good examples of these jurisdictions. A forex license is not mandatory and from application to approval typically takes a few weeks. In addition, there is no investor protection under these jurisdictions.
Forex Brokerage Trading Platforms
While there are several excellent platforms to choose from, such as CTrader, the Metaquotes platforms get the lion’s share.
MetaTrader 4 and MetaTrader 5 are among the most popular trading platforms in the world.
Tried and tested, these platforms have an excellent reputation for ease of use and advanced features. Their popularity saw the emergence of an entire online community devoted to sharing tips and tricks, trading robots, and general knowledge about the platforms.
Licensing fees for Metaquotes platforms can be expensive, starting from $5,000 a month for even the most basic package. While this is a decent entry point for most startup brokers, it doesn’t include any value-added features your brokerage will need.
For example, you’ll need to add a CRM, a PAMM/MAM solution, Affiliate Systems, Risk Management, and others. Luckily all these are available with the YOONIT modular system. YOONIT is based around intelligent modules, runs on the highly secure Microsoft Azure platform, and comes with the renowned PLUGIT customer service.
The modules in YOONIT make opening an account for your retail investors a simple procedure with onboarding and KYC (Know Your Client) included in the system.
All the modules integrate directly with MT4 and MT5, so your clients can get on with their forex trading with minimal fuss and bother. YOONIT is the most efficient way to enter the forex markets!
We touched on these in the section above, but it’s worth going over these in detail. Your systems form the basis of your brokerage, so it pays to get them right from the start.
Forex Broker CRM
Your CRM is the hub of your business. The CRM is where you keep a record of all your clients, their status, and their KYC documentation, along with financial and account information.
You have to have a simple and user-friendly way for new clients to create accounts on your forex brokerage and upload all the documents you’ll need for your KYC procedures.
While several CRM systems are available on the market today, you need a system customized to your requirements as a broker. YOONIT includes a fully-customized CRM solution.
Forex Broker Risk Management
Trading is a risky business, both for your clients and for you as a broker. Unexpected events can have a catastrophic impact on your operations, so an efficient Risk Management solution is an absolute must.
Our Dynamic Margin module is flexible and scalable. Based on intelligent automation, Dynamic Margin is a cutting-edge product. Fine-tune your risk management policies, set multiple margin and leverage profiles, and set levels for future events such as Economic Calendar releases. Dynamic Margin does it all!
Copy trading is one of the key drivers in new account registration. Over the last few years, copy trading has gained a considerable following and is one of the features new traders actively look for in a new broker.
If you don’t want to be left behind, you need to offer this feature to your clients. YOONIT includes a copy trading module with PAMM, MAM, and Trading Signals. Fully integrated with MT4 and MT5, our copy trading module will add value to your brokerage environment.
Forex Brokerage Partner Module
Client acquisition costs have been on the rise for several years now. Your marketing costs as a broker will make up a considerable percentage of your overall operating costs, so maximizing your marketing return is key to your revenues.
IBs and Affiliates are crucial for any forex brokerage, making an efficient partner system an essential part of your operations.
YOONIT includes a user-friendly, robust, feature-rich partner module to help you manage all your partners, including IBs and affiliates. In addition, intelligent automation lets you set multiple payout structures with real-time reporting and various secure payout methods.
Bonus Automation Module
Depending on your jurisdiction, you’ll be running bonus offers and promotions for FTDs (First Time Deposits) and re-deposits in your retention.
While these bonus offers are a proven way to increase your business, running them can soon become tedious. You can also leave yourself open to bonus fraud, where clients try to manipulate your offers.
Efficient bonus offers need an efficient system to run them. The Bonus Automation Module in YOONIT lets you set multiple promotion configurations with built-in protection from bonus abuse.
Setting up a new forex brokerage involves a lot of research and work. However, you can rely on the multiple award-winning modules in YOONIT to make the whole process much more manageable.
Get in touch with us today and schedule a no-obligation demo. You’ll be amazed at what we can do for you!
Contact us and see how PLUGIT can help you optimize your operations!
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Contact us and see how PLUGIT can help you optimize your operations!
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