There are two approaches to establishing a brokerage business: utilizing White Label/Turnkey solutions or building it from the ground up. In the following section, we will examine the step-by-step process of initiating a brokerage business from scratch. The basic steps include:
Selecting the Ideal Broker Model
The choice of selecting the best forex broker model is paramount – A-Book, B-Book or Hybrid. Please reference my last post for an in-depth discussion on the available models (click here).
Identify Target Market
To successfully launch an forex brokerage, a thorough analysis of competitors and the identification of the target audience are essential. Key parameters to determine include age, gender, hobbies, income level, country of residence, and more. These factors significantly influence decisions such as your company’s legal address, the approach to platform promotion, the number of supported languages, and various other aspects. The scope of your regulatory license and the passporting of licenses is also of paramount importance.
Prior to commencing a Forex business, it is imperative to register a company and acquire the necessary licenses. The license holds significant weight as a decisive factor for traders when selecting a Forex broker. Various government regulators issue licenses in different jurisdictions, and the specific choice depends on factors such as the broker’s business scale, budget, and other variables elucidated in this publication. From a legal standpoint, the broker’s license specifies the regulatory authority overseeing the broker’s activities and effectively shapes the company’s reputation.
Operating a Forex brokerage without the necessary licenses is possible but can lead to legal consequences, including fines and the shutdown of the business. Additionally, potential clients may be hesitant to trade with an unlicensed broker due to concerns about the lack of regulatory oversight and consumer protection. To wit, jurisdictions such as Saint Vincent and the Grenadines, which was home to countless un-licensed forex brokers, officially prohibited the practice at the beginning of 2023. This led to the unregulated forex market looking for other jurisdictions such as the Marshall Islands in order to operate without a license. However, a major pitfall to operating in the unregulated space is the increasingly few banks and payment service providers willing to work with unlicensed operations.
Building the Technical Infrastructure
Before embarking on the creation of a Forex brokerage, it is crucial to recognize that the marketplace, where buyers and sellers converge, constitutes a sophisticated system with interconnected elements operating both online and offline. These elements collectively furnish the necessary tools for a seamless and uninterrupted trading experience. Here is a breakdown of indispensable components within the structure of the Forex exchange, integral for its functionality.
- Matching Engine The order matching engine, often referred to as a matching system, is an electronic system designed to match buy and sell orders in various financial exchanges. Serving as the core of electronic exchanges, it executes orders swiftly and efficiently, ensuring optimal prices for both buyers and sellers. Each trading pair has its order book within the matching engine, facilitating the convergence of buyers and sellers for trade execution.
- Liquidity The Forex market, with its daily trading volumes reaching trillions of dollars, thrives on maximum liquidity. Numerous transactions involving different currencies necessitate counterparties willing to buy or sell the desired currency. Large financial organizations, known as liquidity providers, play a crucial role in the Forex market by offering liquidity to various participants, including brokers and private traders. These providers, often banks and brokerage firms, maintain significant funds in different currencies, ensuring they can fulfill requests for varying amounts at any given time.
- Trader’s Room/CRM Essential for the operation of a brokerage business, the trader’s room serves as a consolidated web service providing traders with convenient access to diverse trading tools. It organizes the client’s personal space on the brokerage company’s website, facilitates back-office functionality, manages payment systems, and handles document processing and client identification requests. Additionally, the trader’s room commonly integrates Customer Relationship Management (CRM) software for seamless interaction with traders.
- Trading Platform The trading platform is the gateway for traders to access the Forex market. Irrespective of trading style or preferred instruments, the chosen trading platform significantly influences the overall trading experience. From providing access to fundamental research and analyzing market news to performing technical analysis on currency pairs, trading platforms aim to simplify trading processes and enhance opportunities for traders to manage their investments.
- Data Centers and Hosting Specialized programs installed on servers autonomously execute orders, monitor the market, analyze price changes, and identify optimal entry points for profitable agreements. The use of Virtual Private Servers (VPS) or Virtual Dedicated Servers (VDS) for hosting trader terminals is crucial for maintaining a constant connection to broker servers. This is especially vital for automated trading systems, ensuring high-speed and continuous access to the latest market quotes, allowing algorithmic trading strategies to function effectively.
Identifying Liquidity Partners
Forex brokers, particularly those employing direct transaction processing (STP), typically collaborate with numerous significant liquidity providers to uphold their own pricing and maintain liquidity levels. These liquidity providers are commonly large financial institutions or banks deeply involved in currency trading. Essentially, their substantial trading volumes make them highly likely choices for traders looking to sell currency and correspondingly buy from them. Occasionally, a broker may execute currency sales without forwarding transactions to liquidity providers. In such instances, when making a purchase, you are transacting with the broker directly, not the specific liquidity provider to whom the broker routed the transaction. Brokers adopting this approach are referred to as “market makers,” serving as counterparties in the trading process.
Identifying Payment Service Providers & Payment Rails
Managing complex tasks in the realm of Forex brokerage demands meticulously refined technical processes, particularly in the handling of customer deposits. This extends to selecting payment service providers (PSPs) capable of meeting specific requirements based on geographical regions and providing the desired methods for clients. While most PSPs typically do not impose account opening fees, processing fees can fluctuate. It is strongly advised to engage multiple providers, allowing the redirection of customers to alternative accounts in the event that one becomes unavailable. Given the critical nature of this aspect in your business, a continuous search for reliable payment providers is essential. This includes not only favorable banks offering B2B/B2C accounts, but all merchant gateways and electronic money institutions that offer card process, IBAN, SWIFT, Crypto etc.
Selecting a Trading Platform
The trading platform serves as the sole gateway for investors to the market. Therefore, it is crucial for Forex traders to verify that the trading platform and any associated software provided by a broker are user-friendly, encompassing a range of technical and fundamental analysis tools while facilitating seamless opening and closing of trades. Currently, MetaTrader 4 and 5 stand as highly favored trading platforms, albeit with considerable costs. In such instances, alternative options like cTrader can be explored, offering comparable functionality, a user-friendly interface, and ease of use without compromising quality.
MetaTrader 5 is the current industry standard. It is the successor to MetaTrader 4 (MT4) and was developed by MetaQuotes Software. MT5 was introduced to provide additional features and capabilities beyond what was available in the earlier version.
Here are some key features of MetaTrader 5:
- Asset Classes: MT5 supports trading in various financial instruments, including forex (foreign exchange), stocks, commodities, and cryptocurrencies. This expanded asset coverage distinguishes it from the primarily forex-focused MT4.
- Timeframes and Charts: Traders can analyze price movements using a variety of timeframes and chart types. MT5 offers more timeframes than MT4, providing greater flexibility for technical analysis.
- Order Types: MT5 supports a range of order types, including market orders, pending orders, and stop orders. Traders can use these orders to implement different trading strategies.
- Technical Analysis Tools: MT5 comes with an extensive set of technical analysis tools, indicators, and graphical objects. This allows traders to perform in-depth analysis of price movements and market trends.
- Algorithmic Trading: Like MT4, MT5 supports algorithmic trading through the use of Expert Advisors (EAs). Traders can create or purchase EAs to automate trading strategies.
- Economic Calendar: MT5 includes an economic calendar that displays important economic events and their potential impact on the financial markets. This information is valuable for fundamental analysis.
- Improved Charting Tools: MT5 offers advanced charting tools, including more drawing tools and analytical objects. This enhances the platform’s capabilities for technical analysis.
- Multi-Currency Backtesting: Traders can test their trading strategies using historical data for multiple currency pairs simultaneously, providing a more comprehensive analysis.
While MT5 offers several advantages over MT4, it’s important to note that MT4 remains widely used, and the choice between the two often depends on personal preferences, the specific needs of the trader, and the offerings of the broker. Many brokers offer both platforms to cater to a broader range of clients.
Testing & Implementation
Evaluating the usability of your trading platform is a crucial step in establishing a business, offering insights into whether your customers are engaging with your exchange as intended. Furthermore, it sheds light on any encountered issues. It is advisable to conduct testing at an early stage to facilitate prompt adjustments to the design before the product is officially launched.
Once the software development and preceding steps are completed, your exchange should operate effectively in its beta version. Developers ought to scrutinize user experiences and implement necessary changes based on this feedback, ensuring a seamless transition to the full project launch. This phase also serves as an opportunity to promote the Forex exchange to the target market.
Selecting the correct forex broker model is an essential step in launching a profitable forex broker. Adam Tracy offers guidance on forex broker licensing, identifying technical partners, trading platforms such as MetaTrader, liquidity and payment flows. Be sure to reach out with any questions or comments!
Otherwise, you can book a free consultation here.
About Adam Tracy
Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.
Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.
In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.
Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, Hollywood Reporters, CNBC, Reuters, CoinDesk, and Bitcoin.com.
Find Adam: https://linktr.ee/adamtracy
Blockrunner, LLC., is a financial services match-making marketplace and consulting company. We are not a bank, FI/NBFI, Payment Service Provider, deposit taking institution, trust, or money services business of any kind. We are not regulated by any financial regulator. Banking, Payment, Processing, and Licensing services are provided by our participating members. This website is for informational purposes only and does not constitute legal advice. If you need legal advice, please consult a licensed attorney in your jurisdiction.