The decentralised structure of the forex market makes it an easily accessible place for all traders, irrespective of their location. The currency market is truly global, and trading activities are carried out via online trading platforms. At the same time, there is a lot of transparency, and the businesses providing brokerage services have to comply with the regulations to ensure the safety of traders. Becoming a forex broker or setting up an online brokerage is a sound business idea with a high potential for revenue. Opting for a white label solution can be more feasible for a beginner as it offers an easier setup process, allowing you to enter the market within a few weeks.
However, an aspiring forex broker needs to pay attention to the legal aspects and regulations before moving forward with their business plan. In this article, we will discuss the prerequisites of starting a new brokerage and the things you need to adhere to when functioning as an online forex broker.
Why Start a Forex Brokerage Business?
We need to answer an important question before moving forward, which is why we need to start a forex brokerage business. The first and foremost reason for pursuing this business plan is the high-profit potential. When you start out as a forex broker, you will get a large potential client base consisting of traders from all parts of the world. The forex market is open 24 hours a day, and the increased accessibility offered by online trading platforms attracts a lot of people.
The Forex currency pairs have emerged as the most popular asset class for trading due to its high liquidity. There are millions of individuals engaged in forex trading, and all of them need a broker to access the currency market. Thus, you will enter a market where your services are always in demand. Anyone with a system or device and a stable internet connection can get into trading as all they need is a broker functioning as a link connecting them to the forex market that operates on a virtual level globally.
In short, you won’t have to worry much about the demand for your services if you are confident about offering your clients a reliable platform (MT4 or MT5) and favourable trading conditions.
What Do You Need to Launch Your Own Forex Brokerage?
Now, let’s have a look at the key prerequisites needed for launching your forex brokerage business.
- A Sound Business Plan
The first step towards success in any new venture is a sound plan; you need the same for starting a new forex brokerage, too. Since it is a business venture, we can refer to it as a business plan that covers all the aspects that need to be considered before taking action. Your business plan should state all your goals and objectives along with the means to achieve them in the best possible manner. Your goals need to be realistic and practical, and you should also be mindful of the cutthroat competition and risk. Don’t expect to start earning profits right away, as it does take some time for a new broker to win the trust of traders and grow their client base.
How much capital will you need for the initial setup process, and how much funds will be needed to meet the expenses after launch? You need to have a clear idea about the capital requirements and should also estimate the time period that will be taken for launching the business. You don’t need to rush the process and can do things at your own pace, but make sure you make it possible as fast as possible. Doing thorough research is essential to find the best options, and those who create entrepreneurial success stories will tell you about the importance of a solid plan.
2. Understanding the Regulatory Environment
As I mentioned before, the decentralised structure of the forex market makes it way more accessible to the common population, but the market is also subject to a lot of rules and regulations, which vary depending on the jurisdiction that you choose for running your business. The regulatory environment in offshore jurisdictions differs greatly from the regulatory conditions in major regions like the EU and the US. There will be rules about the protection of trader’s funds, leverage limitations, negative balance protection and more that you need to comply with.
Having a top-tier authority like CySEC or FCA as a regulator is not that easy. But it does give you a competitive advantage as many traders prefer to join platforms with strict regulatory oversight. Brokers who opt for a white label solution from a regulated broker will be able to confirm with the regulatory standards in an easier way as the white label provider will be in charge of all the complex legal formalities.
In addition to this, those who wish to expand their potential client base by promoting diversity need to look into the religious aspects of forex trading. There are a lot of Muslim forex traders in the market, and you need to understand the concept of halal trading to meet their requirements. You will have to do some research about Islamic finance and offer Sharia-compliant trading accounts, as it boosts your revenue potential by widening your potential client base.
3. Establishing Broker-dealer Relationship
The broker-dealer relationship is an important aspect to consider as the dealer as it determines the method for providing market access. The dealer is responsible for providing sufficient liquidity to the broker’s clients so that traders get the best prices for buying and selling a currency pair.
The broker-dealer relationship in forex trading can take different forms:
- Straight-Through Processing (STP): Some brokers operate on an STP model, acting as intermediaries and passing clients’ orders directly to liquidity providers or other participants in the market. In this case, the broker’s role is primarily to facilitate trades, and they may not take a direct interest in their clients’ trades.
- Market Maker: Market maker brokers, on the other hand, act as both the broker and the dealer. They make markets by setting their own bid and ask prices and may take the opposite side of client trades. This model can involve a potential conflict of interest because the broker-dealer profits when clients lose money.
- Electronic Communication Network (ECN): Some brokers rely on ECN systems for providing market access that connects traders directly to the interbank forex market as they team up with several top-tier liquidity providers. ECN brokers are known for the fast execution of trades and tight spreads. Hence, they are very popular among retail traders who want to minimise costs.
You need to evaluate the pros and cons of each system and choose the best one for your business.
4. A powerful trading platform
Offering an advanced and powerful trading platform is one of the primary functions of a forex broker. You can consider popular platforms like MetaTrader 4 and MetaTrader 5 as they are the most preferred trading softwares in the forex world. Platform integration is a crucial step in establishing your brokerage, and when you choose a white label package, you will get a turnkey solution for all tech-related aspects, including the trading platform.
The platform must be able to support a large volume of trades with seamless execution, as the trading experience of clients needs to be satisfactory in all situations. It is important to capture new clients and retain them for a longer duration.
Regulations to Adhere to When Opening a Forex Brokerage:
- Margin Requirements: Margin requirements are the minimum amount of funds in the trading account to initiate or keep a trade running. As a broker, you must determine how much collateral is required for each client’s trade.
- Leverage Limits: Offering sufficient leverage to traders is essential to attract them to your platform. But you also need to adhere to the regulations and set a limit to the leverage. You need to follow the rules of your regulatory body while providing leverage.
- Position Sizing: You need to define the maximum size of positions clients can take.
Position size limit varies according to the currency pair and associated risk. Major pairs often have higher position size limits compared to volatile pairs.
- Risk Management: You should also Implement sound strategies to manage client exposure to risk. This makes you a trustworthy broker, and clients will stick with you for a secure trading experience.
Now, you have learned everything you must adhere to while opening a forex brokerage business. The legal procedures and licensing formalities tend to be complex and time-consuming when you enter the forex market as an independent broker. Being a beginner, you can surely consider white label solutions to make things easier and faster.