The Foreign exchange market generates more than dollar five trillion business daily. It is the largest liquid foreign currency market in the world. In the past few years, the FX market has attracted the attention of millions of brokers. It has seen a rise in a significant number of brokerage agencies across the world. These brokerage firms understood that there is a tremendous revenue opportunity to earn than simply introducing clients. There has been an increase in the number of start-ups FX brokerage companies. These entrepreneurs are finding it more profitable to run their own business. Furthermore, the FX market holds vast opportunities for all who want to set up their independent FX brokerage firm. One should follow some of the important guidelines before setting up their own FX brokerage business. They are as follows.
- Establishing a company
- Choosing a business model for your FX brokerage firm
- Transparency and ownership
- Liquidity Provider
- Safety of Funds
To discuss the topic further, we should explain it clearly.
Establishing a company
The trouble a start-up broker faces is when they open their brokerage agency. The initial work involved establishing an FX brokerage company and the legal framework surrounding it. Another primary feature of establishing a brokerage company involves establishing corporate banking relationships and developing its workflow and processes. The steps that are in mind before establishing your brokerage firm are as follows.
- One needs to register your FX brokerage business in a jurisdiction within your budget and business requirements
- Always open a corporate bank accounts for client deposits and the company operations
- Look for your own FX brokerage office, hire staff and IT equipment for running the FX trading platform
Choosing a business model for your FX brokerage firm
In general, there exist two business models that an FX brokerage can adopt. Market Maker or Principal model: This is where the brokerage B-books (take the risk on its books) its clients trading activity. Hybrid Model: This is where the brokerage basically runs a combination of the market maker and agency models based on certain field of criteria.
On the other hand, you will try to find out a technology partner who is flexible enough and has a structure that is adaptable to any business model that the retail brokerage often implements. To set up your own FX brokerage business, you need the money manager infrastructure of crucial trading and reporting tools. Apart from that, you also need to have a flexible introducing brokerage feature accompanied within your agency. It is the IB and money management program that is the primary catalyst for boosting your transaction volume. The IB model is prevalent all across the globe, and in return, they receive rebates based on the trading volume of the new clients.
Transparency and Owner Ship:
Since you are dealing with liquid currency for your FX brokerage business, always choose such a banking partner and payment service provider who will provide you complete information for trade reporting and execution on a real-time basis. Always make sure that you maintain full ownership of your clients. Never share your client’s merchant account credential with your competitor. Maintain absolute secrecy or else you will face fraud and anti-scam problems within your FX brokerage business.
The 2008 financial crisis made the Prime Brokers (PBS) very selective in establishing relationships with brokerage agencies. As a result, many brokerage agencies lost their tier 1 prime brokerage account. Prime Brokers are happy to deal with clients from Multinational corporations, hedge funds, and larger brokerage agencies. The same wasn’t applicable for startup FX broker firms since they didn’t have sufficient capital. It has given rise to a new model known as Prime of Prime (POP). The benefit of having a POP account is that they work for the startup FX brokerage firms. It includes margining, having money in a place, and dealing with a single point of contact. Always the newly formed brokerage agencies should know who the underlying prime broker when dealing with a POP. A strong PB will offer the brokers reliable pools of liquidity across the multiple liquidity provider at an affordable cost. When choosing a POP, remember that it is crucial to go with a regulated POP that offers quality institutional tier-1 money and transparency.
The FX brokerage firm requires a partner who provides innovative technology to ensure you have a competitive advantage. New brokers should always look for a flexible technology provider who will provide all kinds of the trading platform at once. Some provide full turnkey solutions for technology as well as entire end to end solutions for new brokerage. Some of the technology includes trading software, bridges, and risk management tools. These technology providers provide an advanced risk management system that minimizes the potential for loss to the broker.
Safety of Funds:
As a startup brokerage firm, it is wise to establish a relationship with a regulated broker. It ensures that your funds are in safe hands, and you will receive all your payments from the clients in your designated merchant account. The regulation guideline for the brokerage firms will be available on the regulatory agency’s website. If you follow all the regulatory instructions, your business will be free of fraudulent activities.
If you wish to establish a brokerage business of your own, then follow these factors strictly. It will help you to earn potential profits from the fastest growing market in the world.