Table of Contents 1.) Market Saturation & Competitive Advantage 2.) Choosing Partners 3.) Company Setup & Regulation 4.) Bank & Payment accounts 5.) Trading Platforms 6.) Customer Support & Sales 7.) Introducing Broker (IB) Network 8.) Marketing
1.) Market Saturation & Competitive Advantage
Examining the competitive environment is one of the first things you need to do before starting any business. Anyone with knowledge about the retail foreign exchange (FX) industry knows that the market is already very saturated with forex brokers. Let’s take it one step further and quantify the amount of forex brokers currently in existence using some basic assumptions and estimates. Metaquotes is a trading technology company that has created the very popular MetaTrader 4 (MT4) trading platform. Metaquotes has been successful in capturing the majority of the “White Label” market in the retail FX industry. Based on our knowledge of the industry, we’ll make an educated guess that forex brokers using MT4 make up 70% of all the retail forex brokers in the world. If you install MetaTrader 4 mobile on your phone, you can see that Metaquotes lists the total number of MT4 Servers currently in existence. Every Forex Broker will be listed at least twice, once for their live server and once for their demo server. Some brokers like FXCM will be listed multiple times, as they own more than one MT4 Server. So take the total number of MT4 Servers (currently 3127) and divide by 2, that gives you 1563. Then, let’s estimate that the number of extra servers owned by brokers is 200, and subtract that from 1563 which gives us 1363. Now, we have to make another guess as to the number of “illegal” or “hacked” MT4 servers which exist in China. While we know that the black market for hacked MT4 Servers in China is fairly substantial, we aren’t sure to what extent so we’ll have to guess there are somewhere around 100. That brings the total up to 1463. If we operate under the assumption that this total number of MT4 forex brokers accounts for 70% of all forex brokers in the world, then the total number of forex brokers in the world would be (1463/.7)=2090.
And there you have it. You knew the market was over-saturated, but you probably didn’t realize that it was this obscene. And we are using conservative estimates here – if MT4 forex brokers make up less than 70% of all the forex brokers in the world then the total amount of retail forex brokers in the world would actually be higher.
2.) Partners – choose them extremely carefully!
If you’re going to start a Forex Broker then you need the help of a good consultant. If we haven’t scared you off from entering an extremely over-saturated market yet, then this reality of the FX industry might – most of the people that you go to for advice are going to view you as an income stream. The sad reality of this industry is that most consultants and service providers will only care about you to the extent that they think they can make money off you. Company service providers often sell extremely marked up company incorporation and regulatory packages, liquidity providers mess with trade orders, spike the spreads while there is thin liquidity, and adjust swap rates according to where their book is at.
Choosing reliable consultants who are honest and fair is one of the most important parts of starting your own Forex Broker. We advise having several in-depth phone calls with a potential consultant before deciding to do business with them. Always make sure you sign a contract and have it counter-signed by your consultant before sending them money! Also, be careful of unrealistic timeline estimates. One way to guard against that is by tying your payments to benchmarks in the written agreement between you and your consultant.
3.) Company Setup & Regulation
There are many jurisdictions that you can choose to incorporate your company in. We’ll explore the most popular choices here and their main benefits.
– Saint Vincent: has been one of the most popular choices over the last 3 years, primarily because it is an extremely low cost option. An International Business Company (IBC) incorporated in Saint Vincent and the Grenadines can usually be set up in a few days, depending on how busy your Registered Agent is. While the country’s companies registrar is a government agency known as the Financial Services Authority and all companies are technically registered with this agency, there is currently no oversight of forex brokers and they operated as completely unregulated/unlicensed entities.
– Belize: is a regulated jurisdiction for forex brokers. Since Neri Matus became the new director general of the International Financial Services Commission on July 20, 2015 she has conducted an overhaul of Belize’s financial regulation. Specifically with regards to forex brokers, she has substantially made it more difficult and costly for forex brokers to obtain a financial services license. Please note that a Belize-licensed forex broker is prohibited from offering services to any non-Belize resident if the broker itself is not properly licensed in the non-Belize resident’s home jurisdiction.
– New Zealand: the financial services license in New Zealand for forex brokers is the derivatives issuer license granted by the NZ Financial Markets Authority (FMA). In order to qualify for the license, an applicant broker’s management, operations & compliance officers must have appropriate experience & qualifications, and all primary operations must be performed from a place of business in New Zealand.
– Australia: the Australian Securities and Investments Commission (ASIC) oversees Australia’s financial licensing regime. In recent years, as part of an ongoing review of the brokerage regulatory landscape, there has been a notable decline in the amount of new licenses granted by ASIC in the market-making category. Any prospective license applicants are advised to review all recent notices & reports issued by ASIC on this subject and to contact our regulatory advisers for further information.
– Cyprus: is a regulated Markets in Financial Instruments Directive (MiFID)jurisdiction for forex brokers which operate under the supervision of Cyprus Securities and Exchange Commission (CySEC). It has been extremely successful in terms of being a home for many regulated forex brokers to operate from. However, its’ reputation has been tarnished recently as several of its regulated brokers (e.g. IronFX, ACFX) allegedly stole millions of dollars from Chinese investors without any recourse. Since then, many investors in Asia no longer wish to do business with any CySEC regulated entities.
– Bulgaria: is a regulated Markets in Financial Instruments Directive (MiFID) jurisdiction for forex brokers which operate under the supervision of Financial Supervision Commission (FSC). Bulgaria has the advantage of being a low cost MiFID jurisdiction. The cost of living, an office, and staff are all relatively low.
– United Kingdom: is currently the most sought after and well known regulated jurisdiction for forex brokers in the world. forex brokers regulated here operate under the supervision of the Financial Conduct Authority (FCA). The requirements, cost, and timeline of obtaining a financial services license from the FCA are substantial.
Future Trends: We expect (real) regulation / official financial services licenses to become increasingly more popular in the retail Forex industry. Capturing market share is becoming more difficult for brokers due to over-saturation and the increasing sophistication of established regulated brokers. We expect most of the unlicensed forex brokers to eventually go out of business.
For FX Brokers in the current environment, opening a corporate bank account to facilitate client deposits and withdrawals can be very challenging. Most banks around the world have adopted a policy of refusing to open corporate accounts for FX Brokers. The rationale behind these policy is simple – from the bank’s point of view it’s inherently high-risk business and the potential profit from holding the deposits and processing the transactions isn’t worth it. Here’s a more in-depth view from the bank’s perspective:
(A.) The bank is not performing their Know Your Customer (KYC) process on all of the broker’s clients. This is inherently a violation of most bank’s internal policies, as they are required to perform their KYC process on any person/client holding money at their bank. In this scenario, the Banks would be opening accounts for FX Brokers who would then be opening accounts for their clients who would then deposit money at the bank (third-party deposits.) If the FX Broker were to accept clients that were criminals or politically involved persons, these people would essentially be allowed to interact with the bank, sending and receiving money, without the bank ever knowing who they are. While a lot of FX Brokers are careful with who they on-board as clients, other irresponsible & unregulated FX Brokers will accept anyone as a client. It’s practically impossible for the banks to know for sure which FX Brokers are operating with sufficient KYC policies and which are not, so banks are forced to deny accounts for all FX Brokers.
(B.) If a bank does open a corporate bank account for a FX Broker then the FX Broker will be having their clients deposit money at FX Broker’s corporate account held at the bank. At any point, it’s possible for the owner/signatory of the FX Broker’s corporate bank account to simply withdraw all of their client’s money and run away with it. Unfortunately, the FX Broker Industry has been plagued by scam artists operating over the past decade that have ultimately lost or run away with client funds. The behaviour of these “bad apples” has made banks extremely averse to taking the risks associated with having FX Brokers as corporate clients.
While we have outlined the risks involved with facilitating this type of business for the banks, there are two primary ways that banks can mitigate the risks involved with accepting FX Brokers as clients. The first way is only doing business with highly regulated FX Brokers (such as FX Brokers operating in the United Kingdom under the Financial Conduct Authority (FCA), etc.) The second way is to do thorough due diligence on the entire business of the FX Broker and their management team. This usually involves several interviews or in-person meetings.
We do know of banks that have and continue to open corporate bank accounts for FX Brokers on a case by case basis. However, these are typically medium to large sized FX Brokers with substantial businesses, strict KYC/AML policies in place, and competent management teams.
5.) Trading Platforms
While there are a number of FX Trading Platforms available in the market, MetaTrader4 (MT4) is by far the most popular. Most of the larger brokers have developed their own internal trading platforms (Examples: FXCM, Saxo Bank, LMAX, CFH), but these trading platforms haven’t managed to take much market share away from MetaTrader4 because of MetaTrader4’s extensive White Label (WL) business and their very popular Expert Advisor (EA) automated trading systems. Currently, cTrader is probably the biggest competitor to MetaTrader, but it still holds a relatively small percent of the overall market share. Our recommended choice to traders is MetaTrader4 due to it’s popularity and functionality.
6.) Customer Support & Sales
Having a solid support/sales team in place before launching your broker is critical to gaining initial traction in the market place. The minimum size should be at least 3 people (2 people in different geographical locations plus yourself) to give around the clock 24 hour support. Ideally, the support personal can also double as sales people and try to convince potential clients to open accounts and deposit money. Once your broker has grown and you’re able to hire more people you can separate sales and support into separate departments. It’s important that your staff replies to inquires very quickly and with a high degree of professionalism. We often hear of support staff being outsourced to countries such as India due to the cheap cost and geographical location. That can end up costing you a lot instead of saving you money if you lose out on potential clients. If you’re going to hire someone make sure they are professional, can speak English fluently, and understand FX!
7.) Introducing Broker (IB) Network
This is an area where we’ve seen new entrants struggle a lot. Most people who start their own broker understand that having IBs is very important, they just seem to be unable to convince IBs to send them any business. What they fail to understand is that it’s much easier for IBs to convince clients to join established, well known, and regulated forex brokers (such as FXCM) then it is for the IBs to send business to their broker that no one has heard of before.
To get IBs you need some kind of competitive advantage such as razor fast customer service times (e.g. all replies within 20 minutes.) Often times IBs introduce clients to a broker and the clients aren’t satisfied with the broker’s support, leaving room for you to take the business (if you can provide high quality support.) You could also offer the IB a book/profit share on their client’s trading profit and losses (PnL) if you are running a dealing desk. Lastly, the most effective way to win over an IB is by developing a personal relationship with them. It’s much easier said then done, but if you can develop a connection and become good friends with them then they could keep sending you business for a long time. If you’re trying to expand your business in Asia then this means being prepared for lots of drinking and karaoke!
8.) Marketing
Here are some different approaches you can take to online marketing as you launch your broker:
Have an active presence online: create social media accounts (Facebook, Twitter, Instagram, Linkedin, etc.) and start posting like crazy. Comment on blogs, join forums, and be sure to link back to your website. Don’t blatantly spam links to your website because that will have a negative SEO effect. Take this a step further and ask all of your IBs to be as active as possible on social media.
Creating cool original content: that other people will want to link to is another thing you can do to generate traffic to your website. A good example of this can be seen here.
Shadow posting: One of the best ways to generate traffic to your website is to post in a lot on forums. The problem with most forums, such as the most popular retail FX forum ‘Forex Factory’ is that they confine brokers to posting in a very limited section that most retail traders don’t look at. The rationale for this is that they don’t want their regular users to be spammed with unsolicited advertisements. The only way to effectively get around this rule is to pretend to be a normal user and causally post content about your broker or a link back to your website. This is easier said then done because many brokers try to do this so forum moderators are good at spotting it and banning the associated account. To be safe, post at least 200-300 times as a normal user before attempting a VERY causal mention of your broker.
Normal Advertisements: once you have a marketing budget you can spend money on a Google Adwords campaign, and paid Facebook and Twitter ads.
Email Campaigns: even if you aren’t launching your broker with a list of leads, you should have some campaigns designed for your first potential clients that sign up for demo accounts.
