Vasily Alexeev is the co-founder and CEO of the international fintech company UpTrader providing software solutions to brokers and blockchain startups for over 10 years. Due to the development of UpTrader’s IT products and technology services, over 30 Forex companies automated their operations and scaled their businesses. In addition, for a decade of work, the IT provider has continuously tested its recipe for running a forex broker from scratch with time and cost savings.
Today, when we experience dramatic changes in the global economy. Do you think it’s worth running a forex business?
Forex brokers seem pretty immune to such crises. They act as intermediaries between private traders and large financial institutions and give individuals access to the global foreign exchange market.
The average daily turnover in the Forex market was $ 6.6 trillion as of mid-2019. By the end of 2020, that number could reach $ 10 trillion. Experts say the foreign exchange market will continue to grow exponentially thanks to the globalization and popularization of teleworking. Under these conditions, the brokerage is more viable than the traditional one, which can be pushed away from the balance of inevitable economic fluctuations and crises.
How does a Forex broker generate income?
There are several ways to make money from dealers’ activities.
Trading volume fees may vary depending on the instruments (currency pairs) and the company’s greed. On average, such a fee equals about $ 5 a day. $ 100,000 in trading volume.
Some brokers don’t charge fees, and then the spreads are their biggest income – the difference between buying and selling prices in currency. Compared to retail exchangers, such as Your bank offers Forex brokers much tighter spreads. For example, if an exchanger buys 1 euro for $ 1.03 and sells for $ 1.15, that means its EUR / USD spread is 0.12. If you buy and immediately sell 1 lot ($ 100,000) from such an exchanger, you will lose $ 12,000.
On the other hand, brokers have access to larger liquidity providers, and their spreads are usually small fractions of 1 cent. A broker can offer the same EUR / USD pair with a spread of $ 0.00005, ie. 2,400 times less than the exchanger. This means that merchants can operate in large quantities while paying small fees.
A broker’s income is the difference between the spread of their liquidity provider and the final spread of the traders. Therefore, it is important to find a liquidity provider with the smallest spreads so that they can be increased while continuing to appeal to traders. Brokers who generate their income from spreads are interested in professionals who trade large quantities and thus generate profits.
It is often said that forex brokers are interested in a client’s loss. Can they profit from business failures?
There are brokers who act as counterparties in their clients’ trade without the participation of major market makers. In this case, a broker actually earns from dealers who “burst” their deposits, which sometimes upsets the clients as the broker seems to be interested in their failure. Despite this, such conditions also mean faster order execution, which is favorable for those who prefer high frequency trading.
Unfortunately, some brokers misuse this scheme and provide non-market deals to their clients. Such companies do not last long, but an honest internal operation can be lucrative, even without being spoiled for deals.
Once again, there is always a risk that professional traders will bankrupt the broker with high earnings, which can only be prevented by balanced risk management.
How Much Do You Need to Run a Forex Broker from the Ground Up?
Investing in opening a Forex broker can only reach $ 500,000 in the early stages and it can take years to build a business. However, there are ways to save significant amounts of money and optimize the launch of a Forex company.
For example, a license to a trading platform, which is the broker’s most important tool, requires large investments. For the most popular platforms MetaTrader 4 and MetaTrader 5, the price starts at $ 75,000. However, today there are ways to cut costs – instead of buying a full license for the trading terminal, it is possible to get a White Label MetaTrader 4 or MetaTrader 5 from a fintech provider who takes care of everything for a small subscription fee: from liquidity to adjusting trading conditions.
Is national law mandatory for a Forex company?
Forex business can work without national license. However, having a license and certification issued by a reputable regulator inspires confidence and appeals to traders. As brokers operate online worldwide, it is possible to register the company in any jurisdiction where licensing is cheap or even not required. In regions like Europe, a license costs from $ 70,000 to $ 1.2 million and paperwork can take up to two years. But even here, we can save resources by turning to offshore jurisdictions where licenses can only be issued in two weeks for only $ 1,500.
How to build an effective IT infrastructure without major investments?
Even 7-10 years ago, huge spending involved the only way to enter the brokerage business. Among other things, they were required to build the entire business environment: CRM, trader interface, payment processing, marketing tools to attract customers.
But progress is not stalling and today’s IT world is a world of cloud-based solutions. The cost of launching a broker can be reduced to $ 10,000 with a $ 1,000 subscription fee to maintain the entire infrastructure including mobile apps. And the launch period can be reduced to a few weeks.
Today, over a million merchants spend UpTraderDozens of software or brokers. For such brokers, buying White Label solutions is cheaper and faster than buying licenses for trading platforms, setting up CRM and automating back office.
By comparison, it takes at least six months to create your own business interface and even with strict budgeting costs at least $ 30,000. And this without considering maintenance and development of infrastructure and salaries for employees after launch.
UpTrader launches a fully equipped CRM with a functional back office and branded trader interface in one day for $ 1,000. Then, for $ 1,000 a month, a broker gets not only the product, but also a team that will both provide daily support and work on expanding the software’s original capabilities.
UpTrader CRM is especially popular because of the three most important and interconnected interfaces: admin, back office and trader interface. The team adjusts and labels it for each broker, configures the necessary conditions for dealers and partners, bonuses, fees, and provides deep analytics for client activity.
What else does a new forex broker need?
It depends on what services a company intends to provide to its customers. For those interested in expanding the functionality of merchants, UpTrader offers a web-based trading terminal, copy trading services and cryptocurrencies. This could go hand in hand with White Label trading platforms MetaTrader 4 and MetaTrader 5, as well as legal services and technical support.
All in all, if you are setting up your own forex broker, do not hesitate to pass on some key features to the outsourced team of professionals. You get many opportunities to show your ingenuity on your way. A way that will be challenging, but exciting.
Disclaimer: The views, suggestions and opinions expressed here are the sole responsibility of the experts. None. Forbes India journalist was involved in writing and producing this article.