This is especially true in the case you would like to offer straight through processing or you would like to have a reasonable amount of risk control. If you want to move beyond the developing country markets where you are located, you may be required to put up a higher net capital investment. See Section 5: Business Model for further discussion. It is possible to get credit lines from multiple banks at the same time to fulfill your total capital requirement.

Technolog y Problems To be prepared for the situations Have backups and a where you need to act quickly. Regulator y Existence Unknown regulatory environment which Ideally become a licensed can lead to regulatory investigation and entity where you are fines or other consequences. incorporated and know your local markets; hire appropriate legal talent.

Regulator y Update Forex is relatively new and faces Focus on simple regulations that are changing daily. securities first, and then move into more complex and highly regulated securities. Location of Incorporation Incorporating in an offshore area The Cayman Islands has a usually means that you are in a less- strong reputation for experienced country for dealing with financial services.

Belize Forex issues. has a good deal of Forex experience. Both of these locations also provide more flexibility and lower startup costs than many other countries. Countries of Registra tion You may get customers from Start with countries where countries where you are not you are actively marketing, registered. then move to new countries if customer concentration increases in new places Taking Risk as a Counte r - Taking the other side of trades that Hedging trading risk with Part y go against you risks your capital.

liquidity providers. Fixed Costs Not enough income to pay the Make sure that you pay operating costs. your recurring costs from your recurring revenue.

Market Description Forex is an emerging market with many disaggregated players. The diagram below provides an overview of the major players and how they interact.

Currency trade values are in the multiple tens of millions of US dollars at a time. These trades are the ones that really set the price of a particular currency. They are used for speculation, hedging and currency exchange for international commerce. The prices are determined with less variability than smaller players. Regulation: These entities have similar regulations to large broker houses. However, in some developing countries, spreads are even larger, at Pips.

In general, this industry is still growing a great deal, and is thus in flux. Best practices are to get licensed in your country of incorporation to start, followed by a careful review of the regulations in countries where you are marketing.

Daily averages in April for different years, in billions of US dollars, are presented on the chart on the following page. institution; and, Retail traders small speculators are a small part of this market, but constitute a growth opportunity.

Please see a listing of the Top Ten on the following page. This includes being a pass through, or being counterparty. Here, the broker makes money regardless of the market movements ASSUMING his technology is able to act quickly and without errors to unload the risk from the customers to the liquidity providers.

This is not zero risk! Errors can happen. Risk has to be monitored and controlled at all times. If you offer a 1. Of this, 1 of these pips goes to you, and 0. Commissions - The maximum number of pips you can realistically charge in the U.

is about 2. In developing countries, you can actually charge higher commissions — up to 4 or 5 pips. Here, we give an example of charging a commission of 1. The customer pays 1. Multiply this by the U. The customer buys from the broker and sells to the broker. If the customer makes money, the broker loses money, and the contrary. This model is simpler, but riskier.

They take small profits, and let losses run. Ongoing customer acquisition is thus very important. In this model, some of the more experienced or savvy customers will grow frustrated that they are not dealing with Straight Through Processing. Segmenting these customers out and dealing with them through a Straight Through Processing model is usually a good idea. Below we discuss such hybrid models.

Technology The example below is an illustration of how a large multi-platform, multinational, multi liquidity provider brokerage organization looks.

It will usually offer multiple trading platforms, one of which will be mostly for retail maybe MetaTrader 4 and one of which will be mostly for institutional investors see red boxes. It will also use multiple specialized liquidity providers banks, in blue. Each liquidity provider will offer different spreads for different pairs and different volumes for each pair. In general one can acquire a platform for a flat fee plus a monthly fee.

MetaQuotes has developed a new platform, MetaTrader5 MT5 , and an upgrade fee should be expected. In this case over the 1st year one will end up paying less than in the case of buying a platform but over time one will end up paying more. Tradeoffs In general the less you pay the more dependent you are on somebody else. If one purchases a platform one needs to also pay for its maintenance, add-ons, updates, and IT personnel to maintain and upgrade it.

The broker who owns a platform fully controls it. If one uses a white label one rarely has control over the minimum spread which is usually imposed on him with a markup of course. In addition the white label provider could theoretically shut down the access and the platform at all times. In the case of leasing a platform the control is somewhere in the middle.

Platform features Before you choose a platform you have to decide on the features that you are looking for. Such an investment only makes sense in the case when the broker would like to have FULL control of the platform features and potential and in the case when the broker is envisioning becoming part of the top largest brokers in the world. How to choose the platform and set of services that is right for you? We have put together a model that estimates the margin gain in each step of the value chain, and what that means for the cost to the customer of the entire transaction.

Counterparty - You need a counterparty for all your trades. You need to set this up in advance, but counterparty is a relationship for each major trade. They just take the other side of a trade, but you can switch counterparties on different trades. As counterparties, a large bank will be a market maker, whereas an ECN is just an exchange — they find someone else to make a match against you.

Thus, for practical reasons, sometimes it is easiest to use a counterparty favored by your Prime Broker, because they already have a relationship. Example: here, we have chosen ODL as our counterparty, which charges 1. Prime Broker - Your Prime Broker is your credit source — it is a bank that provides a service to you.

For this relationship, you need to put money down in an account with that bank, and also pay a fee per transaction. There are several types of Prime Brokers, with varying associated  UBS, Barclays and DeustcheBank are the most expensive. These companies service fees. large companies, governments, and other large institutions. leverage, but also the risk of losing everything. com — because time of something, against a counterparty might be ODL, or not. ODL is easier to start with.

The upside of something like ODL is that it allows you to start with low startup costs. The downside is that fees are higher. The bank or prime broker that you work with will provide you leverage for trading — i. Usually, however, banks provide at most leverage. So to evaluate which credit source to use, you must look at both the leverage, and the fees per million dollars traded.

Platform As a brokerage, you offer a trading platform to your customers. You then offer that leverage to your customers. The customer trades against you via a platform, per our example Metatrader service that shows prices and charts, etc. So Metatrader charges you, the brokerage, a monthly fee, and then you translate that into a variable cost in pips that is added on to the customer fees.

Options You can also add-on options given to the trader. This package of options is chosen by the broker, you, as a business decision. You would basically add in costs to the trader, per trade, as part of your offering. Added Margin Then, you add whatever spread you think you can get.

As mentioned earlier, a reasonable TOTAL spread is between 2 and 3, and maybe 3 and 4 pips for a developing country. This brings out total cost to our customer to 3. Of course, this would be high for the U. AS A GENERAL RULE IT IS GOING TO BE HARDER TO SELL WITH HIGHER PIP SPREADS Technology security and reliability certification In order to offer a secure environment and become a market leading competitor in the electronic trading industry, the trading platform security and reliability have to be outstanding.

The broker needs to verify the different authentication methods used by the trading platform and to test these authentication methods. The broker must explain the different encryption methods used for the platform and it will demonstrate and test its functionality. The broker needs to work with the customers to identify each account that has privileged access to the platform and to provide a list of all the accounts with the list of rights for each account.

The broker needs to verify the presence of written security charts and the appropriate level of training of the Information Technology personnel. Verification of a physical security management like closed circuit television for entry  areas and restricted zones to the customer datacenter.

Customer Support The broker should test and verify the customer capacity to answer end-user complaints regarding access problems and other electronic access problems. The broker should test his capacity to escalate problems it is unable to resolve to the appropriate entity. Disaster Recovery and Redundancies Broker should regularly verify its Disaster Recovery and Redundancy capacity and its knowledge and control of the fail over procedure. It should conduct disaster recovery and failover exercise with the IT team.

Advance Disclosure Broker should verify the presence of an electronic trading disclosure information form in the package received by each end-user upon opening a business relationship with the customer.

The disclosure form should contain reasonable and clear information on the limits and possible problems of electronic trading. Credit and Risk-Management Controls General Standard Brokers should have a detailed written document explaining the different risk indicators and their presence in the platform. This document will explain the functioning of the risk management tools and their meaning. Account Controls Broker should verify the level of training and knowledge of the customer employees on the risk management and their controls.

An exercise will be performed to verify the procedure to be taken in case the amount of risk taken by the customer is above the level described in the customer internal procedures and risk control manuals. Review Broker should verify the presence, in the organization, of a risk control monitoring system and the presence of the appropriate risk control communication channels. Individual Reporting Broker should write a document demonstrating the capacity of the platform to provide information for each individual, for each order and account in real time.

Time and Price Records Customer should posses a document explaining and exhibiting the platform time and price records. Retention Broker should verify its capacity to provide safe and durable retention of all the platform information for a duration of 5 years, including verifying the available capacity for this purpose. Trade Integrity General Standard Broker should posses a written document explaining the general capacity of the platform to provide bids and offers that are reasonably related to current market prices and conditions.

Broker should verify the presence of redundancy in price sources and the reliability and fail over of the pricing sources. Slippage Broker should check the configuration of the trading platform to ensure that any slippage is based on real market conditions and that slippage is less frequent in stable currencies than in volatile ones, and prices should move in customers' favor as often as they move against it. For example, in Forex, while the builders usually claim that the platform also works in other markets Example CFDs one should perfectly understand the requirements of each particular market.

Example : How do you setup for each contract different expiration dates in the Futures market? For example for Futures the platform has to be NFA compliant in United States. For example, for Futures to the eCBOT and eCME and for stock to the New York Stock exchange. In order to be connected, a platform needs its API connected to the exchange. Most platforms go around all these difficulties by allowing Forex only and enlarging their list of available products to CFDs which are in fact treated like over-the counter, off-exchange products very much like the Forex symbols.

REALLY how long does it really start to gain market traction and what does this mean for the REALISTIC CASH BURN in the meantime? to estimate the total price you will have to incur to service and support your customers and the re sultant profit margin that you can expect to achieve on each transaction.

The capital costs should flow into the overall startup costs for the company on a monthly basis, plus ongoing technology support costs. From being in the industry, we know many of their models from working with their technology. Marketing has three dimensions: 1. Marketing - generate leads of people who might potentially be interested in the products of your brokerage.

Sales - convert the leads into accounts, or actual customers. Customer support - keep the present customers happy by answering their needs, questions and any concerns they have.

Example : www. One rule of thumb for finding potential customers is that those who think alike can be found together. The better the spreads, the lower the commission, the faster the execution, the bigger the liquidity of the FOREX products the better. The more symbols to be traded, the more likely that you will find the product everybody is looking for.

This is tied to the conversation skills, the convincing capacity and can involve friendship-bonding, self suggestion, conversation directing, step-by-step approach and other convincing techniques. As one might guess, a big factor is cultural and thus setting up an in-person office can sometimes be effective for reaching certain populations. Customer support As you might expect, customer support is very important in this industry. Competition Who are the Forex Brokers FCMs out there, what business model do they use and how do they market?

The following information has been garnered from conversations with sales staff at various FCMs ACM, Saxo, PFG, Gain and Currenex, among others. Model The model employed by many FCMs is to have accounts trade as frequently as possible as the FCM Broker usually participates in the spread unless they charging a commission only. Where Does This Mentality Come From? This is attractive especially when we are reminded at how this figure completely dwarfs the stock market. How do Retail Brokers Position Themselves vs.

The Competition? The Forex market is completely decentralized. This means that, unlike centralized exchanges such as the NYSE and LSE, there is no central location where each transaction can be traced and recorded nor do currencies have specialist market makers responsible for providing quotes for the entire market.

Instead, the entities that act as market makers for the currency market are the world's largest banks. These banks carry out transactions between each other on a regular basis, hence the term 'interbank market'.

In order for you to deal directly with these large banks you need to establish credit relationships with them which takes a vast amount of money and consequently most people cannot afford to do this. So this is where the retail brokers come in; they connect customers with the large banks. Retail Forex Brokers are the middleman between customers and the interbank market so every time a customer places an order to buy EURUSD for example, their broker alters their currency holding positions with their large bank partners to reflect this.

Rightly so your broker charges a fee for this service which usually comes in the form of spread the difference between the bid and the ask. The spread they offer you is slightly larger than the spread they are offered in the interbank market so your broker can make a small profit on every trade you make. All FX brokers follow a similar sales model in attracting clients. This makes sense given that retail FX is all online. Sites like www. com and www. com charge heavily for banner advertising based on the demographic they attract to their website.

To be effective, multiple ads on various sites would be  While all brokers use this source, none of them were able to quantify the revenue from needed.

Small Brokers often use this resource as well, though with smaller investments. this source of advertising despite the technology being available for them to do so. they are able to take the other side of the trade.

As a result of this, advertising costs for all FX brokers have gone up dramatically in the past few years. essentially sales people. These take on two forms, in-house and independents. Commissions are typically paid from the spread from the round turn and at some brokers are standard and at others are based on volume traded. The more that is traded the more the IB shares in the spread. The cost of having a sales force is very low as they are only paid on a per trade basis.

Examples Saxo: Saxo is one of the largest and oldest retail Forex brokers around. In the retail market, Saxo is among the top three FCMs FXCM is the oldest, and the biggest retailer. Saxo is  Marketing: Saxo employs a lot of capital in online advertising. What are you trying to achieve?

And what is the main focus? The reason these types of questions are important is because it will help you create a trading plan that is personalized for you and your trading style. For example, are you a conservative trader who only wants to make the best trades and is happy with smaller profits?

Or, do you want to look for higher risk trades and are more suited to scalping the markets on the smaller time frames looking for bigger gains? Below I have gone through an example Forex trading plan template that you can use to help create your own trading plan. This template will help you think about the sort of questions and rules you need to create in your own trading plan.

You can also download a PDF of the trading plan template below. Here are some of the things you will want to think about and add into your own trading plan;.

Whilst a trading plan covers your whole trading strategy and the rules you will use overall, a trading checklist can make sure you stay within these rules on each individual trade. You can use a quick trading checklist beside your computer to make sure each trade you take fits the rules you have created.

These checklists can be incredibly useful and act as a very quick way to make sure you are staying on track. Below is an example of what you could include in your own trading plan checklist. You can also download a PDF trading plan checklist below to help you create your own. A trading plan and trading checklist does not have to be a huge page document. As we have just gone through you can create a one page simplified trading plan and turn it into a PDF that you sit beside your computer.

This along with your trading checklist will make sure you stick to your trading rules and stay on track. You can access and download the one page trading plan example and trading checklist to help you create your own using the button below. I hunt pips each day in the charts with price action technical analysis and indicators.

My goal is to get as many pips as possible and help you understand how to use indicators and price action together successfully in your own trading.

edu no longer supports Internet Explorer. To browse Academia. edu and the wider internet faster and more securely, please take a few seconds to upgrade your browser. The following document is intended to serve as a guide for our customers who want to start their own Foreign Exchange Forex brokerage.

This document will provide a roadmap to help you start your brokerage business using the Boston Technologies framework. Essentially, there are many different parts of the value chain to sort througheven with simple spot Forex, and thus many different ways to take on risk and achieve margin. Dagfinn Rime. Log in with Facebook Log in with Google. Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link.

Need an account? Click here to sign up. Download Free PDF. Forex Business Plan. Abhishek Singh. Continue Reading Download Free PDF. Related Papers. Foreign Exchange Market Structure, Players and Evolution. Download Free PDF View PDF. New electronic trading systems in foreign exchange markets. Introduction The following document is intended to serve as a guide for our customers who want to start their own Foreign Exchange Forex brokerage. The Role of Boston Technologies Boston Technologies builds, installs, maintains and supports foreign exchange software.

Boston Technologies also works with our partners to help provide our customers with other related services to augment their foreign exchange businesses. Boston Technologies is neither a broker nor a trading company. We will assist our customers with any relevant technology needs but we will neither hold end-user money nor initiate trades in any way. Boston Technologies is NOT a trading counterparty. Starting Up Every brokerage is regulated in a variety of ways and can be started in a variety of locations.

Assuming you want to start in a thoughtful, methodical way, here are the recommended steps to take: 1. Scope - Deciding on the scope of your brokerage business startup is important. We will discuss a recommendation for the scope of your startup in the sections that follow and the reasons behind the recommendation.

Incorporation — You will need to incorporate your company in a location where there is a solid background in financial services and where it will be fairly simple, inexpensive and legal. Registration - Registration brings legitimacy and credibility. Even where registration is optional, your company will benefit from being registered. Where registration is required, your company will need to be registered as a financial body in order to market in these locations.

You should start by looking at all the markets where you plan to accept client funds. Capital Requirements - In general, being registered means that the local authorities will go through a due diligence process on the owner and the credibility of the project. In addition, to secure the customer funds, many authorities will require that the owner of the entity deposit some capital in the brokerage. This capital is called Net Capital or Net Cap. These requirements will be more described below.

This means starting with securities and a set of regulations that are manageable and establishing your brokerage where you will be able to legitimately trade and compete without the danger of overstepping legal or regulatory bounds. Because of this, we recommend starting as a spot Forex company, trading over the counter, in order to become familiar with how the process works. However, the regulatory requirements and environment for these products is significantly more complex.

To jump into these right away would ultimately delay the process of creating a workable business model, in an industry — Forex — that is already early-stage and in many ways, ambiguous. Essentially, there are many different parts of the value chain to sort through — even with simple spot Forex, and thus many different ways to take on risk and achieve margin.

Given your assumed desire to be light- footed and your lack of a need for being able to market in Western Europe, we recommend starting your Forex brokerage in a less complex environment. London has an established set of regulatory hurdles and FX is therefore more difficult there. htm Offshore Financial Centers There are a number of islands such as the Cayman Islands and the Bahamas that are experienced financial services centers, though they may be less established Forex centers.

Obviously, many of these locations have fairly low-cost barriers to entry and certain tax benefits, although many of them require that the institutions they license appear to have some sustainability. asp compare. aspx  Cayman Islands, which has the largest value of AUM in offshore funds, and is also the strongest presence in the U.

securitization market. Regulation and supervision of the financial services industry is the responsibility of the Cayman Islands Monetary Authority CIMA. The CIMA licenses firms to conduct securities investment business, which includes market makers, broker- dealers, securities arrangers, securities advisors and securities managers. This is typically defined by country. In general the rule of thumb is that registering in multiple countries can get very expensive.

If you are an online company, it is possible that you will get online clients from a variety of countries beyond where you register. At first, you may choose just to register in the countries where you are actively marketing. If you start by incorporating in Belize, for example, then just registering in the developing countries where you will initially operate is likely the most cost effective path. However, if you find that, say, you are getting a lot of clients from a different country — it will start to make financial and legal sense to go through the regulatory hoops of the country.

Below is a discussion of two example countries, Pakistan and Bahrain and also an overview of the U. registration landscape for comparison. Currently, the SBP is not specifically regulating Forex brokerages, but a good practice would be to incorporate in an area where there is Forex licensing in order to put forth a good faith effort to follow sound regulations.

Bahrain requires that if you are selling to its citizens, you need one of their citizens to be part of your partnership, or be in partnership with a local company. Either way, you can still own the majority of the subsidiary company that is you set up in Bahrain.

asp , which is essentially synonymous with being a brokerage in the Forex arena. Two organizations police the sector and step in to protect the consumer on a regular basis. These organizations are the National Futures Association NFA and the Commodity Futures Trading Commission CFTC. Of the two the CFTC is most heavily involved in the detection and punishment for fraud, manipulation and abusive trade practices in the retail Forex sector.

The www. gov website is an excellent source of information on customer protection and on-going legal disputes against brokers and other entities. Here is a list of some of the regulating agencies:  NFA - the National Futures Association.

Capital Requirements Depending on where you are registered, capital requirements will vary. Capital requirements are a catch-all phrase for the capital that countries, regulatory agencies or the country of incorporation will require in order to feel comfortable with you as a Forex institution. In more highly regulated locations like the U. It is likely that startup brokerages will be required to have significant capital in the form of credit lines with a big bank. This is especially true in the case you would like to offer straight through processing or you would like to have a reasonable amount of risk control.

If you want to move beyond the developing country markets where you are located, you may be required to put up a higher net capital investment. See Section 5: Business Model for further discussion. It is possible to get credit lines from multiple banks at the same time to fulfill your total capital requirement. Technolog y Problems To be prepared for the situations Have backups and a where you need to act quickly.

Regulator y Existence Unknown regulatory environment which Ideally become a licensed can lead to regulatory investigation and entity where you are fines or other consequences. incorporated and know your local markets; hire appropriate legal talent.

Regulator y Update Forex is relatively new and faces Focus on simple regulations that are changing daily. securities first, and then move into more complex and highly regulated securities. Location of Incorporation Incorporating in an offshore area The Cayman Islands has a usually means that you are in a less- strong reputation for experienced country for dealing with financial services. Belize Forex issues. has a good deal of Forex experience.

Both of these locations also provide more flexibility and lower startup costs than many other countries. Countries of Registra tion You may get customers from Start with countries where countries where you are not you are actively marketing, registered. then move to new countries if customer concentration increases in new places Taking Risk as a Counte r - Taking the other side of trades that Hedging trading risk with Part y go against you risks your capital.

liquidity providers. Fixed Costs Not enough income to pay the Make sure that you pay operating costs. your recurring costs from your recurring revenue. Market Description Forex is an emerging market with many disaggregated players. The diagram below provides an overview of the major players and how they interact. Currency trade values are in the multiple tens of millions of US dollars at a time.

These trades are the ones that really set the price of a particular currency. They are used for speculation, hedging and currency exchange for international commerce. The prices are determined with less variability than smaller players.

Scope - Deciding on the scope of your brokerage business startup is important. Log in with Facebook Log in with Google. You can also download a PDF trading plan checklist below to help you create your own. Counterparty - You need a counterparty for all your trades. We have put together a model that estimates the margin gain in each step of the value chain, and what that means for the cost to the customer of the entire transaction. Download Free PDF.

Categories:

• Binary Options online
• Forex Bitcoin
• Binary Options
• Forex Brokers
• Forex