How to become a forex broker, and what are the best options
Dozens of forex brokers spring up every day in all parts of the world.
However, it is important to know what to do since the forex market, while not regulated as much as the stock market, is closely monitored by independent national bodies.
If you open a fx broker you need to be aware that users will entrust the company with part of their savings, and as a result you need to operate with professionalism, transparency and integrity.
Committing fraudulent acts, can lead to national and/or international ban of the forex broker, the withdrawal or suspension of your forex license, millions of USD in fines, and even jail time in the most severe cases.
We at InvestinGoal do not provide consulting on the opening of an investing or forex business, however we can provide you with some preliminary information and steps on opening your own licensed forex broker.
So, if you want to start a forex brokerage you should take a look at the following information:
- Choosing a jurisdiction
- Opening a registered office
- Developing a technology
- Signing agreements with liquidity providers
How to choose the right forex broker license for your forex company
If you’re looking for the best forex broker license for your fx business, these are the FCA, the ESMA-compliant jurisdictions or the CFTC in the USA.
However, all these jurisdictions cost a large amount of money to maintain, they are quite hard to obtain for any new currency trading broker, and they require the brokers to follow strict rules. This is the reason why young forex brokerages choose an offshore jurisdiction (or Tier 3 forex licenses) such as the Vanuatu FSC which requires only $50000 to be obtained.
However, you must also consider the fact that there are more prestigious regulations than others, so, all things being equal, if you attract users with regulations that are considered unreliable, they may choose another forex brokerage firm.
Below you will be able to find a list of regulations, their tier of membership (from 1 to 3) and the cost required to obtain them.
| Forex regulations | Tier | Licensing costs |
|---|---|---|
| CFTC (USA) | 1 | Over 20’000’000 USD |
| FCA (UK) | 1 | From 125’000 EUR |
| MAS (Singapore) | 1 | Up to 5’000’000 SGD |
| CySEC (Cyprus) | 2 | From 125’000 EUR |
| MFSA (Malta) | 2 | From 125’000 EUR |
| BVI (British Virgin Islands) | 3 | From 100’000 USD |
| SCB (Bahamas) | 3 | From 300’000 USD |
| SFSA (Seychelles) | 3 | From 50’000 USD |
| IFSC (Belize) | 3 | From 50’000 USD |
Of course, if you decide to invest your money in an existing forex broker, you will retain their regulation.
You should also keep in mind that the costs may vary according to your marketing strategies and business plan. In fact, depending on the business model of your brokerage (A-Book or B-Book), you might have to apply for different licenses which may have different costs.
For instance, in order to get an ESMA or FCA approval, you can apply to 3 different licenses with 3 different capital requirements:
| Type of license | Goal of the license | Money requirements |
|---|---|---|
| Dealer license | For becoming a market maker | 730’000 EUR |
| Intermediary license | For becoming a NDD firm | 125’000 EUR |
| Introducing broker license | For conducting sales and marketing, but without retaining clients’ funds | 50’000 EUR |
Registered office
If you want to start a successful forex brokerage, the office registration is important as it allows users to have a physical location to refer to, and more importantly it allows regulators to finalize the licensing process in order to attract new clients.
The choice of an office location for your forex business must not be random, but must follow certain rules depending on the relevant regulatory body.
Most regulations, in fact, require that the office be located in the same country that the financial watchdog is monitoring.
In other words, if you want to get CySEC regulation in order to trade in the European Union, CySEC will require you to have a physical legal entity in Cyprus. Same thing if you want to operate in the United States: you will be required to open an office in the United States.
If you do not have large amounts to invest, there are some offshore jurisdictions that do not have physical presence requirements. This is the full list:
| Offshore license list | Country |
|---|---|
| IFSC (Belize) | Belize |
| BVI | British Virgin Islands |
| CIMA | Cayman Islands |
| SFSA | Seychelles |
Technology
The “infrastructure and technology” factor is extremely important for any forex brokerage firm, but both are very expensive to implement and maintain financially.
When we talk about a broker’s infrastructure and technology, we refer to:
- The forex trading platform
- The servers used for executing clients’ orders
- The broker’s servers
- The algorithms used to monitor clients’ performances
- The risk management algorithms
- The forex brokerage website
If you want to start a forex brokerage business, then you will be able to find these services integrated in a White Label solution. White Label fx brokers are brokers who, under monthly or annual fees, allow third parties to leverage their technology and brand it to their liking.
Although a white label solution is not totally cost-efficient, it is generally the most popular among newborn forex brokers because the research, development, and production costs would be extremely high if the goal is to produce everything from scratch.
With a white-label service, on the other hand, it is possible to both reduce the production timeline, but more importantly, to accede to proven and reliable technologies from a forex brokerage who has years of experience in the foreign exchange market.
Research and production costs, in fact, can exceed half a million USD during the first year. In fact, to give a practical example, it is possible for a forex brokerage to purchase a MetaTrader license so that they can offer their trading platform to their clients.
MetaTrader, however, can come to cost over 100000 USD per year between license activation, maintenance cost, and activation of essential services such as order routing and server management.
In addition, some trading platforms (as is the case with the cTrader trading platform), place a maximum limit on the trading accounts that can be created. To increase this limit, the license package must be expanded, which results in additional costs.
Get liquidity providers for your forex brokerage firm
A liquidity provider allows a FX brokerage business to offer low spreads to existing clients, while at the same time ensuring proper and efficient execution of trading orders.
However, in order to access the largest and most established forex providers on the international scene (mainly large banks), substantial trading volume orders must be generated.
When a forex brokerage business does not yet have a solid customer base and/or is unable to generate large volumes, it must ask for a hand from so-called liquidity aggregators, i.e., middlemen between smaller brokers and larger liquidity providers.
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