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How to build a scalable and successful Forex brokerage?

Who wouldn’t like to be his own boss? If you’re already successfully operating as an IB (introducing broker) you should consider starting your own Forex brokerage. Becoming a broker is like building a house – requires investment but is also more profitable in the long term than renting or working for another broker.

There are more similarities to this analogy. A house, as well as a brokerage, need to have strong foundations and a nice look. There are aspects of each of these endeavours that are inherently designed to be flexible eg the colour of the paint, which is akin to the broker’s website and marketing and can be easily changed over time. On the other hand, there are decisions that have to be made early on which will affect every future decision. Though possible to change down the road, it can be highly disruptive and costly to do so and thus to have a good idea of where you want to take your business in the future is essential in the early stages. You do not want to build a mansion on a foundation of cardboard.

To establish a good foundation for your brokerage you should identify which parts of your brokerage are most likely to change in the future.

  • How will your client base evolve over time?
  • What mechanisms will be required to interact with your brokerage?
  • How will you manage client execution as your volumes and demand for more complex liquidity environments increase?
  • How will you react to potential regulatory changes?

Along the path of growing a brokerage from start-up to global leader, the answers to these questions will inevitably change over time. The important decisions are those that avoid re-building your entire business each time the market dictates a change.

Key decisions to make when starting own brokerage

It is very important to decide whether you want to build your own IT team (which is not an easy job nowadays) and manage all your servers yourself or you choose to outsource. Both options have its pros and cons, so a broker needs to be very aware of the consequences of this choice. If you choose a hosted solution – then you need to carefully consider the fees aspect. The best option is to pay a fixed monthly fee to your technology provider, which will allow you to expand the business without generating excessive costs. The technology provider can also provide you with access to some additional solutions that are already integrated with its system, which is also an advantage, especially in the initial stage. The most important disadvantage of a hosted solution is the lower flexibility and lack of full control over the server. To avoid that you can have your private MT4 server, but hosted with a proven technology provider.

Another crucial aspect to decide is your Risk Management solution. There are 2 options at broker disposal. A broker can either run his own B-book, which means that he will be always a counterparty for his clients’ trades or he can run the agency (A-book) model. Choosing an adequate model is very important because it highly affects profitability. Running the B-book model involves higher capital requirements because the broker needs to have a financial reserve to assure proper settlement for clients’ trades. In the A-book model broker is just earning the commission and markups, which is a difference between institutional and retail spreads.

Which solution for brokers to choose?

Before choosing a platform, the broker should carefully consider, what features he needs. The most popular is the MT4 /MT5 platform, but choosing between them should be preceded by proper research since it’s hard to point which one is better. Another option is a cTrader or an xStation, a little less popular but equally good, web-based platforms. They provide only hosted solutions and have great branding possibilities.

The issues I’ve pointed out are only the most important ones for building a successful brokerage. At Match-Trade we ensure each broker has not only full technical support but can also consult its business development. Our strategy is to help our clients grow their businesses so our technology could develop with them.

To learn more about possible cost optimization for your brokerage business please read this article or contact us.

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