The Internet’s penetration in so many corners of the world led to an exponential increase in people’s online activity. Nowadays, we do most things online, such as banking Or trading.
Online trading’s popularity has led to stiff competition among forex brokers. Can anyone become an online forex broker today?
In principle, the answer is yes. However, in reality, it is a bit more difficult than it appears in the first place.
Setting up an online brokerage house is fairly straightforward. Many houses are just glad to sell a turnkey solution, and you can even have your own branding.
But for that, one needs to invest, just like when opening any new business. Costs mount and cannot be ignored. Assuming funds are not an issue, what else matters?
Customers do. One needs a sound business plan on how to attract customers, aka traders.
The problem goes beyond attracting traders. It continues to retain them. What good is a trader if, in one month, they no longer trade?
For this reason, a new brokerage house should focus on investing in traders’ success. One way to do so is to offer educational materials, such as webinars or trading literature, and make them available to as many traders as possible.
The retention rate is directly proportional to a trader’s success. The trader will keep pouring funds into a trading account up to a certain point. If success doesn’t follow, the trading activity will decrease in time until, eventually, it will stop.
But the rate of success is very low in FX trading. Hence, brokers fight to attract new traders to the trading game rather than retaining the successful ones. Typically, a successful trader will rarely leave his current broker for fear that other brokers might not offer similar conditions.
Besides customers, a broker needs credibility. The easier way to solve this issue is to become regulated by the local financial authority. This way, traders know that the broker is backed by a financial regulator, and if something happens, the regulator steps in.
However, the regulation comes at a financial cost. It costs a lot of money to become a regulated entity. Moreover, the brokerage house must follow a series of rules to keep its licence active.
Finally, the type of brokerage house also matters when deciding to become an online forex broker. One can opt for an ECN or STP broker, a market maker, or a hybrid solution. They all come at different costs, and some have ethical problems, such as trading against your clients.
To sum up, the stiff competition in the online trading industry led to increased costs to set up a forex brokerage house. However, as more and more people are interested in trading the Forex market, the potential customer pool is big enough to attract interest in the industry.
While the financial costs of setting up such a business are often prohibitive, it is very lucrative once established and regulated.