This post is the third one in my ‘Establishing a Brokerage Firm’ series. In the first one, I gave you basic guidelines for a general layout of a business of such a kind; I helped you define your services, product package, and target audience. The second post was dedicated to the topic of regulation. In this post, I’ll dive into internal, outsourced, and hybrid development methods to help you decide which one of these better suits your business.
The three branches of brokerage firms
From 2000 to 2005, trading was unofficially designated for professional and institutional investors. However, with the rise of the internet and smartphones, technology has greatly changed the trading infrastructure, allowing retail clients to access the markets. This led to an increase in trading volumes and liquidity.
Nowadays, technology is the main focus of most brokerage companies and customers. Therefore, your start-up needs to consistently advance its frontend & backend and automate most of the processes. Note that before doing so, you’ll have to choose between:
- Internal development
- Outsourced development
- A mix between internal and outsourced
It’s understandable that entrepreneurs wish to perform all the business’ necessary procedures in-house. However, you should know that doing everything in-house is very costly. You’ll have to spend hundreds of thousands to millions of Euros a year of your funds on highly professional staff in every aspect of your business. If you decide to go for it, it may give you a slight efficiency advantage over your outsourcing competitors, but it’ll be negligible.
- Complete freedom over integration, functionalities, features, and design.
- It allows you to adjust processes along the way, saving time by not waiting for outsourced developers to complete their assignments.
- You manage your teams. This means you have a free hand in picking employees and directing them towards your objectives.
- Overall costs for employee payroll are substantial and might weaken your business from the start.
- This type of ‘agrarian’ company will have to deal with more expenses for extra services and integrations since it’s somewhat unrealistic to develop the entire technology ecosystem internally.
This is a more sensible direction for a brokerage house in its early stages. Paying for existing automated services will save you time and money. You’ll be free to focus on improving in-house aspects of your business, like customer service, partnership creation, and strategy.
- As a client of a 3rd party company, you get a product package with a support network.
- The outsourcing company supplies you with API (Application Programming Interface) for all other integration processes.
- Most 3rd party services allow little to no room for development and customization since they are pre-built.
- Even after acquiring 3rd party services, you still have to make a lot of additional integrations. This means you have to pay additional tens of thousands of Euros per month for hosting, technical support and maintenance, feed, liquidity, change requests, and back office.
- A 3rd party company has its own set of priorities — consider that acquiring its services means you won’t get what you need right away.
- Since you don’t own the technology supplied by the 3rd party company, any additional request will mean extra costs.
I believe paying for a Whitelabel (a product\service produced by a company to be rebranded and sold by another company) and adding internal developments might be a good idea for a new brokerage brand. You can buy the platform and its features and rebrand them. You can also negotiate for extended permissions to customize it. Afterward, you can proceed with the CRM software (Customer Relationship Management), payments, and liquidity processors integrations by yourself. The bottom line is that you need a predefined structure that you can design according to your needs.
Expect the worst, aim for the best
As you can see, establishing a brokerage house requires much more than understanding the financial markets. It demands that you raise substantial funds, conduct deep research, and have great technology, willpower, negotiation skills, and much more. I advise you to expect the worst but aim for the best and be ready for a long and exhausting process. In any case, once you achieve your goals, it’ll be well worth it. With that in mind, you still need to be aware of some aspects of the brokerage business. I’ll discuss these in a future post.