The basics of establishing a brokerage firm
Technologically speaking, the world around us is changing fast — including, of course, the financial world. It is sometimes hard to follow and realize what a passing trend is and what is here to stay, but my background and experience help me not get washed away and remain focused on what’s to come. In my years of activity in the financial industry, I’ve set up a few well-known brokerage firms. I would like to advise anyone who wishes to enter this world and set up their brokerage brand.
Even though there are plenty of official guidelines from regulators and articles about this topic on the web, this information tends to be scattered and written in confusing “official” terminology. For this reason, I decided to break things down and clarify the essential information here. I hope you’ll find my advice helpful.
First of all, it’s a business like any other
Before we dive in, you must ask yourself a few key questions:: What market are you addressing? Which needs do you wish to meet? Who are your competitors? What is unique about the services you offer?
After figuring these out and setting goals, you are ready to establish your brokerage. These are the first steps you should take:
- Get funded — run a funding campaign or find a source for seed money.
- Recruit and build the right team for your business — make sure you choose employees who are experts in the field.
- Choose a regulatory body based on your profile to get an operating license (I’ll add more on this later).
- Create the proper infrastructure for your business by selecting the right technology and liquidity providers.
- Invest some money in marketing. Don’t skip this part, it’s essential. Without marketing, your brand will get lost among all the other brokerage brands out there.
Retail vs. Institutional broker
A brokerage firm serves two types of clients: retail and institutional. You should know that addressing either of these is quite different due to their diverse needs. On the one hand, a retail investor is usually an individual who buys and sells securities through brokerage firms. On the other hand, an institutional investor is not a person but rather a body active in the financial world. For example, a money or trust manager, a private equity firm, a hedge fund, etc. This type of client has sufficient resources to entrust a brokerage company with enhanced authority, but on the other hand, they require attention — and a lot of it.
Keep in mind that in order to deal with either of the two listed above, you’ll need a different kind of license. In both cases, you should expect a long bureaucratic process.
Choose your field of expertise
There is no getting around setting goals for your business. This way you can truly make important decisions about budget requirements, technical infrastructure capabilities, and other key issues. Furthermore, there is no better way of getting to know your advantages over similar brands.
Now, you must choose what type of brokerage brand you wish to be:
CFD (Contract For Difference) trading is gaining popularity thanks to a few reasons:
- High liquidity.
- A wide variety of instruments.
- The potential to maximize capital through leverage.
However, many scammers have found their way into this world, staining the term ‘CFD broker’ and harming the reputation of honest businesses. If you wish to be a CFD broker, my solution for this is to apply for a reputable license, maintain transparency at all costs, and train your personnel to the highest level.
Direct crypto exchange differs from trading crypto CFDs in a few ways. In direct exchanges, the clients buy or sell digital assets, while with crypto CFDs, they speculate on the future price of assets. The latter is easier and more accessible to the general public since the clients don’t own the assets. Moreover, in CFD crypto trading, the clients don’t pay fees for contract rollovers since crypto doesn’t have an expiration date.
DMA (Direct Market Access) brokers allow clients to trade orders directly. A broker offering DMA needs to have the technology to facilitate fast order routing. Provided that it has increased market visibility and direct interaction with financial market exchanges, this can be the right option for the experienced or institutional trader. Keep in mind you’ll need to make some adjustments if you wish to cater to them:
- Accommodate multiple assets and market access.
- Allow discounts for certain trading volumes.
- Make sure your regulatory body is top-tier.
Look to the long run
The world of financial markets is ever-changing and ever-evolving. For many, it might be difficult to indicate what’s about to happen in the brokerage world. However, I have some predictions that might interest you.
Thanks to online brokers, the trading world is becoming much more accessible to people who aren’t knowledgeable in this field, attracting large amounts of new customers and paving a path to continuous growth. Fractional trading with zero commissions will probably take over a large share of the online activity.
Furthermore, blockchain technology will allow almost everyone to participate in the markets, regardless of their income. I expect one-stop-shops to bundle up services to be a package deal for customers. Automated Wealth Management systems have the potential to replace human supervision with the aid of data collection, turning into personalized advice, and even automatically investing with client assets.
All in all, I strongly believe that investing in the market is about to become more common among the general public. That’s why I advise you to accelerate your plans to set up your brokerage brand if the thought of one has crossed your mind.