Forex white label ideal for start-ups

A quick way to enter the forex market or startup a new brokerage business is to enter into a forex white label agreement with an established brokerage, which not only will reduce the risk of failure but will also allow the entrepreneur to better understand the business before committing money and resources.

Forex white label is essentially the process whereby you as the new startup get to offer a ready and tested online trading platform under your brand, whereas in actual fact, everything is done by an already established and preferably regulated forex brokerage or investment firm.

Suppose you wish to offer the popular MT4 online trading platform to your clients. First thing first, you need to formalize how you wish to operate because all the regulated forex brokerage firms or investment firms offering forex trading will not agree to white label their platform to you unless you can prove that you, yourself are regulated.

Assuming you are regulated and have secured your license, the next question is the level of investment you need to make in an online trading system. Do you buy the MT4 and then try to find counterparts with whom to deal and provide you with live prices or is it better first to enter into a white label arrangement whereby the forex brokerage provides you with their already tested platform and take responsibility for solving all technical and pricing issues and you simply add your logo to the platform and offer it to your clients?

In my opinion, such an arrangement is by far the best strategy since the funds needed to pay to another investment firm to white label their platform is significantly lower that purchasing the platform and secondly, it is very difficult process to resolve all technical and pricing issues, with the whole process likely to take several months until all issues are resolved.

Once you are up and running, then you can take the decision to purchase the online trading platform and slowly get on with the process of making it work in all areas including pricing, back-office and front office.

In this respect, I would say the most important element is how much volume your firm is likely to generate, since many firms are likely to finance the cost of setting up the white label electronic trading platform and cover the monthly service charge payable to MetaQuotes if you can guarantee minimum monthly volume.

In such a case, your entry into the forex business can be very cost effective since not only there will not be a need to pay setup fees and monthly service charge, but you will also get sufficient income since in a white label arrangement, you also do get the option to add extra commission to the spread. If you have volume, then you can negotiate almost anything.

The fastest and guaranteed way to providing assurances that you can deliver volume is to place a deposit under a forex managed account arrangement whereby the forex brokerage offering you the white label will trade on your behalf. This way, your brokerage will deliver the minimum volume without charging you for setup fees and monthly service charges, you will get to benefit from the added spread and your portfolio will also grow.

Forex brokerage need volume to survive

The key to the success of every forex brokerage firm offering online forex trading is to generate sufficient volume generated through the activity of its clients. It does not matter whether the forex brokerage is an STP broker or market maker taking the risk. Without volume, the forex brokerage is doomed to fail.

This may explain why forex brokerages are the most aggressive advertisers through the Internet, in the traditional press (such as newspapers, magazines) or by cold-calling clients offering very tight spreads, swap free accounts ideal for Islamic traders who by faith are prohibited from receiving or being charged interest as well as those who offer free trading tips.

Once a forex brokerage manages to attract a client, then this becomes a revenue source for both the brokerage acting as pure STP broker or market maker. In the case of the STP broker, who does not take a counter position against the client, the objective is to make a tiny markup on top of the spread received from a counterparty and thus make the desired profit. In the case of the market maker, and specifically those who never cover positions, the objective is for the client to lose and eventually be wiped off, so that the specific brokerage makes all the money.

This may also explain why many market makers agree to accept clients with deposits of as little as $100 whereas a pure STP broker will only take clients with minimum balances of $5000 and above.

In fact many market makers also agree for commission free client deposits through credit cards or plastic money transfers and absorb the 2-3% card handling and processing fees, since for them, the objective remains to attract clients at all cost on the belief that eventually all retail clients lose their money.

For those who opt to become an STP broker, another effective way to attract clients and generate volume is to offer forex managed accounts whereby they manage the accounts on behalf of clients and take the responsibility to generate buy and sell orders. Although there is no guarantee with respect to performance, but it is generally accepted rule that any broker, especially the regulated ones are most likely to work properly and take all measures to generate genuine profits for their clients and at the end be rewarded with a certain percentage from the positive performance.

Forex Managed Accounts: Trading on breakouts

A professional and experienced money manager in charge of managing your forex managed account is more likely to be using a specific trading technique, such as trading on breakouts, or hope that recent trading ranges will hold or trade on major chart support or resistance levels.

If the money manager can determine when the market is ranging, trending or breaking out, then without a doubt, that forex manager would be the best in the market racking up the biggest gains.

Unfortunately, most forex managers rely on one particular trading system or favoured way of trading. Trend trading is by far the most popular method of trading, whereby the trader attempts to follow the trend. In order to determine the trend, the most trusted method is to compare current prices to the previous 5, 10, 20, 50, 100 or 200 days. If spot is above all trend line indicators, then trend is positive, so you trade long. If the spot price is below all or more importantly the long term indicators, then the trend is negative, which is why such traders are more likely to trade short the market.

But the market is not always trending. Sometimes, it simply range trades, stuck between 5 big figures. Other times, the market trades on major chart support or resistance levels, so each time it touches a major support line, traders buy and push prices higher and each time it approaches or touches a major resistance line, traders sell and push prices lower.

At a particular time the market will make a break out of recent ranges, or above/below particular support/resistance levels. That is when a breakout occurs and is the start of a trend. Does it always work? I’m afraid not. Many times the market does several false breakouts, that is when it breaks above a major resistance level or a particular level that had been holding for a long time, it retreats back again, thus frustrating most traders.

Let’s say the recent range on EURUSD has been 1.40-1.45. This means range traders and those following support/resistance levels will be shorting the euro each time it approaches 1.45 with stops above, let’s say 1.4550. Breakout traders on the other hand will be going long euro every time it goes above 1.4500, let’s assume at 1.4550 in an effort to catch a major move to 1.50.

So each time the price touches or goes above 1.4550, the majority of forex traders will be going long euro – one group to stop their positions, the other in preparation of a major move up. You can imagine the frustration of everybody, when the price hits 1.4560 and then retreats back to 1.4400!

Rest assured, the major players with full knowledge of the stop loss orders will be the driving force behind this frustration, which in the process will be causing huge losses for the small or retail forex traders, but making solid gains for their forex dealing rooms.

Such a process can go on for a long time but at one point, the market will make that convincing break and head higher or lower. This is why timing is very important in the forex market and why forex trading needs a lot of discipline, since no matter how many times they hit your stops, you need to trade with stops, and no matter how much they frustrate you, the day will come when the market will make the breakout and start trending. When that happens, no forex trader will like to be on the wrong side of the market.

Forex Brokerage: Need a business plan before you start

It is very strange and at the same time surprising to see that many entrepreneurs who wish to set up their own forex brokerage, seldom bother to conduct a serious business plan, usually have no idea from where they are going to solicit clients and don’t know whether they are going to be regulated or not, and which jurisdiction.

It appears that the main reason for deciding to enter the forex business is “because the guy next door is making tons of money.”

Just because the forex market has a daily turnover of $4 trillion and so many brokerage firms are making millions every day does not mean that just about everybody can enter the forex business but more importantly survive. Competition is cut-throat and there is no room for error.

As we have mentioned in previous articles, the first thing to do is decide from which jurisdiction one is going to get the license to operate as a forex brokerage firm. It can be an EU jurisdiction like Cyprus or one of the offshore jurisdictions like BVI or Cayman Islands.

If the forex brokerage startup decides to be regulated in the EU, this means additional costs since all heads of departments need to be licensed persons, and for every service for which the forex brokerage has applied for licensing, it will need to have qualified staff, operating manuals, rules and procedures and the necessary capital. This means huge expenses which would range between EUR 350.000 to EUR 1 mln annually.

If one decides for an BVI or Cayman Islands license, the application process will still cost between $20.000 to $50.000, but the annual expenses will be significantly lower since offshore jurisdictions don’t require for the forex brokerage startup to employ qualified persons, or follow manuals on how it runs its business and there is one minimum capital requirement for all sorts of activity.

The choice of jurisdiction will decide in which geographical areas the forex brokerage startup will be active. If one has decided to be regulated in the EU, then the forex firm will be allowed to be active in the EU27 and beyond, whereas all those who have BVI or Cayman Islands license cannot legally operate in any of the EU27 member states.

Forex brokerage firms face very tough regulatory issues before being allowed to solicit business from US citizens while a number of countries such as China and India have banned forex trading on margin and leverage.

For this reason, it is very important for the forex brokerage startup to prepare a business plan as to  where it wishes to be based and regulated, which countries and geographical areas it wishes to be active and whether or not it will be violating securities laws or not.

Combining Forex Brokerage Startup With Forex Managed Accounts

Entrepreneurs who have decided to setup a forex brokerage should seriously consider combining their newly setup forex brokerage with offering forex managed accounts as a guaranteed way to generate volume and thus make sure that they will survive in the very tough and competitive forex market.

Suppose as an entrepreneur you have raised the required capital, hired the professional managers, traders and have a well organized back-office in order to become a forex brokerage, licensed and regulated by an authority in your home country or an offshore jurisdiction and you also have marketing plan to attract clients who will start trading through your platform, but does this mean that your brokerage will generate sufficient volume to cover your costs?

Probably not, which is why every new forex brokerage startup should seriously consider combining retail trading on client orders with forex managed account trading.

Getting volume from retail clients who decide for themselves how to trade, and when to enter buy/sell orders is probably a sure way to making money and is the preferred way of trading for most forex brokerages.

There is no risk on the forex brokerage since the client takes the decision and if the client loses money, the forex brokerage is not responsible for the loss. In the meantime, as the client trades in and out of positions, the forex brokerage keeps making money from the spread charged to the client.

The next question that we should ask is if the retail accounts are funding their forex accounts with decent amounts and thus generating sufficient volume or if they are small accounts, hoping in and out on 1-5 lots, which over several thousand accounts will be substantial, but until the forex brokerage startup reaches that stage, it may take time while the expenses are running.

So what should the forex brokerage startup do until it builds up such substantial client base to generate sufficient volume to cover costs and move into profit? The best and quickest way is to also offer forex managed accounts.

By offering the forex managed account service, the forex brokerage startup will make sure that a professional fund manager will manage the accounts and start trading positions with the objective of generating satisfactory profit for the participating clients based on a forex trading system.

In the process, the daily in and outs will generate sufficient volume, hence adequate spread income for the forex brokerage to cover daily expenses until the retail business picks up, while additional income will be generated by charging an asset management fee and performance fee on the positive performance generated from the forex managed service for the forex investors.

Fund Management companies usually charge a 2% asset management fee and then apply a 20% performance fee on any positive performance, which may be substantial and can generate such fee income to convince the forex brokerage to concentrate more on forex managed accounts, rather than chase small retail clients who trade in small lots.

Forex Managed Accounts boost daily forex volume

There are millions of individuals who have opened forex trading accounts and are placing buy/sell orders and making trades in the market and thus contributing to the phenomenal increase in daily forex volume, but the bulk of activity is generated by Fund Managers who have been entrusted with the management of forex managed accounts.

According to the Bank of International Settlements, the daily volume of forex trading surpassed $4.1 trillion a day. The report, which is published only once every three years, is useful since it highlights the phenomenal growth of the forex market.

The forex market is the market through which all global trade activity is made so it’s no surprise that the daily volume is so high.

An important part of the market however is also related to trading or investing activity, the bulk of which is carried out by institutional fund managers as opposed to the retail speculators who hop in and out and trade small lots.

There is no doubt that the majority of investors who wish to trade in forex prefer managed forex accounts handled by professional forex fund managers who use a combination of fundamental and technical analysis tools to trade in the forex market.

There are many who question whether a small retail investor can survive in the forex market. In fact many forex firms who have the license to act as marker makers that is they take the risk and never cover client positions have based their business success on the failure of the retail investor.

The reasoning is that eventually, the retail investor will lose his money because retail investors are not sophisticated, they are not disciplined and they trade with their heart rather than their brain.

An increasing number of market makers thus increase the leverage offered in an effort to convince the retail investor to trade bigger amounts and thus increase the chance of losing the original capital invested.

On the other hand, a professional manager is more likely to use sophisticated technical analysis tools, have access to the latest news and comments hitting the newswires and which are likely to have a major impact on prices and equally importantly trade based on discipline and risk management tools.

 
This is why more and more investors are shifting to professional fund managers, especially those employed at regulated investment firms, giving them the mandate to manage their forex accounts.