The Dot-com boom has brought us accessible information, opportunities to voice opinions and a channel to create aspiring online businesses with a global audience. Among the businesses that have boomed as a result of the Internet and globalization are Forex brokers.
A forex brokerage is an entity that connects retail forex traders (i.e. individuals that trade on the foreign exchange market) with the forex market. The forex market is traded on the “interbank” which is a fancy way of saying banks trade electronically with each other at various prices that vary from bank to bank.
The growth of forex brokerages can be attributed to the fact that, now more than ever; people wish to make money from home rather than going to work and putting money into someone else’s pocket. Among these people are Forex traders – people that predict the price movements of various currencies from around the world in order to make a profit. To do this, they need Forex brokers; so, the more “home traders” there are, the more Forex brokers will increase.
Entering the Forex Brokerage Industry
Today, the sheer number and availability of online Forex brokers is staggering. You do not need to conduct major research to find one. Unfortunately, with this increase, a lot of unreliable forex brokers slide into the market and make promises they cannot keep (i.e. the promises of making money, low spreads or the most user-friendly trading platform available). Therefore, many new traders get sucked in, and in the long run they burn out all of their trading capital and leave the broker. Clients (i.e. traders) need reliable forex brokerage services; and those that don’t have one will lose out every time.
If starting a forex brokerage business is truly a passion, then here are three factors that should to be considered to become, and remain, competitive.
1. Don’t over-make your market.
Forex brokers get their spread cost between two currencies (i.e. EUR/USD) from the Interbank market. The Interbank market is simply a collection of major banks, hedge funds and financial institutions that are legally obliged to serve commercial turnover of currency investments as well as a large amount of speculative, short-term currency trading.
For example, if the Interbank market charges 1 pip on EUR/USD, a large volume of Forex brokers mark this up to around 3 pips. This means that they make a profit of 2 pips on every trade for this currency. In essence, they are making their own market by over-charging their customers. This is a certain recipe for disaster as this makes Forex trading expensive.
There isn’t anything wrong with marking up the Interbank market price, but the advice simply is – don’t over-do it. There are thousands of other brokers out there who will gladly take your customers by simply quoting a cheaper spread. This is especially relevant to the six most traded currencies. The last triennial central bank survey lists them in the following order: 1) US Dollar 2) Euro 3) Japanese Yen 4) Great British Pound 5) Australian Dollar 6) Swiss Franc.
Keep in mind, the US Dollar contributes around 85% to daily trading so this should be the primary currency to consider when making the market (i.e. devising a price for the customer).
2. Offer low or no commission.
A commission is simply a fee that customers are charged when placing a trade (a buy or a sell). This commission can vary depending on the currency pair traded. The aim is to make Forex trading as cheap as possible for the customer. Low spreads and no commission are exactly the type of trading they like and it is up to you to provide it.
Believe it or not, some forex brokers lie. They claim their trading is commission free, but all they do is pump up the spread cost so customers never receive the benefit. To accompany low spreads, low commission can work absolute wonders for Forex brokers.
The absolute worst thing you could do is to promise this, but fake it by pumping up the spread costs. This means the Forex brokerage owners do not want to wait and rely on volume of traders so they acquire as much as they can by faking it and overcharge them straight away. Unfortunately, a lot of brokers do this and end up losing customers.
3. Ensure world class support.
Alarm bells start ringing if customers have trouble undertaking standard activities such as withdrawing funds or simply being avoided when asking support questions about a forex brokerage trading platform.
To stay competitive, and in-tune with customers, support must be high quality and responsive. For instance, if a customer asks a question about your platform’s usage, support must provide specific instructions on how to resolve the issue. Also, withdrawing funds should be a seamless process that does not take more than 2 days to process. It is small factors such as this that will eliminate any doubts in the customers’ mind about your services.
Dragan Lukic is a professional trader and a trading educator. He has years of experience in working with Forex brokers and has helped people from around the world get started in this industry. Forex trading is his passion which he educates through his company – Capital Forex Training.
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