How Forex brokers make money

Vasily Alexeev is a co-founder and CEO of the international fintech company UpTrader that provides software solutions for brokers and blockchain startups for over 10 years. Due to development of IT products and technological services by UpTrader over 30 Forex companies automated their operations and scaled their businesses. Moreover, for a decade of work the IT-provider has continuously been testing out its recipe of running a forex broker from scratch with time and cost savings.

Today, when we’re experiencing dramatic changes in the global economy. Do you think it's worth running a forex company?

Forex brokers seem rather immune to such crises. They act as intermediaries between private traders and large financial institutions, providing individuals with access to the global currency market.

The average daily turnover of the Forex market was 6.6 trillion dollars as of mid-2019. By the end of 2020, this number can reach $10 trillion. Experts say the currency market will continue to grow exponentially thanks to the globalization and popularization of remote work. Under these conditions, the brokerage business is more viable than the traditional one that can be pushed off-balance by inevitable economic fluctuations and crises.

How does a Forex broker generate income?

There are several ways to earn money from traders' operations.

Trading volume fees can vary depending on the instruments (currency pairs) and the company’s greed. On the average, such a fee equals about $5 per $100,000 of trading volume.

Some brokers don’t take fees, and then the spreads are their main income — the difference between buying and selling prices of currency. Compared to retail currency exchangers, such as your bank, Forex brokers offer much tighter spreads. For example, if an exchanger buys 1 euro for 1.03 dollars and sells for 1.15 dollars, it means that its EUR/USD spread is 0.12. If you buy and immediately sell 1 lot ($100,000) from such an exchanger you will lose $12,000.

On the other hand, brokers have access to major liquidity providers, and their spreads are usually small fractions of 1 cent. A broker may offer the same EUR/USD pair with a spread of $0.00005, i.e. 2,400 times less than that of the exchanger. This means that traders can operate with large volumes while paying small fees.

A broker’s income is the difference between the spread of their liquidity provider and the end spread for traders. That’s why it’s important to find a liquidity provider with the smallest spreads, so that they can be increased while remaining appealing to traders. Brokers that generate their income from spreads are interested in professionals who trade large volumes, thus generating profit.

It is often said that forex brokers are interested in a client’s loss. Can they earn on traders’ failures? 

There are brokers who themselves act as the counter-parties in trades of their clients without the participation of large market makers. In this case, a broker indeed profits from traders who “blow” their deposits, which sometimes disturbs clients as the broker seems to be interested in their failure. Despite this, such conditions also mean faster order execution, which is favorable to those who prefer high frequency trading.

Unfortunately, some brokers abuse this scheme and provide non-market quotations to their clients. Such companies don’t last long, but an honest in-house operation can be lucrative even without tampering with quotes.

Then again, there’s always a risk of professional traders bankrupting the broker with large earnings, which can be prevented only by a balanced risk management.

How much does one need to run a Forex broker from scratch?

Investments in opening a Forex brokerage can reach $500,000 only in the early stages, and building a business may take years. However, there are ways to save significant amounts of money and optimize the launch of a Forex company.

For instance, a licence for a trading platform, which is the broker’s main tool, requires large investments. For the most popular platforms MetaTrader 4 and MetaTrader 5 the price starts at $75,000. However, today there are ways to cut the expenses — instead of buying a full licence for the trading terminal, it’s possible to get a White Label MetaTrader 4 or MetaTrader 5 from a fintech provider who will take care of everything for a small subscription fee: from liquidity to customization of trading conditions.

Is a national regulation mandatory for a Forex company?

Forex business can work without national license. However, having a license and certification issued by a reputable regulator inspires trust and appeals to traders. Since brokers operate online worldwide, it’s possible to register the company in any jurisdiction, where licensing is cheap or even not required. In regions like Europe, a license costs from $70,000 to $1.2 million, and the paperwork can take up to two years. But even here we can save the resources by turning to offshore jurisdictions where licenses can be issued in two weeks for only $1,500.

How to build an effective IT infrastructure without large investments?

Even 7–10 years ago, the only way to enter the brokerage business involved enormous expenses. Among other things, they were required to build the entire business environment: CRM, trader interface, processing of payments, marketing tools to attract clients.

But the progress doesn’t stand still, and today’s IT world is a world of cloud-based solutions. The costs of launching a broker can be cut to $10,000 with a subscription fee of $1,000 for the maintenance of the whole infrastructure including mobile apps. And the launch period can be cut to a couple of weeks.

Today over a million traders use UpTrader’s software in dozens of brokers. For such brokers it is cheaper and faster to buy White Label solutions than to purchase licences for trading platforms, create the CRM and automatize the back office.

For comparison, creating your own trader interface takes at least six months and even with strict budgeting costs at least $30,000. And this without considering the maintenance and development of infrastructure and salaries for the employees after the launch.

UpTrader launches a full-featured CRM with a functional back office and branded trader interface in one day for $1,000. Subsequently, for $1,000 a month a broker gets not only the product, but also a team who will both provide day-to-day support and work on expanding the original capabilities of the software.

UpTrader CRM is especially popular due to the three principal and interconnected interfaces: admin, back office and trader interface. The team customizes and brands it for each broker, configures the required conditions for traders and partners, bonuses, fees, as well as provides deep analytics for client activity.

What else does a new forex broker need? 

It depends on what services a company intends to provide to its customers. For those who are interested to expand functionality for traders, UpTrader offers a web-based trading terminal, copy trading services, and cryptogates. This can go along with White Label trading platforms MetaTrader 4 and MetaTrader 5, as well as legal services and tech support.

All in all, if you are about to create your own forex broker, do not hesitate to pass some key functions to the outsourced team of professionals. You will have tons of opportunities to show your ingenuity on your way. A way that’ll be challenging, but exciting.

Disclaimer: The views, suggestions and opinions expressed here are the sole responsibility of the experts. No Forbes India journalist was involved in the writing and production of this article.