Starting a new brokerage can be compared to building a house. There are aspects of each of these endeavors that are inherently designed to be flexible; for example the color of the house, which is akin to the broker’s website and marketing, is designed to be easily changed over time. On the other hand, there are decisions made early on in each process that can drastically dictate flexibility and expansion for years to come. I would call these aspects, to stick to my analogy, the ‘foundation’ components of a brokerage operation. Though possible to change down the road, it can be highly disruptive and costly to do so and thus having a good idea of where you want to take your business in the future is essential in the early stages. You do not want to build a mansion on a foundation of cardboard.Establishing a good foundation for your brokerage is best done by identifying which parts of your brokerage are most likely to change in the future. How will your client base evolve over time, and what mechanisms to interact with your brokerage operation will they require? How will you manage client execution as your volumes and demand for more complex liquidity environments increase? How will you react to potential regulatory changes? Along the path of growing a brokerage from start-up to global leader, the answers to these questions will inevitably change over time. The important decisions are those that avoid re-building your entire business each time the market dictates a change.
Key decisions to make
It is very important to decide whether you want to build your own IT team (which is not an easy job nowadays) and manage all your servers yourself or you want to outsource it to some company. Both options apparently have its own pros and cons, so broker needs to be very aware about the consequences of this choice. If you choose hosted solution then there is also an important question regarding the fees. The best option is to pay fixed monthly fees to your technology provider, which will allow you to expand the business without generating excessive costs. Technology provider can provide you also access to some additional solutions that are already integrated with its system, which can be also an advantage especially in initial stage. The most important disadvantage of hosted solution is the lower flexibility and lack of full control over the server. The solution for it can be having your private server, but hosted with proven technology provider.Another crucial aspect is deciding about your Risk Management solution. There are basically 2 options which are at broker disposal. Broker can either run his own b-book, which means that he will be always a counterparty for his clients’ trades or he can run agency (a-book) model. Choosing an adequate model is quite important, because it affects substantially broker profitability. Running b-bbok model involves also higher capital requirements, because broker needs to have a capital cushion to assure proper settlement for clients trades. In a-book model broker is just earning the commission and markups, which is a difference between institutional and retails spreads.
What System to choose
Before choosing a platform broker should make a study, what features are the most needed. It is hard to differentiate if you choose one of these platforms. Another option is cTrader or xStation, which are web-based platforms but a little bit less popular. They provide also better options for branding and the companies which offer them, provide only hosted solutions.The points which have been described above are just the most important ones for building a successful brokerage. At Match-Trade each broker has full support and consulting regarding its business development. Our strategy is to help our clients growing, which is mutually beneficial both for brokers and technology provider.