June, 2020 - In this article, TopFX CEO Alex Katsaros talks about the technical challenges that new CFD brokers face when launching. TopFX is a Prime Brokerage, which has been offering liquidity solutions to startups and established brokers for nearly a decade. Drawing from his experience as the CEO of TopFX and previously as the Head of the Product Development team at Spotware Systems, Alex offers his in-depth insights into the topic.
Alex Katsaros, CEO of TopFX
The Forex/CFD industry has now reached a stage of maturity, making it challenging for startups and smaller firms to establish their presence. CFDs were originally introduced to retail traders in the late 1990s but became more popular with investors after 2000, due to the advances in electronic trading. We, therefore, had ample time to evaluate the feedback, understand the expectations of clients, and adopt products that address their needs
Cloud services have made it possible for brokerage startups to quickly launch in a month’s time using PaaS - Platform as a Service - solutions. Alternatively, brokerages can choose to host their servers, or even build their own platforms. Depending on each startup’s goals, financial commitment, and level of expertise, they still need to make important decisions regarding their infrastructure.
At TopFX, we have been assisting broker-newcomers to enter the industry by providing complete solutions that include liquidity, technology and mentoring. Having worked with a diverse clientele for almost a decade, we can understand what serves our clients best in terms of infrastructure and always do our best to address their needs and possible challenges.
Setting up the infrastructure
Before launching a Forex brokerage, it’s important to set up a robust infrastructure as this is the foundation of any brokerage business. The infrastructure of a CFD brokerage consists of the following components; Liquidity, Trading Platform, CRM (Customer Relationship Management system) & Onboarding and Payments. In this article, I will briefly explain each component, describe the challenges that entrepreneurs may encounter, and offer solutions on how to overcome them.
Liquidity is the stream of executable prices a brokerage receives in order to create the electronic CFD (contract for difference) which is “signed” with the client every time a trade is executed. The CFD is a derivative financial contract, for which the Brokerage adds or subtracts funds from their trader-clients depending on the value of the underlying asset at the time of the trades.
Even though most regulators allow brokerages to offer their own pricing, thus creating prices in a sense, in practice, brokers receive the prices of underlying assets from liquidity providers. For that reason, the choice of an LP is of paramount importance in addressing the points below:
Quote Speed - In electronic trading, prices often update more than once per second. Hence, it’s necessary for the Liquidity Provider to be able to serve uninterrupted quoting without delays, missed quotes or downtime.
Execution Speed - Many Forex brokerages send flow to their LPs, due to their business model or their risk management. For that reason, the execution speed, which is the speed that the LP will fill an order, is of major importance. Today, high-frequency trading clients often demand order execution in 50 milliseconds or less. TopFX fills orders by average at around 35 milliseconds. It took a lot of technical effort for us to be able to provide this kind of execution.
Amount of Symbols - Depending on your business model, and your client’s demands, it’s important to evaluate which markets Liquidity providers provide, and be sure that they meet your clients’ expectations.
Integration - For older platforms like MT4, a software called a “bridge” is required to connect the MT4 server to your liquidity provider or aggregator. However, newer platforms like cTrader connect to the liquidity provider directly via FIX API. Proper integration ensures reliable execution and for that reason, brokers need to consider the best possible solutions available.
Trading interface - As mentioned earlier, a brokerage often needs to trade with the Liquidity Provider. Most of the time, the trading is automated from the integrations and settings of the system, but sometimes manual trading may also be required for risk management purposes. For this reason, it’s important to make sure that the trading interface and reporting offered by the Liquidity provider is one your dealing desk can comfortably use and understand.
Cost - The flexibility of the offering of your Liquidity Provider must match your needs and budget.
The larger a brokerage gets, the more apparent it is that one Liquidity Provider can’t satisfy all demands. For example, clients may demand particular stocks, but the Liquidity Provider for those stocks has very unreliable execution and bad pricing for Forex and doesn’t offer Cryptocurrencies at all. For that reason, Liquidity Providers are usually combined and aggregated when a brokerage grows. Startup brokerage companies shouldn’t concern themselves with this issue, as it only arises at later stages. A good Forex / Metals / Energies / Cryptocurrencies executable feed is good enough to get things going.
A trading platforms features, customization, and configuration define a brokerage’s products, quality and brand perception
The trading platform is the main product a brokerage offers to its clients. Its features, customization, and configuration define a brokerage’s products, quality and brand perception. When choosing a platform, brokers need to address the following challenges:
Features - In a mature industry like ours, traders - especially high volume and professionals - demand sophisticated features like advanced charting, social features, reliable execution, user-friendly interface and the ability to use multiple trading methods. Some brokers are looking to build their own platform and differentiate from the competition. Still, regardless of the available funding, the actual time that would take to build enough features to make your platform competitive is more than 5 years. Choosing a Platform as a Service option when starting a brokerage is then necessary for startup brokers who want to launch fast and cost-efficiently.
Hosting - Brokers can either choose to host the trading platform server on their premises or receive it as a service. The first option requires a higher budget, mainly due to maintenance costs. Besides increased cost, startup brokers do not have the expertise to deal with relevant problems, and as a result, the quality of execution may suffer.
Accessibility - Today’s consumers expect to be using trading products on any of their devices while being connected concurrently. Cloud syncing of their work is regarded as a basic and necessary feature.
Community - Trading platforms need to support community backing. A lot of the Forex business is conducted via introducers and affiliates, and it’s important to make sure that the countries and clients that the brokerage is targeting are comfortable with the platform of choice.
At TopFX, we offer cTrader to our broker clients, which supports six different trading methods: manual, automated, copy trading, portfolio management and via FIX. cTrader also has a user-friendly interface, fast execution trade servers with internal processing time of 3 ms, and comes hosted as a service with a cloud of servers all around the world. In line with traders’ demands for cross-device trading, cTrader works optimally on all devices and operating systems.
The Customer Relationship Management system is where your clients onboard, perform regulation required KYC (Know Your Customer), and deposit funds. From the brokerage’s perspective, a CRM helps sales teams to keep track of the relationship that they build with clients, and enables the support team to provide their service by using a ticketing system. When choosing the right CRM for your brokerage, there are challenges and decisions that need to be addressed as with the rest of the components.
Customization - Brokers need to evaluate the customization level of the CRM system depending on the targeted jurisdictions, their regulation and business objectives. When the brokerage is starting up, a CRM with a client area that offers KYC onboarding is more than enough. However, when a brokerage grows, it may adopt multiple regulated jurisdictions, different business models, and different sales cultures and methods that often need to be reflected on the CRM.
Hosting - As with the rest of the products, inadequate hosting might result in delays when clients are trying to onboard, or high latency when support or back office is trying to access your client’s database.
Access Rights - Everyone in this industry has heard or been approached by someone selling leads or databases of customers - usually illegally. Any efficient CRM should offer robust security management and the right tools to control access rights so that exploiters are prevented from using your data.
Accessibility and Interface - It’s important for the client area of the CRM to be straightforward, user-friendly, accessible on mobile phones and offered in the languages of the countries targeted by the brokerage. If brokers fail to choose such a CRM, the clients’ onboarding funnel will be subpar, greatly affecting the number of conversions.
Payments, or accepting deposits, is one of the most challenging issues when operating a Forex Brokerage, both legally and infrastructurally. It’s very hard to open bank accounts and even harder for the banks to offer designated clients funds accounts. It’s also next to impossible to accept credit card deposits without a ton of paperwork, legal opinions, and certifications, only to find that even if those challenges are overcome, every country has its own restrictions and preferred methods of depositing funds.
Every one of those methods requires an API integration with your CRM in order for transactions to be processed instantly and automatically. No trader is willing to wait for funds to be deposited in their accounts anymore.
Integrations - Integrating each Payment Processor or Payment method in the CRM means that precious time will be wasted in development and testing, which will result in lost clients. In addition, the sheer amount of payment methods existing today makes this process counterproductive unless a development team is dedicated to payment integrations full time.
Optimization - Payment Service Providers, especially the unregulated ones, are often unreliable. Their service can generate random errors, go down at any point in time, and in some cases, their whole business goes down without warning, which results in losses of funds. It’s important that the system has rules that optimize the payments flow, by having in place and suggesting alternative payment methods when a deposit doesn’t go through, and providing adequate success reporting to optimize the deposit flow.
The standard solution chosen by brokerage startups is a Cashier, or PSP aggregation software, that solves the above problems. There are already many solutions in the market, and the challenge here is to make sure they are already integrated with the PSPs for the countries that the brokerage is aiming to target, and with the CRM.
Payments, or accepting deposits, is one of the most challenging issues when operating a Forex Brokerage
Reconciliations & Reporting
When a brokerage has multiple platforms, multiple LPs, different trade servers, and many bank accounts and PSPs, it becomes extremely complex to monitor equities, profits and losses in real-time.
In addition to the above, recent changes in regulations have made reporting much more complicated than it used to be, with multiple different reports and deadlines. Startup brokerages are in for a surprise.
The infrastructure built must be able to support both the ability to reconcile your client’s equities, your firm’s equity, and the funds in PSPs and bank accounts daily, as well as generate the necessary reports to avoid missing deadlines of regulatory reporting.
Usually, startups bite the bullet and outsource the reporting due to its complexity, and choose to stay with one platform in order to easily do reconciliations and track their equity daily. Large brokerages often built reporting tools and integrated automated systems with the trade server’s APIs and back-office APIs in order to generate a big part of the report with minimum human intervention.
In conclusion, I would definitely recommend for startups and medium-sized brokerages to go for a tested, one-one stop turnkey solution that addresses all of the above-mentioned issues, like the TopFX All-in-One Broker solution. In this way, brokers can launch fast and focus on growing their business, an endeavour that may well require its own infrastructure, depending on the amount of electronic marketing used. When then the business grows, and if deemed necessary, the brokerage can start evolving or replacing components accordingly.
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