Business

What is the Business Model of an FX Trading Company?

Business owners must check rules set by financial regulators. This is the first thing to check when thinking of how to make forex trading a business. Regulatory bodies require newcomer brokers to get a license for lawful operations. 

Some countries establish specific entities to regulate the Forex market to protect their citizens from fraudulent activities. No matter the commercial or governmental organization, the state is entirely behind its work. 

There are three regulatory bodies with the most stringent regulatory requirements:

  • CFTC (Commodity Futures Trading Commission) and the FSA (National Futures Association) are USA-based.
  • FSA (Financial Services Authority) is headquartered in Japan.
  • FCA (Financial Conduct Authority) is based in the United Kingdom.

The following vital thing that helps launch an advanced broker is creating a business plan forex trading firm. Let’s learn more about the most widespread business models. 

Market Makers FX Brokerage Model 

This model was the most preferable among business owners for a long time. In short, the MM brokerage company acts as a mediator between clients and the real Forex market. It shows prices in the dealing desk, which may differ from the actual situation. In other words, it means that traders buy and sell assets using a brokerage platform rather than on the actual FX market, where they can cut their risks. This is why relationships between the broker and clients may be at risk. The reason is simple: if the operation on the platform is not secured, the brokerage company loses money, and if the operation is protected, the trader loses money. 

In the case of a broker’s loss, the company’s income increases. Let us explain it. Brokers are market simulators and may use this information for performing various manipulations, and no one would be surprised. However, this approach has some essential benefits. For example, the brokerage knows in advance about all expenses and may execute orders immediately. Furthermore, the spreads could rise, or orders will be filled at a different price than we set earlier because of the low market liquidity. 

STP FX Brokerage Model

Using the STP (Straight Through Processing) technology has a prominent advantage. You do not need to launch a dealing center, and trading operations are done at prices set by liquidity aggregators who get all orders from brokerage companies. As a result, major banks, investment funds, and individual investors act as liquidity suppliers for all transactions. 

STP companies often work with an internal liquidity pool. It consists of several liquidity providers that compete for the best Ask/Bid spreads for Straight-Through-Processing brokerage orders. 

Generally, the STP forex trading business model means that the broker operates as an intermediary between the market and its consumers rather than as a typical “dealing desk.” 

Forex Direct Market access is another notable benefit of STP brokers. In this case, traders may access the order book of liquidity aggregators without mediators and high spreads and try the best execution pricing. Orders are filled on behalf of customers at the best possible price, with a bit of extra charge added by the brokerage company. 

Consumers choose a brokerage company that has a wide variety of spreads that are always available. What is the reason? If an FX company can choose the best Bid price from a particular liquidity pool, they will get the best Ask price from another pool. This approach allows traders to get the best possible spread. It is a perfect chance for investors who prefer scalping and trading on the latest news as STP brokerages execute orders in a matter of milliseconds. 

ECN FX Company Model

Electronic Communication Network (ECN) Forex brokers allow their customers to get direct access to the foreign exchange market for pricing and fulfillment with the use of electronic communication network models.

Investors can compare the conditions of several of the ECN companies and try out specific trading platforms provided by them. It will help to define the best-matching offer. 

There are also brokers with No Dealing Desk (NDD) status. It means that the Forex brokers exploit an Electronic Communication Network model for executing orders since they mediate between clients and the whole global market. No Dealing Desk Forex businesses allow traders to avoid MMs and their dealing desks, which want to benefit from transactions. Therefore, NDD brokers seem more attractive for individual market players. 

The vast majority of Forex brokerages that use the ECN forex trading business model will show real-time order data and exchange quotes as they change. Moreover, the Interbank FX market serves as the direct source of pricing. Thanks to the Electronic Communication Network, Forex companies handle operations automatically; there is a little human factor than standard FX brokerages.  

One of the most valuable advantages of ECN brokers is that re-quotes are virtually impossible. News traders may benefit from the market volatility caused by the release of critical economic reports or other breaking news. 

In the end, ECN companies enable investors to trade with much fewer spreads than would be possible if they work with a specific market maker. Despite this, since Electronic Communication Network order filling spreads are not maintained on one level and may change drastically, especially when the market experiences extreme volatility, this may cause some uncertainty into regular commissions traders may access. 

A fixed execution fee on a per operation basis is possible when cooperation with an ECN brokerage company may be reasonable to clients who rarely plan to trade more significant amounts. Because the commission depends on the transaction amount, some brokers can extend their spreads, leading to a rise in transaction commissions. Therefore, this Electronic Communication Network broker may be best-matching for investors who constantly want to trade lesser quantities. 

Hybrid FX Broker Model

The mixed way brings together the most vital characteristics of both ECN and STP models. A conventional hybrid-model way provides their clients with first-class service, outstanding training options, and a wide variety of tools for market analysis. Combining two popular models allows traders to try the cutting-edge service, which enables traders with favorable Forex trading conditions. Moreover, the hybrid-model FX company may automate order input as it is responsible for spread creation and other essential elements of order filling. 

The Straight Through Processing model may be the best form of an FX broker, but the hybrid No Dealing Desk model is another excellent option. By bringing together the STP and ECN models, Forex brokerages can get around dealing with MMs. It may be the most beneficial choice for both investors and brokers. Why? Brokers do not want investors to face losses because their profit depends on spreads and fees they charge.  

Conclusion

Some traders may have considerable expectations when entering the Forex market. This is why they do a detailed analysis of all business models among brokerage companies. Each kind has its unique set of advantages and drawbacks. Moreover, you can’t compile since there are various Market Maker companies and Electronic Communication Network brokerages to choose from. The latter is considered the industry standard for flawless transactions. 

If you want to become an advanced brokerage business, you must partner with different global and regional liquidity aggregators. As for the long-term technique to implement, you should choose a small range of possible gaps in order execution since it is the most beneficial approach. In contrast, STP companies may compete with them in transaction processing speed and efficiency. Those investors who have just entered the Forex sphere may profit from partnering with the MM broker, which opens access to a simulated market.

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