Here, we take a quick look at what exactly is required to set up a new forex, CFD or spread betting business.
A while ago, Peter Cruddas left his brokerage job to found CMC Markets ( in 1989 then known as Deal4Free) with £10,000 in the bank, said staring a brokerage business with that little money probably wouldn’t be possible.
But, that was back in 2014, and much in the fintech world has changed.
Perhaps you want to set up an active gamified community of traders like Nick Bortot at BUX or a social copy trading app like Mike Read at Pelican?
Or, maybe, you just want to exploit the trading industry to try and make some money.
In reality, you can start a spread betting business with much less than £10k.
However, the brokerage market is becoming more competitive every day so you need an edge. There are seemingly very few barriers to entry as new brands are popping up on a daily basis.
In fact, you can start a forex brokerage business with zero cash, zero experience, and zero regulation.
Obviously we’re not talking about setting up an infrastructure, building a platform and taking customers deposits. That clearly takes millions of pounds in development, balance sheet capitalization and compliance. And in that respect Mr Cruddas is correct, “£10k wouldn’t even cover the legal costs”.
We talking about white labels.
So here’s how to start a CFD, Forex or spread betting brokerage business for under £10k.
- Choose a name
- Find a provider
- Sort the commercials
- Get regulated
- Do some marketing
1. Choose a name
You need something that sums up your USP.
If you have an existing brand that you can leverage you can just stick spread betting, capital or markets on the end and you’re done.
If you’re starting from scratch you need something catchy. If you are self-indulgent you could call is “your surname” then Capital. But if your focus is on really tight pricing go for some City phrase that works like Touch Markets, Choice Capital, Zero Spreads or Hedge Spreads.
2. Find a provider – which brokers are white labels?
Firms like Star Financial Systems can provide turnkey brokerage solutions or the major spread betting providers such as, CMC, or IG, can provide branded versions of their platform.
These are called white labels and basically means they provide all the pricing, support, technology, compliance and liquidity etc. All you have to do is come up with a logo, put it in the top left-hand corner and get some clients.
There is an underlying cost to the provider for setting this up. It’s usually not a huge initial outlay, it shouldn’t be massive as they expect to profit heavily from your brand in the long run.
What you will need to do is convince them with a strong business case that you are someone worth doing business with. If you’ve zero experience, contacts, network, marketing budget or clear strategy, they probably won’t entertain you straight away. But, if you can provide a clear map of how your brokerage business is going to generate clients (and profit) then you may get the go ahead.
White label providers will look to make about £100k a year from a white label partnership in commission, hedging, and funding. If you don’t cross that threshold after a year, you may find yourself cut off and the partnership terminated. After all, there are ongoing costs to the provider such as compliance, support and hosting that they won’t continue to pay for if the partnership is not working.
Chances are though, you’ll become an MT4 broker.
However, white labels are on the out, here’s what Dan Moczulski from Star Financial Systems has to say about them…
” 5 years ago, getting a tier 2/3 broker to provide you with a White label for your start-up brokerage was relatively easy and cheap, however, three things have changed that. Firstly the FCA came down pretty hard on brokers that were in the business of offering Appointed Rep ( i.e. sharing their FCA authorisation with partners) status, meaning either it was expensive and reputationally difficult to offer lots of white labels.
Secondly, the commercials of a deal for both the partner and the broker started to become difficult. As more and more brokers came to the market, client acquisition costs shot up. If you, the partner, were sharing revenue with a broker, it became difficult to justify the cost of actually getting clients through the door.
Finally – there were just too many flops. Startup brokers were just expecting business to flock to them and it just didn’t. You have to work hard to make your partnership a success. I remember a major bank, tied with a tier-one CFD firm, offering golf clubs to new clients, assuming they would just come in with no marketing effort, and after a couple of months it had only handed out 5 clubs. Not even enough to fill a bag!
Essentially the large CFD providers just lost the appetite for this kind of business. It must also be said, for firms who had invested in their own proprietary platform, creating lots of competitors with the same product was also undesirable.
That is where Star Financial Systems has benefited. Essentially we allow startup and existing brokers to enjoy 100% of the revenues they derive from their client base. They can control and own the client’s journey from opening an account to trading, governing all aspects of the service, the platform, and the products and opportunities offered.”
3. Get the commercials sorted
There are three ways spread betting, forex and CFD platform providers make money; spreads, funding and hedging.
The spread income comes from the difference between the buy and sell price times the stake. So if someone bets £10 per point on the UK 100 with a 1 point spread, that is £10 income. If the spread was two points that would be £20 income etc.
Funding income comes from overnight financing on open positions. This is usually 2.5% over/under libor and calculated on the consideration of positions (not the margin). When libor is high clients receive interest on shorts, but at the time of writing it’s too low and the -2.5% takes it to negative and clients are charged. So, for example, if a client has £10,000 worth of positions open they will be charged 2.5% over libor. This is an annual rate and then charged on a daily basis. In this example the cost to fund the position for a year would be (0.5% for simplicity purposes) Libor plus 2.5%, so £10,000 x 3% = £300 per year or 82p per day (£300/365 – yes they charge interest on the weekends).
Hedging income comes from netting off client positions. In many circumstances spread betting clients will trade in amounts smaller than the minimum contract on the underlying exchanges. For example, the FTSE contract trades in one lots which are equivalent to £10 per point. If clients trade less than that the broker cannot hedge it. So they take some risk by not hedging everything, when the book fills up one way or another they cover. They also run A and B books, generally, an A book is fully hedged and the B book consists of clients who constantly lose money so is hedged less.
As a white-label your trading business should be able to negotiate a split on the spread and financing income. Your split will depend on your negotiating skills and also how solid your business plan is. It will also be scaled based on performance. The more business you do, the better your commission and funding split.
Generally, your provider will not share B-book revenue as this will be determined by their own book and other white label clients. It will also consist of wild P&L swings and sometimes make a loss, so it may be in fact risk that you do not want. Plus the FCA doesn’t allow it, so if they do you’re probably dealing with the wrong white label provider.
4. Regulation and financial security of your client’s funds
As a white-label, you will be using the regulation of your brokerage provider. The provider will set up a trading name and lodge that with the FCA and operate on the basis as “My Broker” is a trading name of “AN Another Broker”.
As far as client funds are concerned, they are not actually your clients. They are the clients of the underlying provider, although you should confirm you retain marketing rights. So your brand’s customer are contracting with the provider and the funds are lodged with them. This means, your provider is regulated by the FCA, client funds are also protected under the FSCS scheme up to £50k or £85k.
5. Marketing, getting clients and making money
This is the hard bit. Getting set up is easy and should take anything from three to six months depending on how busy your provider is. Now, for you to make money you need clients and you need clients that trade.
The main way to market for new brokerage business is through these channels
- Affiliate marketing – on the way out due to regulatory rule changes
- Direct online advertising – really expensive and awash with clickbate and robots
- Email marketing – GDPR has put a stop to that I’m afraid.
- Social media influencers – all scammers
Affiliates were the most cost-effective way of marketing a spread betting business. It is a form of performance-based marketing where you only pay once a client has deposited funds and placed a trade.
So it is relatively risk-free. To get set up you will have to find out where the other brokers source clients, this is pretty simple. Once you have targeted your list of affiliates you will have to set them up with tracking links that tell your platform where an account has been introduced from.
However, due to changes in regulation, affiliates can no longer earn a revenue share, even if they are regulated. They can still, just about receive a CPA (cost per acquisition) payment. But the FCA actually considers that regulated activity. because it is a payment contingent on a transaction. So expect further clampdowns in the world of affiliate marketing in the trading industry.
Direct online advertising is simply advertising online through networks such as Google AdWords with text and display adverts or other finance specific networks. Unlike affiliate marketing (where you only pay for actual accounts) online display advertising can be very hit and miss.
Forex, CFD and Spread betting marketing is a metrics game and you will need a big budget to make it work. Over the last decade, the cost of sourcing a new client from online advertising has increased from around £400 to over £1,500. So expect to pay around £1,500 or more in advertising spend to get a single active customer. This can clearly be very expensive if not done correctly so the use of highly targeting and efficient ad strategy is essential. Simply casting wide net and hoping for the best will result in instantly blowing your ad budget and getting nothing in return.
Email marketing is still one of the best ways to market for new customers. There are some very strict rules on financial promotions via email so ensure that you seek professional compliance advice before sending anything. An email is a permanent feature in inboxes and can land you in hot water with the regulators. In most circumstances, your provider will insist on approving financial promotions before they are sent. Email marketing can be expensive but worthwhile and the CPA is still around £500 for solus emails. The key features of email marketing is to have a clear CTA (Call to action) and a significant offer. Just sending an email saying “here we are” is not going to get you anywhere. You will have to offer something like a guide, welcome offer, or competition to entice new clients.
So there you have it!
It will cost you virtually nothing to set up a CFD, forex or spread betting brokerage business. But it will cost you a fortune to actually make it profitable. Expect to only be successful if you have:
- A well-established brokerage brand looking to expand into spread betting, Forex or CFDs
- A wealth of industry experience (both financial and marketing) and a strong network
- A massive marketing budget and a network of affiliates