Thinking of starting a stock brokerage but need a simplified guide that breaks down each step in a non-complicated way?

You’re in the right place! 

Setting up a brokerage requires careful consideration of business models and regulatory, licensing, technology, and customer service requirements. 

Entering the financial industry means dealing with client funds. Getting these factors right is important, and the consequences of poor preparation in the launch phase can be hefty. 

That being said, it’s a fantastic time to enter the space, with plenty of accurate information and guidelines available. The challenge for brokers is filtering and compiling this information into straightforward, actionable steps — that’s where this guide comes in! 

Broker, Dealer, or Broker-Dealer? 

The first step is to identify the type of brokerage that best fits your business. Will you be a broker, a dealer, or a broker-dealer?

  • Broker: exclusively facilitate transactions on behalf of your clients. 
  • Dealer: buy and sell securities using your own accounts.
  • Broker-dealer: offer a combination of both.

Let’s take a look at how each type makes a profit to help inform your decision. 

Broker

Brokers act as a middle-man between the stock exchange and their clients (the investors), facilitating transactions (trades). They charge a commission or fee for providing this service.

How exactly do they facilitate the trades? Normally as part of their services, they provide a trading platform, where their clients can place buy and sell orders. The broker then executes these trades on the stock exchange. 

They are also responsible for the clearing and settlement of trades, making sure that this is completed quickly, smoothly, and in line with regulations. 

For brokers to be competitive, they can provide other services that create a desirable trading environment, to attract clients. This could include tools that help with the decision-making process like advanced market analysis, trading strategies, and financial news feeds; or more personalized services like portfolio management and financial planning. 

Remember, for this type of broker, volume is important. With their commission-based model, their primary focus is not so much on the types of trades their client is making, but rather that their clients are trading, period. 

Dealer

Unlike a broker, a dealer is using their own funds and securities. They are no longer the middle-man in the transactions, but principals, participating directly in the market for their own profit or loss — they take on the risk. 

Dealers also play an additional role in the market ecosystem that benefits investors: they provide liquidity to the market. 

Just like a shopkeeper needs to always make sure there are goods on the shelf for buyers, dealers help make sure there are always stocks available. They do this by having their own assets ready to buy or sell for investors. This means trades can be executed quickly. 

So, how are dealers compensated for providing liquidity? Dealers make their profit from the bid-ask spread. 

Bid-ask spread: the difference between the highest price an investor is willing to pay (the bid) and the lowest price the seller will accept from bidders (the ask). 

The dealers are managing these spreads. They are using strategies and analyzing market conditions and the supply and demand of stocks, so they can strategically set the bid and ask price. 

Why? As we learned earlier, part of the dealer’s job is to create liquidity. If they make sure that the ask price is always higher than the bid price, each time they buy and sell their assets, they will make a profit on this spread. 

Broker-Dealer

As the name implies, the third option is a combination of both types. If an individual or firm takes on both functions, they will also have to make sure that they cover themselves for the licensing and regulatory requirements for both types of brokerages. 

Institutional or retail

All three types of brokerages (broker, dealer, and broker-dealer), will also need to decide if they will provide their services to individual clients (retail) or act on behalf of entities (institutions). This will also impact licensing and regulatory requirements. 

Licensing

Now that you have decided what type of brokerage your firm will be, the next step is to apply for the correct license. We have compiled links to two helpful guides from official organizations to simplify this process for you: 

FINRA advises that broker-dealer license applications are usually completed within 180 days. Their application process includes 8 steps: 

Regulations 

This step goes hand in hand with licensing but encompasses regulations after you receive your license. Regulations are an ongoing top priority for brokers. Brokers are subject to strict rules that are constantly evolving to adapt to the needs of the market. Failure to stay informed and adhere to regulations can result in hefty penalties, or even lead to being shut down permanently. 

A good trading platform will automatically generate regular statements for brokers to help them fulfill their ongoing compliance obligations. 

We have a comprehensive guide covering everything broker-dealers need to know regarding different regulatory bodies and their respective regulations. Read the in-depth article here. 

Technology: Trading platforms 

Next up is perhaps the most obvious step, but also the most multi-faceted. Trading platforms are the face of your brand— your storefront. 

Besides providing a place for your clients to buy and sell trades, analyze the markets, and manage their assets, your goal as a broker will also be to choose a platform to host your services, that provides an experience that makes your clients want to stay with you. The trading platform experience is where trust and credibility in your firm can be built and lost. 

This comes down to factors like performance, UX/UI, design, integrations, risk management tools, customization, maintenance support, resilience, and scalability— you need a platform that can grow with you. 

To build or to buy?

Brokers need to decide whether to build or buy/license a platform. Let’s consider the pros and cons of each. 

*here when we say license, we are referring to licensing a platform from a software vendor. We can think of it as leasing the software. 

Building a platform from scratch

Pros: completely tailored solution, with full ownership and control of the platform. 

Cons: the amount of resources, costs, and time needed comparatively. 

Buying or licensing platform software from a vendor

Pros: cost-effective, accelerated timelines, faster to launch, ongoing maintenance support, market-tested performance, leverage the vendor’s expertise and experience. 

Cons: less flexibility—however, you can counter this by choosing a vendor that allows customization and tailored features. DXtrade for example allows their clients to apply their logo and branding and is flexible with integrations and liquidity providers. 

Some vendors (Devexperts is renowned for this) offer brokers enterprise or source code options, meaning that once you grow and scale up as a broker, you are not locked in and still have the option to increase your control, or even obtain full ownership of your platform. 

Another factor to weigh up in the equation is mobile apps (Android and iOS functionality). For example, Devexperts provides brokers with their own independent mobile trading app to complement their web platform. Technology components like this will make a huge difference down the line when you need to stand out in the market from other brokers. 

Asset classes

The next consideration will be the types of asset classes your platform will support. This will depend on your business model and objectives. You may decide on an initial offering, and plan to increase this as you grow.

To give you an idea, a competitive platform like DXtrade offers the following asset classes: stocks, options, futures, mutual funds, and bonds.  

Cash or margin account trading?

This refers to the type of trading accounts you will support. Trading accounts are held by the investor (your clients, traders). Let’s go over the differences. 

Cash trading: your clients will need the full amount of money in their account, required for the transactions (trades) they want to make. There is less risk involved for both the trader and broker. 

Margin trading: the broker lends the client money for the transaction they want to make. Brokers charge interest for this service. It increases the potential for profit for both the trader and broker, but of course, also increases the risk and regulations. For this reason, brokers who offer margin trading need a platform that provides excellent risk management tools. 

Order management system (OMS)

This is where the magic happens: the OMS is the system responsible for executing all the orders (transactions). As you can imagine, performance is crucial here, and as a broker, you want to ensure that your platform has an OMS aligned with your offerings. 

Key system considerations:

DXtrade’s OMS is complete with all of the above features. Learn more about these features here. 

Risk management

Risk management has already cropped up quite a few times in other sections, demonstrating just how important it is for many areas of starting a brokerage! 

Now that we understand the different functions and services brokers provide, it is clear why a platform relies so heavily on risk management technology to constantly monitor the market, the trades their clients are making, and price configuration (where applicable). 

To understand what should be expected from a platform, let’s review the risk management capabilities of DXtrade, a solution used by established, industry-leading brokers. 

Account management

  • Manage and monitor client’s accounts in real-time
  • Trade on behalf of clients from their accounts when needed
  • Manage positions without confusion, using a view of the positions and orders from both the broker’s perspective and the client’s perspective. 

Real-time exposure monitoring

  • Receive risk alerts (customized with your preferences)
  • Use built-in analysis techniques
  • Model portfolios
  • Directly hedge the exposure of clients
  • Track and manage overall risk with NOP

Price management

  • Automatically stop clients from trading expired pricing, and receiving off-market pricing
  • Automatic failovers to minimize stale pricing

Execution settings

  • Set exposure limits 
  • Throttle orders to manage toxic flow and latency 
  • Cancel all orders (worst-case scenarios) with a kill-switch
  • Prevent new positions from being opened
  • Configure margin settings to make sure you are compliant with regulations 
  • Apply different settings to different sizes of trades (tiered settings)
  • Create settings that switch certain trades to manual execution 
  • Manage A/B book settings for different instruments, and client groups

Comprehensive, right? Risk is so deeply ingrained in trading, and ultimately tied to whether a broker makes a profit. Therefore it makes sense that the breadth and capabilities of risk management tools need to reflect this. To learn more about these features, continue reading here.  

Integrations

Finally, when choosing a platform, brokers should check what integrations a platform currently offers (this applies to a scenario when a broker buys or licenses a platform from a software vendor), and how flexible they are with additional integrations that might be needed. 

An example of this is DXtrade’s integration of TradingView. DXtrade adapted to the demands of brokers and their clients and integrated TradingView as a widget within their platform. This flexibility is exceptional for brokers because it allows them to attract clients and investors who have specific preferences (like using TradingView). Brokers don’t want to get caught licensing a platform that is not flexible and evolving with market trends. 

Customer service

Our last step for starting a brokerage is often overlooked. It’s all well and good to register your firm, get a license, buy and launch a platform, and successfully attract investors and clients; but these clients require onboarding, and they will probably have questions at some point. You will also need to engage with them to complete KYC requirements. 

This all requires resources, and additionally, these interactions need to be positive for the clients to boost retention. When starting a brokerage, a customer service and account management team can be costly— or simply not in the budget at all. 

If you are starting a brokerage now, you are entering the industry at a fortunate time. Thanks to the boom of AI and LLMs, new chatbot-style solutions are emerging that automate customer service. 

Devexa for example, is a single AI-powered widget that supports multiple broker departments. The widget is embedded within a trading platform, and takes care of customer service for brokers, along with key operational, marketing, and account management tasks! 

This could be a smart strategic move for brokers looking to provide quality service to boost retention while keeping costs and resources at a minimum. 

Summary

We have covered a lot in this article; starting a brokerage is by no means an easy feat!  That being said, it’s also a very achievable goal with plenty of information to support you every step of the way. 

New firms are launching within 7 days with Devexperts, leaning on the expertise of our dedicated account managers for guidance. 

Discover why Devexperts is a popular choice for start-up brokers. Discuss your goals with our team today.