How to Start a Stock Brokerage Firm

Launching a stock brokerage firm from scratch might seem like a daunting challenge. But with proper guidance, it can be a straightforward process. This guide breaks down all the steps involved in launching a retail stock brokerage so it becomes easy to do in a few months.

All interested parties can use this guide to learn what it takes to open a stock or options brokerage. Our primary focus will be the trading platform—the core entity in this business.

When opening a retail stock brokerage, the first step is to choose your broker type:

• broker
• dealer
• broker-dealer

Becoming a broker

A broker acts as an intermediary between an investor and a securities exchange in an agency capacity. Brokers do not trade on their own account or hold securities in their inventory. They earn their income primarily through commissions or fees charged for their services, based on the size or value of the transactions they facilitate.

Becoming a dealer

A dealer acts as a principal, trading for their own account, meaning they trade for their own profit or loss. Dealers make money through the bid-ask spread, which is the difference between the price at which they buy a security (the bid) and the price at which they sell it (the ask). They play a crucial role in providing liquidity to the market, as they are willing to buy or sell securities when there is an imbalance in supply and demand.

Becoming broker-dealer

A broker-dealer combines the two above-mentioned functions. They can act as an intermediary between buyers and sellers (like a broker). They trade on their own account by holding securities in their inventory (like a dealer). Broker-dealers are subject to a broader range of regulations than brokers or dealers alone, as they must comply with rules governing both agency and principal transactions. In the United States, broker-dealers must be registered with the Securities and Exchange Commission (SEC) and be members of the Financial Industry Regulatory Authority (FINRA).

Once your decision becomes final, you can then make up your mind about which business to support, whether it be retail vs institutional. This decision will determine what license and technology need to be obtained later on.

Obtaining a license

The next step is to apply for and obtain the relevant license. This guide will focus specifically on broker-dealers.

In the United States, you can obtain a broker-dealer license from FINRA. The application process can take up to six months. All necessary documentation must be collected and submitted as soon as possible, to minimize the amount of time lost in this process. 

Follow the 5 steps below to obtain a broker-dealer license successfully: 

1. Reserve a company name
2. Sign up for system access
3. Pay the application fees
4. Meet FINRA’s standards of admission
5. Submit form BD (a uniform application for Broker-Dealer Registration) online, hard-copy form BD, and all additional required forms and fingerprints

The application will be reviewed and processed within 180 calendar days. The next step is to decide what technology and software to use.

Obtaining operational technology

Once the application for a license has been submitted, it is time to focus on obtaining the necessary tools to run your brokerage. The biggest decision to make here is whether you will build or buy a trading platform. 

Building a platform

The first option is to build everything from the ground up. However, this option has both advantages and disadvantages. 

One big advantage is that building a platform will guarantee you a solution that meets your brokerage’s exact workflow and user interface needs.  

The biggest disadvantage, however, is the sheer number of resources required to build a trading platform from scratch, both in terms of time and money.

Add the ongoing costs of maintenance and upgrades, and you can see why so many financial services businesses opt to outsource their software needs to experienced third-parties.

Beyond the economic reasons, specialization in financial software development has reached a point where it’s hard for in-house dev teams to compete with specialist vendors.

Today’s trading venues choose third parties in order to remain competitive in a market that’s evolving at a rapid rate.

Buying a platform

The second option is to buy an existing platform provided by software vendors. Buying or licensing a platform can be a much cheaper and easier option to implement, and it will also allow you to deliver a unique offering to your clients.

One advantage of buying a platform is that it enables brokers to benefit from market-tested software. This, in turn, cuts down your solution’s development cycle and time-to-market.

Today’s vendors often offer 24/7 support, meaning that if you run into technical issues, there’s always someone on-call to help resolve your issue.

It may seem like licensing an off-the-shelf platform would limit the platform’s look and feel, however, this is not the case. For example, a solution like DXtrade offers a white-label trading platform with an extensive configuration engine to support even the most bespoke workflows.

DXtrade has been developed to allow brokers to tailor their platform according to their unique needs, to match the user’s color palette and preference for the overall look.

Devexperts offers tiered licensing options for firms of all sizes. At all tiers brokers are able to make DXtrade their own, customizing the look and feel of the platform so that it can be tailored to their clients.

We call this deep white-labeling, and it’s one of the reasons that DXtrade has proven to be so versatile. Brokers, exchanges, banks, wealth managers, and others, each get a slightly different version of the platform that’s been tailored to their respective businesses.

New stock brokers can even have their solution ready to deploy within a month.

6 things to consider when choosing a trading platform

When choosing a platform and discussing it with the vendor’s solution architects, you need to consider several things.

Supported asset classes

Based on the broker-dealer license and prospective asset class offering, a platform needs to be flexible enough to support your current business needs and future growth potential. A few asset classes to consider for retail trading are:

• Equities
• Indices
• Options
• Futures
• ETFs
• Fixed income (bonds)
• Crypto

Of course, not all of them are necessary. You may, for instance, begin by offering just stocks, and once ready to move forward, enabling a new asset class can be as simple as making a few clicks.

Cash vs. margin trading

Another factor to consider is the type of trading you want to offer your clients. This will dictate which trading accounts the platforms will support.

For cash account trading, the money deposited to purchase securities is the only money investors can use. Simply put, investors can only trade with the cash available in their accounts.

Cash accounts

Using cash accounts is a straightforward and less risky way of doing business for brokers. Investors can’t go short, and can only trade simple options under predefined scenarios if offered by the broker.

Margin accounts

If the broker is ready to undertake more risk, they can use margin accounts to lend money to customers.

The customer will use borrowed money to invest, magnifying their profits and losses as they are using leverage. Margin account users pay interest on any money borrowed. They are able to open short positions and use additional option strategies.

However, margin trading often requires brokers to follow local market regulations set out by the applicable government. For example, brokers in the US need to monitor the number of trades executed per day and limit the margin rate for retail traders.

A platform like DXtrade supports cash and margin accounts out-of-the-box. For cash accounts, DXtrade offers full securities trading in all supported quantities with settled funds. For margin accounts, it includes Reg-T margining for equities and equity options, custom margin profiles, and margin override on the instrument level.

Order management system

An Order Management System, or OMS for short, is an electronic system developed to execute securities orders. 

An OMS allows brokers/dealers to track each order’s progress. As such, choosing the right system is vital.

When choosing an OMS, it’s important to take into account the supported asset classes. Other things to consider include the quantity increments supported, the number of counterparties or destinations, and the types of end users or traders being targeted. For example, the OMS module in DXtrade supports orders both in fractional quantities and notional amounts.

An important component of an OMS is the routing capabilities based on supported asset classes and executing destinations. For example, the DXtrade platform has a routing wheel that allows brokers to establish routing profiles on the asset class level. It features automatic reroute if orders are rejected and allows brokers to update route percentages and destinations in real-time.

For brokers that support fractional trading, an OMS can route orders as received to destinations in fractional and notional quantities. It could also provide a facility for brokers to manage fractional inventory accounts in a principal capacity. This can be achieved with a fractional rounding algorithm which takes orders in fractional and notional quantities, rounds to whole share quantities based on platform configuration, and route to the street in round lots.

Upon order execution, the algorithm allocates the original order quantity to the client’s account and allocates the remainder to a broker inventory account. The DXtrade OMS offers a configurable fractional algorithm, and it also provides an inventory management system to minimize the principal account position risk.

Risk management and monitoring

Risk management is a crucial component of any trading platform and most provide monitoring tools built into the solution itself. Based on the supported asset classes, it is important to identify what risk settings and monitoring capabilities your brokerage needs. DXtrade can provide a customizable set of risk profiles for pre-trade offers.

A risk profile tool can also help determine traders’ reliability. It enables risk assessment for a portfolio of options. As a result, users can estimate potential P/L while simulating changes in key parameters. Said parameters might include volatility, time, and underlying price.

Additionally, real-time monitoring for account balances across clients is crucial. This will allow the broker/dealer to liquidate single or multiple accounts in bulk by closing all positions, trade on an account’s behalf, or export data from the grid.

Orders need to be monitored as well. In certain situations, the firm’s employees may need to replace or cancel simple orders. For instance, this may happen if a trading terminal experiences an unexpected load and crashes when the market is highly volatile. In this case, the client may need to make changes to their account by phone, such as exporting data or canceling orders in bulk.

Monitoring all clients’ open positions is also crucial. One needs to be able to order audit trails for all accounts, manually import positions, and export data.

The trading platform’s OMS section is responsible for performing risk management. But it also handles the following monitoring activities:

• Real-time exposure monitoring
• Risk management groups and profiles
• Price stream management
• Execution settings

Reporting

In smaller companies, clearing agents and back office systems are responsible for compliance reports. Larger companies, however, will handle this task themselves.

DXtrade can send account statements as a monthly report. Brokerage account statements generally include a summary of the broker or dealer’s holdings (which is the recent market value of one’s holdings), account numbers, and contact information for financial professionals and clearing firms.

Connectivity

One of the most important features of a platform is its connectivity options for external systems and venues.

Here are a few third-party integrations that should be taken into consideration:

• Client portal
• Executing destinations
• Clearing agents and back office
• Market data
• Financial news

Most OMSs leverage FIX protocol and APIs to support connectivity, from inbound order flow and client onboarding to outbound order routing, compliance reporting, and clearing.

Value-added features

Today more options are available to brokers than ever before. As vendors compete to offer the best all-round products and service, a variety of value-added features are emerging.

Compatibility and ease of integration is the key. Whether it be the third-party integrations a provider has under its belt, or how it leverages AI to intelligently connect between various brokerage functions, learning what extra features a provider offers is important in the decision-making process.

AI assistants

For Devexperts clients, our AI-powered communication channel, Devexa, has been a game-changer. Devexa serves both end traders and brokerage teams. For brokers, Devexa can ease support congestion by serving as a front line for routine queries.

She can also be used to target communications to specific client groups, and a recent iteration has even added the ability to distribute and handle the payments for “premium” content.

Devexa can be deployed wherever the business needs her most, such as on landing pages, aiding registration and verification, on a range of social media platforms including WhatsApp, Telegram, and Discord, and also as a key part of the DXtrade platform itself.

Traders enjoy access to a highly capable trading assistant that can provide detailed wealth-management-style reports with metrics such as portfolio valuation histories, breakdown by asset class, and profit/loss summaries.

She can help with market research, provide price alerts, and place trades on behalf of the trader, all in natural language.

A recent Devexa update brought community features online, allowing brokers to offer a secure communication channel where their clients can message each other in a chat/forum-like environment.

Products like Devexa add value, which can only increase as these systems become more sophisticated.

Pre-configured integrations

The attractiveness of a vendor’s stock brokerage solution increases depending on how much work has been done on third-party integrations. This is because the system is immediately compatible with a wide variety of other products and services that the broker may require.

Particularly for new firms that have yet to settle on a complete list of vendors, pre-built CRM, liquidity, clearing, and payment integrations significantly cut lead times down and ensure a smooth launch.

Operational resilience

As the trading day grows longer and settlement times contract, brokerage infrastructures are being tested to their limits. Those entering the market today must ensure the solutions they source can meet the challenges of a rapidly changing environment.

This includes the ability to quickly launch new instruments and to make changes to existing markets in simple logic, without requiring systems to be taken offline. 

The need for round-the-clock trading is also increasing uptime requirements. This means that brokerage systems have to be capable of running uninterrupted. Whether it be under peak loads, during a system update, or even when a critical system component is experiencing technical difficulties, firms able to maintain consistent uptime will gain a competitive advantage.

This requires implementing resilience strategies such as duplicating critical components so that failsafes can take over should a system experience technical difficulties. Depending on the scope of the project, this can be done both in cloud environments and in “bare metal.”

Additionally, brokerage infrastructures should be engineered with sufficient “headroom,” allowing a smooth service for end traders even during periods of peak activity. Firms that successfully prepare for the above concerns ahead of time will be able to keep their clients trading, even during the most exuberant bull markets.

The wrap-up

Building a brokerage is not a quick and easy task. You could, however, license a platform that is already available. This saves time and allows you to focus on marketing and launching your stock brokerage business. However, for a truly unique result—if time and money allow it—it may be best to request a custom solution from companies that specialize in this domain.

Whatever you choose, we at Devexperts are at your service. We can create a tailored solution for you, or you can license one of our out-of-the-box platforms. Request a consultation, and we’ll be happy to guide you on your journey.