Importance of a Forex Brokerage Customer Retention Plan
June 17, 2019
Forex brokerages connect retail traders with the
interbank market. To be more exact, the interbank market is only accessible to
retail traders because of Forex brokerages.
For this, the broker charges a commission or a fee. This is being seen in the spreads in the
trading accounts offered and other associated costs, like a commission per each
In earnest, this is the income stream of a brokerage
house. However, few brokers are depending only on these two income sources.
The reason for this is that the road to profitability
is long and there’s the need of having a large customer base. Not only traders
are needed, but active traders.
Because of the above, brokers are divided into multiple categories. There are
dealing desks (or market makers – these brokers are effectively creating a
market for their clients, mirroring the interbank rates and keeping all their
client’s orders in the house).
The idea behind this type of business is because
it is statistically proven that retail traders are losing their first deposit
within the first six months. So, a market maker takes the other side of their
client’s trades and chances to make a profit increase substantially.
This way, the road to profitability is shortened.
There are brokers that keep only a part of their client’s brokers in the house and the other part is routed to liquidity
A hybrid model like the one described above has many
advantages: on one hand, the market-making side of the business brings fast
profits while the non-dealing desk activity provides the necessary cash-flow
for the day-to-day activity.
A true broker, an ECN (Electronic Communication
Network) broker, relies solely on the income streams from commissioning the
brokering activity. Therefore, customer retention is key.
Defining a Customer Retention Plan
Having traders is one thing, and having active traders
is another. Commissions are charged only when a trade is taken, and this makes
the fight for active traders crucial for a broker’s success.
A customer retention plan is needed. The purpose of
such a broker is not to have its clients losing their portfolio, but to have
them trading as much as possible.
If anything, the broker likes the traders to be
profitable. Profitability leads to increase in trading activity and this, in turn, leads to more incomes for the
Therefore, the more active traders, the better for the
broker. How to stimulate traders to be active?
There are several ways to do that. One thing is to
educate them. For this reason, almost all brokers invest in educational programs or trading academies.
The idea is to present potential traders with what the
Forex market is, how to trade, introduce the technical and fundamental
analysis, and so on. The bigger this part is, the better for the trader as it will have more chances to survive
in this market.
More chances to survive translate in more commissions
for the broker through increase activity.
Another way is to offer incentives for traders to be
active. Promotions, bonuses based on the volume traded, etc., are used
successfully by Forex brokerage houses.
All in all, a proper customer retention plan is the
key for successful brokerage. The whole
business should be centered around it.