Very simple math indeed. And let's not complicate things by introducing the more obvious real life costs
real life brokerage operating costs
add a few more real life elements that affect [bucketshop] brokerage's cost of doing business
Assuming the typical bucketshop will not invest $100k for a new mt4/mt5 license +
$15-20k monthly in server expenses, they are likely going to white label mt4 for $5k + 1.7k MQ monthly fees. The white labeler may also have additional service fees, but let's just add $2.3k and make it even $4k/month. The white labeler has given us permission to use our own feeds also, so we can do a/b hybrid book (or 100% b book if you want).
You will need a risk management engine of some kind. If you aren't sending flow to your white labeler, then you must have software to do real-time analytics of how much risk you have on either book at any given time. $1k+ and/or based on volume/included with bridge.
Compliance/dealing staff salary + benefits. $6-8+k/month for yourself + 2 full time people minimum. White labeling will save you some money here, but again, you might be subject to monthly minimum flow.
Cost to whitelabel/source legitimate price feeds. Technically each broker makes their own price, but if it deviates too far from the "real" price, then price arbitrage opportunities will abound or people will not use your services because the cost is too high.
Cost to bridge liquidity from PoP. $0 for bucketshop. But $2.5-$4.00 R/T is not uncommon depending on volume. Remember that there may be costs for additional price feeds even if you do not send any actual flow.
Cost of acquisition / advertising / etc between $300-$1500 per client or more
Adverse selection. Active traders are likely to be informed (which is why they are active and will continue to be active). If you are only internalizing risk, you are pretty screwed as you have no way to offload risk to a larger wholesaler. Or you'd have to have massive spreads.
Assuming you have 100 active clients trading 10 lots per day with $5k starting balance, this would imply that those active clients are profitable on average
clients Not profitable example
(if clients were not profitable, they could only continue to pay commissions for
$4 r/t x 10 lots/day x 63 trading days = -$2520 x 100 clients = -$252,000, assuming they average breakeven across all trades.
Losses would be much faster if they are losing 2+ pips on every trade.
*($4 r/t x 10 lots/day x 10 trading days) + (-$20 two pip loss x 10 trades/day x 10 trading days) = -$400 + -$2000 = -$2400.** They would either quit or have insufficient margin to continue to open trades .
-$240,000 if it is 100 clients in only 10 days.
Lets say $20 per lot r/t profit (2 pips).
$20/lot profit x 10 r/t lots/day x 20 trading days = $4000 x 100 clients = $400,000 profit to clients
$400,000 - $80,000 = $320,000 net profit due to 100 traders......or $3,200 per trader. It's a good chance that profitable traders are going to request regular withdrawals. Especially with a new broker. If 1/2 of the client base choose to withdraw profits....
$3,200 x 33 (1/3 of 100 clients) = $105,600 [-$25,600 broker profit]
$3,200 x 50 (1/2 of 100 clients) = $160,000 [-$80,000 broker profit]
Where are the the trader profits paid from? If the broker takes on the risk, then the broker has to pay from its "winnings"
You could argue that the broker could just simply increase their commission. But then like any other product, you must compete with other brokers. So unless you have some unique execution or pricing (which the average bucketshop likely would not), why should we trade with your brokerage?
In reality, you will have a handful of clients that even trade >=10 lots daily higher. Most will likely trade <5 lots/ month.
Very few offshore retail brokers will have this let alone accept US clients. As I predicted several years ago, nearly all of the brokers that initially told the US CFTC to F-off eventually "bent the knee." The ones that still accept US clients are either doing so very quietly or are fraudulent brokerages who fake legit operations in a major jurisdiction. At least Trader's Way and Tallinex was honest about where they operate from. Many of the brokers on the current list (TurnKeyFx, FinPro) go out of their way to fake a popular jurisdiction or not reveal their regulatory status at all.
Majority of the owners/management of these types of brokers come from the gaming/casino industry and have no intention to act like a real financial services provider. Churning/burning clients are much easier for them. And they do not have to pay out any actual profits.
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