From New York and Chicago to London and Hong Kong, there are plenty of locations to launch a new financial firm. But where should aspiring entrepreneurs begin?
"British Virgin Islands," Andrei Knight, the founder and Senior Currency Strategist at fxKnight.com, suggested. "Panama, maybe. The problem with those jurisdictions, of course, is also the shady element. That's where the loosest regulations are. Your clients won't trust you if you're based there. And there's a good chance you might lose all your money if you're based there."
Knight, who consults for UBS, Ascension Capital, and has been involved with a number of hedge funds, said that he is in favor of smart and effective regulations. "I think London is a good compromise between regulation and respectability, and particularly in forex they are pretty much the center of the currency trading world," said Knight, whose company is incorporated in London. "London still clears more volume in a day than New York does, for example. So at least for us it was a smart and sensible choice. It might not be for every company."
Going forward, Knight said that he thinks that the industry's growth -- and the areas that will experience that growth -- depends on regulation. "America could be the capital of financial world if they write smart regulations that allow them to be that," he said, illustrating the challenges of bad regulation in London. "They passed a bunch of new taxes on financial transactions -- the rents went up like crazy. What's happened is, all the big banks moved and now you see a bunch of skyscrapers on the Eastern dock."
The thing to remember is that with financial firms, "we really live in a global market now."
"If you pass unfavorable regulation, people are gonna move and take their money and their business somewhere else," Knight warned. "You gotta protect the consumer but at the same time you've got to be conscious of and competitive with the rest of the world."
Globally, Knight said that Hong Kong and Singapore are "very tempting right now."
"I think Asia is making a tremendous push for it -- not just as a place to invest, but a place to be based as a company," said Knight. "Those will probably be the two places I would look at. Frankfurt was traditionally a financial center, but obviously their fate depends a lot on the fate of the euro. Switzerland is another one that was traditionally a stronghold of financial business, but here again, they did some stupid decisions from a legal and regulatory standpoint and a lot of investor confidence in Switzerland is shaken now."
Entrepreneurs who are looking for a niche should look no further than San Francisco. But for Knight, it doesn't really matter where his firm is located. "It was never a question of, 'Should we incorporate in Los Angeles?' where I am based, or Nevada because they have cheaper state taxes, or New York because it's the financial capital, because all three still follow the exact same rules," Knight explained. "The United States isn't like Canada. In Canada, each province has its own regulatory structure and different rules, so it really matters if you're in Vancouver versus Toronto. In the U.S., I don't think it really matters that much. In the age of the Internet, I [can] live in California; I don't have to be in New York. I still get real-time price quotes from New York."
Wherever you begin, Knight said that you should be "prepared to do a lot of things outside of your core concentration."
"Be prepared to wear a lot of hats," he advised. "You're gonna spend a good amount of time on regulation, a good amount of time on customer support. If you're an entrepreneur, you've got to be prepared to be your own lawyer, your own PR firm, everything. It's not just going to be you doing your core competency or what you love all the time. You either have a startup budget to surround yourself with a solid team, or you've got to be prepared to do those tasks yourself, which is not necessarily a bad thing. A lot of it is really fun and interesting. But you gotta realize there's more to running a financial firm than just trading, and you've got to be prepared to take it on."
That said, you don't have to be successful overnight. "Failure is not a bad thing," said Knight. "Failure is a very good educational tool. All the great entrepreneurs that I really admire in the world, whether it's George Soros or Richard Branson or even Mark Zuckerberg. The one thing I keep hearing them saying is, just like in trading, you've got to be able to take on a little bit of risk. Don't wait till everything is perfect and then put your feet in the water. Go for it, take a chance, be prepared to fail, and if you fail, don't give up. Use it as a learning opportunity, pick yourself up, and try again."