How do Forex Brokers Make Money?

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If you are wondering how forex brokers make money, then you might be in for a surprise. Whilst there are plenty of forex brokers who simply charge you a fee for placing trades on the forex market, you should be aware that some brokers trade against you and make profits based on your losses. Therefore, when you are choosing a forex broker, it is important to know what to look for so that you can signup with a broker that has your best interests in mind.

How do forex brokers make money?

Most forex brokers make money through a few different channels based on the costs they charge for processing their client traders. This depends on the type of broker that they are. A broker with direct market access and straight through processing, can make money pay charging a commission fee as they will usually give you floating spreads based on what they get from liquidity providers.

On the other hand, you have market maker brokers who use in house liquidity and can take the opposite side of your position. This dealing desk brokers might not charge you any commission fee, but they make money via a spread mark-up. Not only that, as they are taking the opposite trade to you, they can profit when you lose. This can lead to a conflict of interest and is a reason why many experienced forex traders would recommend and ECN broker with no dealing desk interference.

Spreads

The spread is the difference between the bid and ask price of a currency pair. It is a fee that you will need to pay your broker when you place a trade. For example, if you’re trading GBP/USD at 1.3089/1.3091, the spread is calculated as 1.3091 – 1.3089, which is 0.0002 (2 pips).

As mentioned above, some brokers do not make anything on the spread as they get quotes directly from the liquidity providers and the FX market. These brokers will usually gather all of the different bid/ask price quotes from the liquidity pool and present you with the best spreads available at the time you execute your position.

Some forex brokers make money by charging a spread mark-up. If the spread they set or got directly from the market was 2 pips and you paid them 3 pips, they would in theory be banking 1 pip in profit via a spread mark-up. These types of forex brokers can make more money but do not provide the best trading conditions, especially for forex scalping strategies which need the tightest spreads possible.

Commission

In addition to charging you a spread, the commission fee for buying and selling currency pairs is another way in which forex brokers make money. This is to cover their operating costs and so they can make some profit on top which is fair enough considering the convenient market access they give us.

The average commission charge based on my research and experience is around $7. Some brokers will give you cashback and rebates from the commission if you trade enough volume. This can be beneficial if you are a day trader and frequently moving large volumes around.

That being said, not all forex brokers charge commission fees. You can find zero commission brokers which may look attractive on the surface, but will usually compensate for the lack of commission fees by giving you high spreads and possibly negative slippage in extreme cases. At the end of the day, nobody opens a forex broker for the fun of it, they all want to make money.

Other Costs

Whilst the forex spread and commission fee are the two main ways in which a forex broker makes money, there are other avenues for some brokers. For instance, if they have specialised trading platforms and financial feeds, there may be a cost to get access to them.

They could also charge for improved trading tools which can help with market research and analysis for your trading strategies. Social trading brokers might make some money from signal providers and signal followers, such as ZuluTrade. Not to mention, some brokers can charge deposit or withdrawal fees to cover admin costs and then some. There can even be an inactivity fee charged if you don’t trade often enough!

Do forex brokers make money?

Yes, forex brokers can make money but it really depends on who is running the company and how they are running it. I have seen so many forex brokers come and go, with only the best forex brokers lasting for many years. This is a testament to them not only operating in a sensible manner, but also because they have built up trust with an established client base. That can be hard to do in an industry that is rife with scam brokers.

Those forex brokers that make money may be operating on fine margins, or they may be relying on retail traders losing. Sadly, the majority of retail forex traders do in fact lose money which can work in the favour of brokers who trade against them. However, even if a broker is making money only from the commission, it is in their own interest that you can trade successfully. This is because the more volume that you trade, the more money the broker can make.

How much money do forex brokers make?

How long is a piece of string? Really, this is such an open-ended question because it depends on numerous factors. This ranges from the type of forex broker they are, to the current market conditions and clientele that they attract. Even the best brokers can have but periods when the economy crashes and traders or investors need money for other purposes.

Not only that, operating a forex broker can be a costly endeavour. They may need to pay regulatory fees, staff, accountants and lawyers. The hardware and software needed to provide online trading is not cheap. Not to mention, the financial industry is one of the most expensive and competitive when it comes to marketing.

You will come across unregulated brokers who operate an offshore brokerage in order to cut costs as much as possible and provide more flexible trading conditions. However, this can come at a cost for the client who will not get the same protection as they would from a regulated forex broker should something go wrong.

Do forex brokers lose money?

Yes, for sure! Like any business, forex brokers can lose money. Especially those that are not run in a sensible manner. I have seen forex brokers implode simply because they did not have preventative measures in place for different scenarios that could occur. After all, nobody can predict what will happen in the financial markets moving forward. A black swan event can crash the market in an instance.

If a forex broker is under capitalised and does not use segregated accounts, they could be wiped out before clients even know what has happened. In this instance, not only would the broker go out of business, they could take clients funds with them. Even if you were trading with a broker that has negative balance protection, bankruptcy wouldn’t necessarily see you get your funds back.

I have also seen forex brokers offer attractive spreads and rebates to try and entice traders into opening an account with them. The problem with this is that the broker themselves can end up out of pocket if they paying a higher spread than what the client is being charged. If the commission fee doesn’t cover costs, the broker could also be operating at a loss. This is not a sustainable brokerage model in the long run.

Do forex brokers make money when you lose?

If they are trading against you, then brokers can make money when you lose. If you want to a buy a currency pair and they provide the liquidity themselves, it would be in their interest that you make a bad trade. This is because they win when you lose and vice versa.

That does not mean that they will deliberately make you lose, but when you consider that a large majority of retail traders do not know what they are doing, then the odds are in favour of the house. Throw leverage into the equation and you have a recipe for the inevitable.

Conclusion: are forex brokers profitable?

A forex broker can make money if they are under good management and have a team of hard-working individuals. In addition to that, they will need to be operating in an honest and transparent manner. They should provide traders with competitive trading conditions including tight spreads, low commission fees and rapid trade execution speeds at the best prices available at all times.

I think if they follow this blueprint and are regulated by a top tier regulator such as the ASIC, FCA or CySEC, then they can gain the trust of traders and become successful in the long run.

I wouldn’t start a forex brokerage firm without a large amount of capital to invest and with the sole purpose of making money. There are too many brokers out there looking to take advantage of retail traders. Instead, I feel more brokers should do what they can to help traders succeed. This can benefit everyone.

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