How do forex brokers make money? is a million dollar question asked across Forex Market by both Forex Brokers & Traders.

A business is run for PROFIT! And Forex Brokerage Business is no exception to this thumb rule of running a business. Forex Brokers provide forex traders access to large forex market. They provide Trading Terminal like MT4, MT5, Live Quotes, Liquidity, Payment Gateway to make deposits and withdrawals and much more. 

Forex Brokerage Formation Process & Estimated Costs

Forex Brokers incur huge expenses just to start up and even before earning even a single penny. They usually make expenses on:

  • Company formation
  • Bank Account Opening
  • Forex License
  • Office & Staff
  • Forex White Label Solution like MT4 White Label, cTrader etc
  • Servers & Hosting
  • Website
  • CRM / Traders Room
  • PAMM, MAM Software
  • IB & Affiliate Modules
  • Promotion & Advertising
  • Live Price Quotes
  • Deposits with Forex & Crypto Liquidity Providers
  • Deposits and Charges of ECN


Forex Brokers need to make money and there are 2 different ways they can make money.

  • Trading against the Traders/Clients
  • Brokerage and other charges

Order Matching mechanism has the largest influence on what kind of charges a forex broker is going to levy on its clients. As explained in another article, there are primarily 3 types of order matching mechanism a forex broker can opt for:

Order Matching Mechanism at Forex Brokerage

I. A BOOK


When all the orders of traders are sent outside for execution like ECN, forex Liquidity Providers, it’s called A Book Order Matching. And such forex Broker is called NDD or No Dealing Desk Broker. 

Order execution could be done using STP (Straight Through Process) or ECN (Electronic Communication Network). 

All such brokers make money by charging different fees like commission, swap, spread etc. We will discuss them ahead in details.

II. B BOOK


This is the most lucrative Order Matching mechanism for a Forex Brokerage Business. All the orders placed by traders are processed through a Dealing Desk at brokers end itself. This is why such brokers are called DD or Dealing Desk Brokers. 

In simpler terms, it’s the brokers only who takes the opposite side of the traders trade.  

What makes B Booking so lucrative to Forex Brokers is loss of traders is their gain and vice-versa. And everybody who knows even slightly about Forex Trading knows that over 70-95% traders lose money trading. And all their losses are the gains made by brokers.

Example: 

Let’s say a brokerage has 1000 clients with USD 100 each account.

If 90% of all of these traders lose everything, the broker would make USD 90,000.

Let’s assume 10% of the traders make 50% on their deposits which is USD 10,000 they would take USD 5000. 

The broker will still make USD 85,000

This is without charging spread, commission, swap etc. 


However lucrative it may look to a Forex Brokerage, B Book is risky too that makes it a double edged sword for them. Without proper risk assessment and management mechanism in place, they can lose significant money and go belly up.

III. C BOOK / HYBRID


C Book is a Hybrid of A Book & B Book order matching mechanism wherein loss making traders’ orders are passed through the dealing desk and profit making traders orders orders are sent to external networks. 

If done smartly C Book can prove to be the best Revenue Generation Model for a Forex Broker by making the most of losing and profit making clients.


Apart from order matching mechanism, there are several other charges and fee that help brokers make money especially when they choose to be an A Book or  NDD/STP/ECN Broker.

Here are the list of different kind of Charges a Forex Broker levy to their client:

I. FOREX SPREAD

 
Forex Spread also known as FX Spread is the difference between Bid & Ask prices of a currency pair this is why it is also known as Bid Ask Spread. As the name suggests Spread in Forex is the gap between what a trader pays for a currency pair when he buys and sells it. 

When you look at the Price Quotes of a Currency Pair on your MT4 Trading Terminal or somewhere else, you would see 2 columns:

  • Bid:  Left column is usually prices offered by Buyers for currency pair this is why they are known as BID Prices. 
  • Ask: Right column shows the prices offered by the Sellers  for same currency pair and this is why they are known as ASK Prices or Offers.

Have a look at the below screenshot from an MT4 Trading Terminal. It shows Live Price Quotes of different currency pairs like Euro-USD, GBP-USD, USD-CHF, USD-JPY, USD-CAD, AUD-USD etc. First column shows the name of the currency pair, the second column shows Bid Price & third (last) column shows the Ask Price for same currency at that point of time. 

Forex Spread | Difference in Bid & Ask Prices on an MT4 Trading Terminal


The difference between the bid and ask prices is the spread that this Forex Broker is charging for EURUSD pair to this trader.

 

TYPES OF FOREX SPREAD

A. Fixed Spread

As the name depicts, Fixed Spread is the predefined Spread that a Forex Broker charges its all the traders or group of traders. It remains fixed irrespective of the volatility, events, news etc. 

B. Variable Spread

As the name suggests Variable Spread changes with the changes in volatility due to news, events, market timings etc. 


Pro-tip: Make sure you notify traders when you are going to charge variable spread in advance. This will help them plan their trades efficiently. If they “discover” higher charges after placing the order, they won’t like it and may term you as a “Fraud Forex Broker”.

II. FOREX TRADING COMMISSION


Forex Trading Commission is another regular charge that Forex Brokers levy of their traders. It’s the charge that a trader pays when s/he enters into a trade or opens a positions and exits the trade or closes the position. This fo


Types of Forex Trading Commission

A. Fixed Commission

A forex broker may charge a fixed commission on every trade irrespective of the lot size or volume.


B. Variable or Dynamic Commission

A forex broker may charge a variable or dynamic commission on every trade depending on the lot size or volume. They can offer a discount to large account holders.

Charging high commission fee to small account holders and low to zero commission fee to large account holders is common practice among the forex brokers. And it makes perfect sense. Large account holders need to be incentivized for bringing large sums of money and trading into larger volumes that results into high liquidity and greater earnings for brokers.

III. SWAP CHARGES


Swap Charges are levied on trades that a Forex Trader carries overnight. The usual Spread & Commission charges apply when a trader is only into intraday trading. But to carry over an open position or trade to another day, a trader may need to pay Swap Charges. 

A Forex Broker may or may not levy Swap Charges and it could be fixed.

IV. ROLLOVER CHARGES


Rollover Charges are similar to Swap Charges which are applied when a trader rolls over an open position during the weekend. Rollover Charge is also called Financing Cost as it is charged against the interest on the currencies of a pair.

V. DEPOSIT FEE


Traders need to deposit money to their trading account to further use that money as margin for trading. Brokers need to deploy Payment Gateway with multiple options for the ease of traders. This costs forex brokers money and depending on their cost of payment gateway solution,  they may levy Deposit Fee.

What we have seen now that most of the Forex Brokers don’t levy any Deposit Fee to lure the traders.

VI. WITHDRAWAL FEE


Similar to Deposit Fee, a Forex Broker may levy Withdrawal Fee every time a trader takes the money off the Trading Terminal. We have seen many forex brokers charging Withdrawal Fee to their traders to discourage them to take the money off. They want them to trade more so that they could make more money on spread, commission etc.

VII. CURRENCY CONVERSION CHARGES


Back to base currency Conversion Charge is applied while settling the net profit or loss to traders’ account which is done usually at the end of every trading day. 

A trader may have deposited margin money in say USD. He may trade into a non USD base pair like EURJPY. The profits or loss would be settled in USD and the conversion fee will be charged on it. 

Forex Brokers may charge Back to base currency Conversion Fee which is +/- 0.5% of quoted base currency price at that time.

VIII. INACTIVITY CHARGES

Forex Brokers provide platform and solution to Forex Traders to help them trade into their favorite currency pairs at most reasonable price and high liquidity. They make money when clients make trade. Their business depends on no of trades made by traders. This not only helps them generate revenue but keeps the platform liquid. 

If a trader does makes trade for a day or a couple of days or weeks this is absolutely alright but if he is inactive for months and quarters, a Forex Broker may charge and Inactivity Fee. 


How much Inactivity Fee to charge as a forex brokers? 

Well, this depends on what your objective is:

  • A forex broker should levy Inactivity Fee if it is making money only by the charges and fees. You set a threshold period of inactivity like a month, quarter, or year after which you would charge Inactivity Fee which could be USD 10-100 or whatever suits you.
  • Many Forex Brokers charge an indicative small amount liek USD 10 after a year of inactivity just to ensure client remains active. This helps them show good numbers to the boards, investors and regulators who largely follow the active traders count. 
  • Several Forex Brokers charge ZERO Inactivity Fee. They just don’t care. They are good with whatever active traders they have with them and focus on making their accounts bigger and bigger.  

Frequently Asked Questions: Forex Brokerage Business Model

Do forex brokers lose money?

Yes, Forex Brokers do lose money like any other business especially when they trade against their clients/traders which is called B Book Brokerage. If Trader makes money, broker is the one who actually looses the money won by the traders.

Do Forex brokers trade against you?

Yes, Forex Brokers may trade against you. Such brokers are called B Book brokers who take the opposite side of their clients trade. One’s loss is another’s profit and vice-versa.

Do Forex brokers make money?

Yes, Forex Brokers do make money and may lose it too like any other business. Every business has its own dynamics of cost and revenue. If revenue for a given period is more than the cost, business is in profit, simple as that! Forex Brokers who are good with cash flow management, do make money.

Do forex brokers cheat traders?

Like any other business, Forex Brokerage business too is not immune to cheating and frauds. As the odds suggest, some Forex Brokers may cheat you especially the one’s who run B Book Brokerage and start loosing money!


Whether you are planning to start a forex brokerage business or already running a forex brokerage business, you need to keep looking at the reports to see what’s making you most money and opportunity areas for additional revenue without hitting the traders interest.

Hope this article gave answers to all your questions related to “How do forex brokers make money?”

Please feel free to ask more questions in comment section.

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