How Forex Brokers Make Money?
A Forex broker allows traders to stop access to the foreign exchange market. You can equate them to middlemen between the market and Forex traders. They offer numerous services, such as trading platforms through which you sell or buy foreign currencies.
After submitting an order through the trading platform, i.e. IQ Broker India , the FX broker attempts to match it either with its internal team of traders. Besides, the company may forward the order to external liquidity providers who look for the best opposing command.
Every time you make a buy order, there has to be a match with a corresponding sell order and vice versa. Forex brokers account for a relatively small proportion of the daily turnover in the Forex market. BIS research indicates up to five percent of the market worth a total of five trillion dollars.
Main Types of FX Brokers
Forex brokers are of two types. There is no dealing desk (NDD) and market makers, also known as the dealing desk (DD). NDD can either be Electronic Communication Network (ECN), Straight Through Processing (STP), or ECN+STP brokers. All have their pros and cons.
- Dealing Desk
Market makers give liquidity to their clients and form a market for them. Their name ‘market makers’ is because there are the primary sources of liquidity for their customers. They usually take the opposite move. That is, if you buy, they sell to you and vice versa.
They have the entire discretion to come up with ask and bid prices of a currency pair. They don’t have to offer interbank rates. However, due to the massive competition among brokers, they won’t deviate from the interbank rates. Moreover, their spreads are fixed.
- No Dealing Desk
They do not take orders from their customers through a dealing desk. NDDs act as middlemen between their customers and external or internal liquidity providers. They first try to relate your order with their internal liquidity pool. In case there is no match, they pass it to the external pool, which may be mutual funds, hedge funds, banks, other brokers, etc.
The brokers do not know the price that will fill your order. Therefore, NDDs provide variable spreads with a little markup for compensation of their services.
They instantly forward your order to the external pool with access to the interbank market. After finding the best matching order, the brokers include their spread. After that, they complete your order with the external provider’s price and the broker’s spread.
These are the true no dealing desk brokers since they represent a bridge between the interbank market and retail traders. They offer a complex network that links several market participants, such as banks, retail traders, and hedge funds. Market participants execute trades directly with each other. ECN brokers charge a commission for their services.
It is a combination of ECN and STP services.
How do Foreign Exchange Brokers Make Money?
You now know the main types of Forex brokers. Below is a detailed explanation of how they make money. The major source of income for the brokers is the spread. Moreover, they substantially earn from commissions, trading platforms, and extra services.
Most brokers do not impose a commission for client transactions. However, that does not mean that the traders are free from any charges. What usually happens is that the spread is relatively larger.
The spread is the difference between the two prices, bid and ask for a certain currency. The trading platform will show a spread that is way less than that on the interbank market. The broker pockets the difference between the broker’s spread and that of the market.
If a company provides low spreads, then it will charge commission from the transacted volume. Your earning is vital for the broker. When you earn more income, you tend to open many positions and probably in large volumes. The brokerage company thus benefits from what you earn.
That is why the companies frequently activate trading activity with different contents and bonus chances.
3. Additional Services
Brokers usually provide other services that they charge. For example, it could be a VPS or a training course. The demand for educational services is on the rise, and they can earn the brokers a decent income. Investors are looking to know all the subtleties, and a broker that comes up with professionals gains awesomely. First, it earns from training. Besides, traders tend to make many deals when they trade successfully. They also pay good commissions.
VPS service is also in high demand. Traders have a chance to start a functional advisor that will close deals 24/5. The robot executes trade even as you sleep. Therefore, it is rare for the broker to offer VPS services without charging. The companies usually provide flexible services depending on the type of account. Where there is the less minimum deposit, you make payments there. If it is more, you can receive a free remote server since expert traders trade enough volumes.
Besides, customers can request for a trust management service. It is a simple scheme whereby the traders invest money with a broker where experts trade on your behalf and give you income. It is obvious for the company to earn from the profits. First, the accumulation of investor’s funds allows the brokers to increase trading volumes that they table on the interbank market. Secondly, the company also earns from the commission they charge in transactions.
Brokers can also position themselves as intermediates between the PAMM account holder and the investor. It is another form of trust management. The only difference is that the funds do not move to the broker but to the private trader who registered the broker’s account.
4. Trading platforms
Some brokers may charge for additional features on their trading platform. Professional traders usually look for features that can assist you in daily trades. Through experience, they know the gaps in their strategies and help them move to the next level. It is crucial to consider whether the feature’s use is more efficient and profitable than its cost.
A forex broker will take and execute orders to sell or buy currencies. They typically work on the over the counter market. The market differs from other financial exchanges in terms of the rules. The broker may not be subject to most of the regulations that oversee security transactions. Besides, there is no central clearing system in the Forex market. Therefore, traders need to be cautious since the counterparty may default. They should scrutinize the brokerage companies and their capitalization before moving on to choose them.