How Do Forex Brokers Make Money?

The four ways

Every broker uses one or more of these, and most are disclosed on the pricing page:

• The spread: the difference between the buy and sell price. You pay it on every trade without it appearing as a separate charge, and it is the largest source for most brokers.
• Commission: an explicit fee per lot, common on tight-spread accounts. Often more honest than a wide spread, because you can see it.
• Swap: the overnight financing charge on positions held past the end of the trading day. It can be paid to you, but usually it is paid by you.
• Other fees: withdrawal, account inactivity, currency conversion. Small individually, and they accumulate.

If you are comparing two brokers, do not compare the spread alone. Add spread and commission together on the instrument you will actually trade, then compare.

The fifth way, which is not advertised

Here is the part worth understanding. Brokers fall into two camps in how they handle your order:

• Passing it to the market: the broker routes your trade to a liquidity provider and takes the spread or commission. Their income comes from your volume, and it makes no difference to them whether you win or lose.
• Keeping it in house: the broker becomes the counterparty. Your trade never leaves for any market. If you lose, your loss is their income directly.

The second model is neither illegal nor fraudulent in itself - it is a licensed and widespread business model, and most brokers mix the two depending on client size. But it creates a genuine conflict of interest, and you are entitled to know where you stand in it.

Ask your broker directly: are my orders executed in the market or internally? A clear answer is itself a good sign, and evasion is also an answer.

What this means for you in practice

First: every broker earns more the more you trade. So anything that encourages frequent trading - notifications, contests, bonuses tied to volume - serves their income before it serves your account.

Second: an offer that looks costless has a cost somewhere else. Zero spread with a commission, or no commission with a wide spread. The money is always paid; the only question is where.

Third: higher leverage means larger size, and larger size means a bigger spread in dollar terms. Whoever offers you enormous leverage is not handing you power - they are increasing what you pay them on every click.

How to choose a trustworthy broker, and how to test one before depositing anything substantial, has its own page in this guide.