You need one forex broker until you wish to trade money for cash with opportunistic individuals on the street. There is a forex broker for everyone, but they are never free. Thousands of other traders do the same thing all over the world. How forex brokers make money is a common concern shared by many newcomers.
You must first understand what a forex broker is and does. There seem to be other solutions to this topic, and we shall discuss those shortly.
You also need to understand how forex brokers generate revenue and which revenue streams are standard in the business vs. optional income that you may or may not like to participate in. You may protect money, choose forex brokers wisely, and make cost-effective investment decisions by knowing where the broker fits within the more extensive mix of currency transactions.
So, let’s get started immediately!
Forex: What Is It?
Forex refers to the “foreign exchange currency marketplace” and is commonly shortened to FX.
The largest single market on the planet is the forex market. The fact that it is a global market and transactions occur across a network of financial centers means that trading occurs almost continuously, five days a week, 24 hours a day.
Trillions of dollars worth of transactions are made daily on the currency market. Forex trading always requires a pair of currencies at the most basic level.
Also read: What is Forex Market?
What Is A Forex Broker?
The keywords “retail forex broker” and “currency trading broker” are interchangeable with “forex broker.” A firm or a company that simplifies transactions between a client (buyer/investor) and a supplier is a forex broker (seller).
To simplify forex transactions in the United States, six primary organizations have been registered and granted licenses (though the list is growing every year). The following are these entities, in no specific order:
- Ally Invest
- Interactive brokers
- TD Ameritrade
- ATC brokers
Recall the 47 forex brokers detained in the latter part of last year, along with their 1,000+ clients. Very likely, none of those customers were associated with any forex brokers on the listing you just studied.
Other than these, seven organizations may accept the American people. Still, you will quickly realize that finding these businesses requires some detective work, and their “open door” policy toward American forex traders is subject to alter at any time.
Brokers Of Different Types
Market makers and non-market makers are the two primary types of forex brokers.
Market maker forex brokers, also known as DD (for dealing desk) brokers, offer their clients, which includes you, two crucial things:
- liquidity, and
Market makers in these capacities collaborate with the principal interbank forex markets globally to accomplish three goals:
- For each currency pair, determine the bid and offer prices.
- Set the parameters for each currency pair’s acceptable range of transactions.
- When each agreement is completed, assuming the early exposure (take the counterparty position).
A market maker forex broker has limited control over the prices for each currency pair as they act as the middleman from within. Market maker forex brokers often offer fixed spreads, another significant distinction that sets them apart from the competition.
Non-Market Maker Forex Brokers
No trading desk brokers, NDD brokers, STP brokers (straight-through processing), ECN brokers, and STP+ECN brokers are some of the different names for non-market maker forex brokers.
The role of a non-market maker forex broker is that of a middleman, putting you in touch with the private entity that offers the liquidity you require to conduct forex trades. In some circumstances, that bridge might also include other forex traders.
Also read: The Best NDD Forex Brokers in 2022
Forex brokers who are not market makers often only provide variable spreads. Why, then, do these brokers go by so many different names? Within the category of brokers, there are, in fact, more divisions. According to how each broker supports forex deals, these classifications are as follows:
Forex Broker STP (Straight Through Processing)
Once you submit a forex trade order with the broker, an STP forex broker transmits your request to outside liquidity providers related to the larger interbank market. Your purchase will be completed after a corresponding order appears.
Forex Broker ECN (Electronic Communications Network)
When you make a forex trading order with an ECN broker, that broker serves as the neutral hub where different parties involved in forex trade orders can connect and communicate.
Forex Broker: ECN+STP
ECN+STP (often also written as STP+ECN) forex brokers provide both of the services you just read above, as you’ve probably already figured.
Traditional Methods Of Income For Forex Brokers
Forex brokers can generate income using two primary methods.
The first route is what we’ll refer to as the “conventional” route. Regardless of what kind of forex broker they may be, this is how most brokers make their money.
We shall refer to the second approach as the “alternative” pathway. We shall go into more depth about these other income-generating techniques below, but several forward-thinking forex brokers are currently expanding and utilizing them.
How Do Forex Market Maker Brokers Earn Profits?
Simply stating, “When you make a loss, they earn money,” sums up how to market maker forex brokers generate revenue. Even if it’s not always easy, you get the gist. Recollect how this type of forex broker acts as the middleman when you make a forex trading order, then?
Your forex broker will lose money if you profit from that order. However, your forex broker gets the money if you make a loss on that order.
Since they are essentially in charge of determining the bid/offer price for each currency pair and can thus somewhat manage their liability, market maker forex brokers typically provide fixed spreads.
Also read: How do I Trade Forex?
How Do Forex Brokers Who Are Not Market Makers Make Money?
Non-market maker forex brokers have three alternative ways to generate income: through spreads, commissions, or a mix of the two.
Here is a helpful glossary for those who are new to the forex market and are still learning the terminology:
- Spread: The price variation between the bid and ask for each currency pair.
- The outcome of “going long” is the asking price.
- The result of “going short” is the bid price.
- Fixed spread: The difference between the ask and bid prices is constant.
- The variable spread refers to the distance between the ask and bid prices.
- PIP stands for percentage in point or unit of movement in a currency pair’s bid and asks prices.
- A commission or fee, generally paid per trade, indicates the forex broker’s contribution to the transaction.
In These Cases, How Do Forex Brokers Make Money?
The first thing that happens is that the forex broker makes money when changes in the bid/ask the value of a currency pair.
Next, to compensate for their assistance with the transaction, NDD forex brokers may also tack on a charge or fee to your forex trade transaction.
Using the trading platform is another way for NDD forex brokers to profit.
For instance, a forex platform can provide traders with several complimentary features (that is, you). Additionally, the platform might provide “VIP” or “upgraded” services, which you can use by paying an additional optional cost.
NDD forex brokers may also generate income by offering more specialized services, once more, for an additional optional cost. You have the picture of personalized investment education or financial coaching, a more excellent selection of asset classes or currency pairs, advanced research, and investing instruments,
- Dealer brokers, also known as market makers in the forex market, profit when you make a loss.
- Non-dealer brokers generate income via spreads, commissions, fees, and extra services.
However, remember that these are not the only sources of income available to forex brokers; we shall go into much more detail on this subject in later portions of this article.
Alternative Methods Of Income For Forex Brokers
Let’s now focus on a few less popular yet acceptable ways that forex brokers now generate income.
1. Using Affiliate Marketing
This may strike you as an odd strategy for a forex broker to make some additional money. In the end, the entire idea behind affiliate marketing is for the forex broker to forego some future gains (in the form of royalty payments to affiliates) in exchange for luring more forex traders to the system and benefiting from their trades.
Many new brokers and traders are to blame for the Instagram trading frenzy. Affiliate marketing could be considered a particular “volume over excellence” marketing strategy. When it succeeds, the forex broker may make less money per trader, but overall, with more traders making trading orders, the broker makes more money. At least, this is the theory.
But what if the forex broker inflated the charges levied for each forex deal with their advertising up into the sky? This is only an “if” since it is difficult to check these things.
In this ideal scenario (for the broker, not for you), they are making more money qualitatively and quantitatively, with higher fees across the board due to more traders conducting forex trades on their platform.
Forex brokers are allowed to choose their rates for provided services. It would be worthwhile to look around a little bit more to see what other choices are available to you as a forex trader if you come across a forex broker that seems to be charging more significant fees than the competitors and provides an affiliate program with income sharing as a side benefit.
This is particularly true if you have no interest in engaging in any kind of affiliate marketing partnership with a forex broker.
2. Abstaining From Affiliate Marketing
In highly competitive marketplaces, there is one element you can always bank on, and this perfectly fits the FX market. Diversity is that one quality.
To put it another way, for every forex broker that introduces an affiliate marketing program as a part of their overall marketing plan, there will probably be an opposite and comparable forex broker that decides against the same as a part of their comprehensive marketing plan.
The fundamental wager is the same: gaining new clients by standing out in a market where the entire offering is mostly unchanged. This is especially true in very constrained markets like the United States, where the actual product can only be profitably expanded so far.
You may compare forex to auto insurance in this manner. In terms of the minimum standards each driver is required to carry, it is strictly regulated. So how do those many insurance companies compete for clients? They must distinguish themselves depending on the advantages and extras.
Earnings from affiliate marketing are one such benefit. Specific consumer segments will find it appealing in both scenarios, where some forex brokers provide it, and others do not. Here’s a fantastic illustration. One of the seven authorized forex brokers with an AFN and CFTC authorization to conduct business in the US is Oanda.
3. Partner Api Programs
Licensing their proprietary technology, which powers the platforms that process your forex trade orders, is yet another innovative way certain forex brokers make money.
Permissions APIs often give licensees the option to modify the program to meet the demands of their user base. They may also provide opportunities for co-marketing, in which case the licensee is showcased on the licensor’s website.
Another fantastic example of this income scheme is Oanda, which offers a thriving API program to customers interested in using their trading platform.
4. Loan Financing For Liquidity
Some well-known forex brokers, such as the fintech behemoth TD Ameritrade, generate large profits yearly via transactions known as “sweeps.”
Sweeps entail investing their clients’ idle funds with a forex broker’s banking affiliates or partners, who can subsequently use them to fund other loan requests in return. The money starts to earn interest as soon as it is properly invested. Customers make a limited percentage of the claim, typically in the form of high-yield savings or checking rate constant accrued only on the institution’s value.
5. Fees Or Interest On Margin Loans
By providing (and funding) trades on margin, forex brokers can earn interest on loans in another method.
This is where forex brokers licensed by the CFTC and NFA in the United States are genuinely suffering, as it is illegal for them to provide leverage of more than 50:1 to clients in the United States. Compare this to the power of 1000:1 that is available to forex traders in many other regions of the world.
6. Payment For Order Flow
What is referred to as “payment for order flow” is another less well-known source of income for numerous forex brokers.
This is distinct from the costs that clients (you) incur when placing a forex trade order. The forex broker receives a separate fee for referring trade orders to specific third-party trading companies, which then act as brokers for both the broker and you.
7. Processing Fees For Payments
Payment processing fees are another way for forex brokers to make extra money. Payment method is one of those specific benefits—the kind of benefit forex brokers use to attract one consumer group over another—that not all firms will spend for.
Fees imposed for money transfers, credit card deposits, and withdrawals are the most typical types of payment processing charges.
Additional Charges Some forex brokers will also tack on extra charges for account upkeep, account inactivity, account balance restrictions (like if your account balance drops below a predetermined minimum), etc.
These costs can pile up in the broker’s favor and reduce any earnings you make by making forex trade orders on the site, even though they are like sauce on potato salad, always comprise the gravy and never the potato salad.
Enter forex trading slowly. Begin modestly. Make sure the forex broker you choose has competitive prices, business methods, commissions, and fees. And keep in mind that your forex broker will still be profitable. The only remaining query is, “Will you?” By carefully reading this article (and others in this series) and utilizing what you discover here as a baseline from which to choose a reliable, U.S.-registered, and licensed forex broker to execute trade orders, you can give yourself the maximum possible foundation for your forex trading ambitions.