What is a forex broker? A broker is an integral part of the trading process and an important trading partner for every trader in the Forex market. To get started in the forex market, traders need to find a suitable and reliable broker. The following article answers questions about Forex brokers, about how brokers make money from traders.
Table of Contents:
What is a forex broker?
Forex brokers are companies that provide traders with access to a foreign exchange trading platform.
Most forex brokers only handle a small fraction of the volume of the overall forex market.
Retail currency traders use brokers’ trading platforms to access the currency market 24/7 for speculative purposes. Forex brokerage services are also provided to institutional clients by larger institutions such as investment banks.
What are the types of brokers on the Forex market?
There are two basic types of Forex brokers: Dealing Desk (DD) and No Dealing Desk (NDD). Each type of forex broker has a different advantage and is suitable for different trading needs.
What are the characteristics of the Dealing Desk and the No dealing desk?
Dealing Desks are market makers. They have available liquidity, so they have a fixed spread. Dealing desk brokers are people who deal directly with traders, not with intermediaries who link transactions. The way of making money of the Dealing Desk Forex Broker is to buy forex at a low price from the main providers, sell it at a higher price and collect the spread.
No Dealing Desks are brokers that transfer orders to highly liquid markets (STP, ECN, or both). No Dealing desks are just a bridge between a trader and a primary foreign exchange provider (STP) or other trader (ECN). Therefore, these brokers have variable spreads.
How do Forex brokers make money?
Brokers help traders make foreign exchange transactions and collect commissions and commissions.
1. Dissemination fee
The spread is the difference between the broker’s offer and asking for a currency pair.
For example, if the ask price of EURUSD is 1.08442 and the bid price is 1.08351, the spread will be 0.00091 or 0.91 pip.
Forex brokers analyze the market for that currency pair and offer a different spread. For non-dealing desk brokers, the spread varies based on market volatility.
To compete for clients, brokers reduce commissions to attract traders and typically do not charge commissions. Instead, Forex brokers often add a fixed price in the spread to cover the commission.
2. Commissions
In the past, commissions were the main source of income for brokers. The commission rate varies according to the trading volume. The higher the transaction, the lower the transaction fee. Fees are calculated based on each transaction.
Traders quickly charge the spread by taking the asking price before the bid price. This is the total fee for each trade. For commissions, the trader must determine which price to buy and how much to sell to charge a fee for each transaction.
It is even more advantageous for brokers who offer a 0% commission but add a fixed amount to the spread. Traders can easily calculate the spread they lose for each trade.
3. Overnight stay
Swap fees are fees for using leverage. Usually, brokers will not charge interest if traders borrow and pay the same day.
The source of income of another forex broker comes from the investment and lending of funds that traders leave in unused accounts.
For example, they use funds in client accounts to save or invest (self-trading). In addition, of course, when the broker receives interest from that financial asset, he must also divide a specific interest rate for the use of the money by customers.
However, the most significant source of income of a Forex broker still comes from its main activities, commissions and transaction fees.
Conclusion
Approaching the forex market means learning what a broker is. This is the only means for traders to access the world’s largest financial market. The brokers’ primary income comes from commissions and commissions. Traders need to learn the broker’s commissions to find the right broker.
