How forex brokers make money.

Your broker earns money on almost every trade you place, even when no fee appears on your statement. Most of that income comes from the gap between buy and sell prices, from commission and from overnight swap.

A broker that takes the other side of your trade has one more source: the money its clients lose. Knowing which sources your broker relies on shows what a trade really costs you.

How does a broker earn from the spread?

A broker gets its prices from banks and other large firms called liquidity providers. Say a provider quotes EUR/USD at a bid of 1.10000 and an ask of 1.10002, a spread of 0.2 pip. All prices in this lesson are illustrative.

The broker can widen both sides before the quote reaches you. Your platform shows a bid of 1.09996 and an ask of 1.10006, a spread of 1.0 pip.

The extra 0.4 pip on each side is the markup, the part of the spread the broker keeps. You pay it once when you open and once when you close.

1. You buy 1 standard lot, 100,000 euros, at your ask of 1.10006. The broker buys from its provider at 1.10002 and keeps 0.00004, which is 0.4 pip.
2. Later you sell at your bid. The broker sells to its provider at the provider's bid, 0.4 pip higher than yours, and keeps another 0.4 pip.
3. The total markup is 0.8 pip. On 1 lot of EUR/USD a pip is worth $10, so the broker earns 0.8 × $10 = $8.

Your full spread cost is 1.0 pip, or $10. The other 0.2 pip, $2, is the market's own spread, which the broker pays when it trades with its provider.

Spreads widen around big news and in quiet hours. A broker that sets its own markup can widen it further at those times, so an advertised typical spread can differ from what you actually pay.

How does commission per lot work?

Some account types show a spread close to the provider's price and charge a separate fee instead. That fee is a commission, usually set per lot traded, as the commission per lot lesson explains.

Take the same EUR/USD trade on such an account, with an illustrative spread of 0.2 pip and a commission of $3.50 per lot on each side.

1. Opening 1 lot costs $3.50 in commission.
2. Closing it costs another $3.50, so the round trip costs $7.00.
3. The 0.2 pip spread costs 0.2 × $10 = $2.00.
4. Your total cost is $7.00 + $2.00 = $9.00, and the broker keeps the $7.00 commission.

In this example the two costs land close together. The commission account shows the fee openly, while the spread-only account folds it into the price.

Brokers set both numbers, so neither model is always cheaper. Compare the total cost per round trip at the same lot size, as the Standard vs Raw account lesson does.

How does a broker earn from swap?

Hold a position past the daily rollover and you pay or receive swap, an overnight charge or credit based on the interest rates of the two currencies. The swap lesson covers how it is calculated.

The broker sets the swap rate. It starts from the interest gap in the market and usually adds its own margin.

Say the interest gap on a pair is worth $5.00 a night on 1 lot. In theory the long side earns $5.00 and the short side pays $5.00. A broker might credit the long holder $3.00 and charge the short holder $7.00.

The broker then keeps the $2.00 difference on each side, every night.

When the interest gap is small, the broker's margin can be larger than the gap itself. Then both long and short positions pay swap, which you can see in the swap figures of your platform's symbol specification.

On a trade held for weeks, swap adds up night after night, so check the rates before you plan a long hold.

What happens when the broker takes the other side?

The previous lesson showed that every trade has a counterparty. With some brokers it is a provider in the wider market, and with others it is the broker itself.

When the broker passes your trade on and offsets it with a provider, the setup is often called the A-book. The broker earns its markup or commission and has no stake in whether you win.

When the broker keeps your trade on its own books, it is called the B-book. Your loss becomes the broker's gain, and your profit is the broker's cost.

Say you buy 1 lot of EUR/USD at 1.10006 on the 1.0 pip account. Price falls and you close at a bid of 1.09706: 1.09706 − 1.10006 = −0.00300, a loss of 30 pips, or $300.

In the A-book, the broker gains $300 from you. Its matching trade with the provider, bought at 1.10002 and sold at 1.09710, loses $292, which leaves the $8 markup.

In the B-book there is no matching trade, so the broker keeps all $300.

Had price risen so you closed at 1.10306, you would gain 30 pips, $300. The A-book broker would still keep $8, and the B-book broker would pay you $300.

A B-book broker counts on many clients at once. The losses of some cover the gains of others, and the spread tilts the total its way. Many brokers mix both books, which the A-book and B-book lesson explains.

Market making is a normal, regulated business in many countries, so a B-book alone does not mean a broker cheats. It does create a conflict of interest, which makes the way it handles slippage and stop orders worth watching.

Some regulators require brokers to publish the share of retail accounts that lose money. If your broker shows such a figure, read it before you deposit.

Which other fees can a broker charge?

Smaller fees sit outside the trade itself. Common ones include:

• a margin on the exchange rate when you deposit in a currency different from your account currency
• fees on some deposit or withdrawal methods
• an inactivity fee after a long period without trading
• a fixed admin fee on some swap-free accounts, charged instead of swap

These appear in the broker's fee schedule or client agreement. Read it before your first deposit, because small fees are easy to miss.

Part of a broker's income goes to introducing brokers who refer clients, and a rebate service passes some of that share back to the trader.