Who is on the other side of your forex trade?

When you press buy on EUR/USD, someone has to sell to you. In retail forex that seller is almost always your broker, and when you close, the broker buys the position back.

The other party to a deal is called the counterparty. Knowing who yours is tells you who pays you when a trade wins, and who keeps the money when it loses.

Why is there no exchange in the middle?

Shares and futures usually trade on an exchange. Buyers and sellers send orders to one central market, and a clearing house steps between them so neither side depends on the other paying.

Spot forex has no such centre. Banks, funds and brokers deal directly with each other, two parties at a time. This is [over the counter](/en/learn/glossary/over-the-counter) (OTC) trading: each deal is a private agreement between the two sides.

Retail trading follows the same pattern on a smaller scale. Your account is an agreement with one firm, and every trade you place is a deal with that firm.

What contract do you actually hold?

A retail trader does not receive actual euros or dollars. The trade is a cash-settled contract, most often a contract for difference (CFD), which pays the difference between your opening and closing price, multiplied by the trade size.

In some countries the same idea is sold as a rolling spot forex contract instead of a CFD. The name differs, and in both cases the broker is the other party.

The ways to trade forex lesson compares these contracts with futures, forwards and options.

Here is one trade with round illustrative prices. One standard lot is 100,000 euros, so on EUR/USD each pip of 0.0001 is worth $10.

1. You buy 1 lot of EUR/USD at an ask of 1.10000, and the broker is the seller.
2. Later you close by selling at a bid of 1.10200, and the broker is the buyer.
3. The move is 1.10200 minus 1.10000 = 0.00200, which is 20 pips.
4. 20 × $10 = $200, which the broker credits to your account.

If the bid had fallen to 1.09800 instead, the move would be minus 20 pips. The broker would take $200 from your balance.

No euros changed hands at any point. Only the $200 difference moved between you and the broker.

What does the broker do with your trade?

After you buy 1 lot from the broker, the broker is short 1 lot of EUR/USD. If the euro rises, it owes you money, so it has to decide what to do with that exposure.

It can keep the risk on its own books, which traders call the B-book. The broker then gains when your trade loses and pays out from its own funds when your trade wins.

It can also open a matching trade with a liquidity provider (LP), usually a bank or a larger dealer. That is the A-book, where the broker earns from a spread markup or a commission instead of from your losses.

Many brokers mix the two and sort trades by size, client or instrument. The A-book and B-book lesson explains how that sorting works.

In both cases your contract stays with the broker. The liquidity provider has no agreement with you, so your claim, win or lose, is on the broker alone.

How can a broker sit on both sides at once?

A broker with many clients often finds that their trades cancel out. When one client buys and another sells the same amount, the broker can match them on its own books. This is called netting, or internalisation.

Take two clients at the same moment, with EUR/USD at a bid of 1.10000 and an ask of 1.10010, a spread of 1 pip. The prices are illustrative.

1. Client A buys 1 lot at the ask, 1.10010.
2. Client B sells 1 lot at the bid, 1.10000.
3. The broker sold 1 lot to A and bought 1 lot from B, so its net position is zero.
4. Later the quote is 1.10200 bid and 1.10210 ask, and both clients close.
5. A sells at 1.10200: 1.10200 minus 1.10010 = 0.00190, a gain of 19 pips, or $190.
6. B buys at 1.10210: 1.10000 minus 1.10210 = −0.00210, a loss of 21 pips, or $210.
7. The broker pays A $190 and collects $210 from B, keeping $20.

The $20 is the two spreads: 1 pip from each client on 1 lot, at $10 a pip. Had the price fallen by the same amount, A and B would swap results, and the broker would still keep $20.

That only holds while both trades are open together. Any amount left unmatched is exposure the broker must keep or hedge, as the internalisation lesson explains.

What risks come with the broker as counterparty?

The first is counterparty risk, the chance that the other side of a deal cannot pay. Your open profits and your account balance are only as safe as the firm that owes them to you.

Rules on keeping client money apart from the broker's own money differ by regulator, and so do compensation schemes if a firm fails. An entity licensed in a lightly regulated country may offer much weaker protection.

The second is a conflict of interest. A broker that keeps your risk gains when you lose. Regulated firms run B-books too, but the incentive exists, so check how your broker fills orders and handles stops.

Pricing is a quieter effect of OTC trading. With no central market there is no single official price, so each broker streams its own quotes, and two platforms can show slightly different prices at the same second.

How can you find out who your counterparty is?

Start with the client agreement you accepted when you opened the account. It names the legal entity you contract with, which may be one of several companies in a group with similar names.

Check that exact entity on the regulator's public register, as shown in how to check a licence. A licence held by a sister company in another country may not cover your account.

Then read the order execution policy. It often states whether the firm deals with you as principal, meaning it is your counterparty, and it may list the liquidity providers or venues it uses.

How the broker earns in each of these setups is covered in how forex brokers make money.