What does a forex broker actually do?

Every trade you place goes through a company that stands between you and the currency market. That company is your forex broker: it opens your account, quotes the prices you trade at and fills your orders.

This lesson follows one small trade from deposit to close, so you can watch each job the broker does on the way.

What jobs does a forex broker do?

Banks trade currencies with each other in large amounts, and only with firms they have agreed credit with. A broker opens an account for you, usually checks your identity and gives you a platform where small trades, often down to 0.01 lot, are possible.

Once the account is live, the broker does all of the following:

• It streams two prices for each pair: the bid, where you can sell, and the ask, where you can buy.
• It accepts your orders and fills them.
• It holds your deposit and sets part of it aside as margin while trades are open.
• It applies leverage, so a small deposit can carry a larger position.
• It recalculates your profit and loss each time the price changes.
• It charges or pays swap on positions held overnight.
• It closes positions if your account falls to its stop out level.
• It keeps records, sends statements and pays out withdrawals.

Almost all of this is automatic and runs on the broker's trade servers.

What happens when you press buy?

Say you deposit $1,000 into an account with leverage of 1:100. EUR/USD shows a bid of 1.09990 and an ask of 1.10000, a spread of 1 pip. All prices and settings here are illustrative.

You buy 0.10 lot, which is 10,000 euros. The broker handles the click in four steps:

1. It receives the order and reads the pair, the size and the direction.
2. It works out the margin. The position is worth 10,000 × 1.10000 = $11,000, and at 1:100 the margin is $11,000 ÷ 100 = $110.
3. It checks your free margin. You have $1,000 available, which covers $110, so the order goes through.
4. It fills the buy at the ask, 1.10000, and shows you an open position.

Had your free margin been below $110, the broker would have rejected the order. If the price moves between your click and the fill, you can get a slightly different price, which is called slippage.

The maximum leverage you can use depends on the broker, the account type and the rules where the broker is licensed. The margin calculator repeats step 2 for other pairs and sizes.

Where does your money sit while the trade is open?

As soon as the trade opens, the broker locks $110 of your money as used margin, a deposit it holds for as long as the position stays open.

Your buy opened at the ask, but you can only close at the bid, 1.09990. The trade therefore starts 1 pip down. On 0.10 lot of EUR/USD a pip is worth $1, so the floating loss is $1.

Your platform now shows four numbers:

The broker updates these numbers on every price change. If losses grow, equity falls toward the used margin, and at the broker's stop out level it starts closing your trades. The margin and stop out lesson explains these levels.

Take an illustrative stop out level of 50%, with the margin held at $110. This trade would start to close when equity fell to $55, which takes a loss of $945: a bid of 1.00550, or 945 pips below your entry.

What happens when you close the trade?

Later the bid rises to 1.10200. You sell 0.10 lot to close, and the broker fills the sell at the bid.

1. The move is 1.10200 minus 1.10000 = 0.00200, which is 20 pips.
2. Each pip on 0.10 lot is worth $1, so the profit is 20 × $1 = $20.
3. The broker releases the $110 of used margin.
4. It adds the $20 to your balance, which becomes $1,020.

The spread is already inside that result, because you bought at the ask and sold at the bid. The example assumes no commission and a trade opened and closed on the same day.

Hold a position past the broker's daily rollover and it adds or deducts swap. On an account type that charges commission, that fee also comes off the result.

Who is on the other side of your order?

When you bought 10,000 euros, someone had to sell them, and the broker decides who.

It can pass your order to liquidity providers, the banks and trading firms that send it prices. It can also take the other side itself, so it is the seller to your buyer.

Many brokers do both and choose by client or by trade. When the broker takes the other side, your loss is its gain, and the counterparty lesson explains how that conflict is managed.

No euros are delivered to you in either case. A retail forex trade at a broker is usually a cash-settled contract: the broker records the position and pays the profit or takes the loss in your account currency.

What a broker is not, and how it gets paid

Forex has no central exchange. It trades over the counter, between firms directly, so your broker's price is its own quote built from the prices it receives. Two brokers can therefore show slightly different prices at the same moment.

The platform is often another company's software. MetaTrader 4 and 5, for example, are made by MetaQuotes and licensed to brokers, who run their own servers behind them.

An introducing broker (IB) refers clients to a broker and is paid by it for them. It does not hold your money or fill your orders.

Some IBs, such as AutoFXRebate, pass part of that payment back to traders as a rebate.

The broker earns from the spread, from commission on some account types and from swap. When it takes the other side of trades, client losses can be income too. The lesson on how forex brokers make money covers each source.

Many regulators require brokers to keep client money apart from the company's own funds. The protection depends on the licence, and the next lesson shows how to check whether your broker is regulated.