How Forex Brokers Make Money ???

When trading forex, you are speculating on the future direction of currencies, taking either a long (“buy”) or short (“sell”) position depending on whether you think a currency pair’s exchange rate will go up or down. Specifically, you seek to profit from fluctuations in the exchange rates between currencies, betting on whether one currency’s value, like the Japanese yen, will go up or down in relation to another, such as the Australian dollar. Price movements in the forex market are triggered by currencies either strengthening (price appreciation) or weakening (price depreciation). Your ability to open AND close trades is limited to the prices that your forex broker offers to you, as there is no other market for these trades.

  • The forex market is where traders from around the world exchange foreign currencies.
  • The forex market is the largest in the world in terms of notional value.
  • Forex traders often rely on brokers to facilitate trades and find counterparties in more illiquid currencies.
  • Forex brokers, like most other brokers, are typically paid a commission per trade. They may also charge a spread between the bid and ask in a currency quote.

Where do the forex broker’s prices come from?

  1. A higher price (“ASK”) at which you can buy (“go long”)
  2. A lower price (“BID”) at which you can sell (“go short”)

You see these quotes on your trading platform (or “customer terminal”). These quotes displayed are known as a “price stream”.

But where do the prices come from? How Pricing Works on Exchanges

Once a security has opened for trading, buyers and sellers trade securities with three factors shaping prices: supply, demand, and news. When the highest bidding price matches the lowest asking price, a trade takes place.

The price that YOU see is based on prices that your broker obtains from these liquidity providers.

The broker has a pool of multiple LPs from which it receives pricing for the various currency pair it offers.

The forex broker aggregates or collects these prices in real-time to find the best available bid and ask price.Both prices do not necessarily have to come from the same LP.  For example, the best available bid price may come from one LP, while the best avaiable ask price may come from another LP. The aggregated prices are fed into a “pricing engine” which streams prices (your “price stream“) to your trading platform. The price that YOU see will usually have a markup added (unless you’re paying commission).

Liquidity Providers

Every reputable forex broker displays to YOU “their” price based on what liquidity they have access to.

Forex brokers who are large enough to have a prime broker (PB) can access a mix of different liquidity providers such as Tier-1 banks, ECNs, and aggregators.

When multiple liquidity providers stream their bid and ask prices, the broker’s “price engine” selects the best bid and ask price, which results in the best available spread.

Each LP is competing to be the forex broker’s hedging counterparty so this provides the leverage to demand better pricing. Having multiple liquidity providers is also important especially during abnormal market conditions, such as during times of extreme volatility, when some liquidity providers may decide to widen the spreads or stop quoting prices altogether. For A-Book brokers, this is crucial since their execution model is totally dependent on liquidity providers being available to provide quality liquidity even during volatile or illiquid market conditions. Smaller forex brokers source their pricing by connecting to an aggregated liquidity feed provided by a Prime of Prime (“PoP”), and sometimes in conjunction with other non-bank liquidity providers (“NBLPs”) who are known as “electronic market makers”.

Here are some online resources that you can use to gauge how close the prices your forex broker offers to what others are offering:

  • XM
  • TradingView
  • LMAX Exchange
  • FXCM

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