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One of the most curious questions investors seeking to gain by investing in Forex is the profit of brokerage houses. Forex is a sector where competition is very high. For this reason, each forex broker has different advantages, spread rate and campaign. It is important to know how forex brokers make money in order to choose the right brokerage house.It can be said that what we need to pay attention to when choosing a broker is how the corporate earnings policy is.
Earning methods of forex brokers;
1- SPREAD
When trading in Forex, if you are buying, selling price will enter the process, if you are selling buying price will enter the process. So we are paying the cost of BUY and SELLS price difference. Brokers operate like foreign exchange offices. They make money from what we call spread.
When we want to buy dollars in foreign exchange offices, they sell to us from the current dolar exchange rate. Then, by matching the central bank, the difference between the spreads, that is, profit as much as difference.
Forex brokers also earn by working in the same way. The same amount of price they receive from customers is transmitted to large price-issuing banks. If they pay 5 USD to the overseas price provider, they will receive 10 USD spread from the customer. They will make as much profit as the difference on this number.
There is no treasury or trading desk of the brokers that work in this way. They do not risk currency risk by winning only spread.
The trading volume is very high with Forex trading. Therefore the difference paid is quite low.In the foreign exchange offices and in the banks, the transaction volumes are low, so the institutions open the spreads with the desire to earn higher income.
Among the brokerage houses where competition is high, spread rates are the most attractive means of attracting customers. As the institutions that offer transactions in Forex earn the difference between the spread they are paying abroad and the spread it gives to their customers, they can lower the income by giving a low spread to increase the number of customers.Even at the breakeven point, gives a low spread just to catch more customers.
From an institutional point of view, companies operating in this way offer transactions without direct exchange risk by sending orders to direct price providers. Therefore, the more transactions the customers make, the more profits they have. So the broker is not interested in your profit or loss. It is important for them is how often you open transactions.
If we look from customer eyes, we want to work with the lowest spread rates when trading. The less the cost, the better it will be for us to increase our profit. Therefore, we choose the institutions with the lowest trading difference offered to us when we go to the institutional search. However, what we need to be careful about is how companies that provide spreads much lower than average spread rates of all companies should be able to provide this. Working with unsuccessful, unreliable companies in the rest of their services aim to get only a low spread can take us dangerous in a long run.
2-MARKET MAKER
Only brokers that do not want to earn only spreads can take the risk of foreign exchange and prefer the prices themselves. Market makers provides prices through treasury and transaction desk in the institution. Profit from the transactions made by the customer will be at their disadvantages, and it will be advantageous to make losses from the transactions made.
Market makers are profitable if the customer is harmed, and if the customer is profitable they get loss.
We can say that the profits of trading companies with this policy are quite high, as the number of clients making profit by trading in Forex is low.
From a customer perspective, perhaps with better spreading rates, very different orders can be made from the prices in the real market, which in fact can be very damaging than the profits. Or they may not allow the transaction to close when the customer has a profit. The customer may not execute orders. May delay withdrawal requests. At tp / sl levels, the CLIENT can suffer from difficulties.
3-SWAP
We talked about what is swap in forex in our previous article, What is Swap in forex? Brokers can also earn money in the swap as well as spreads. They can earn as much as the difference in the swap ratios according to the financials of their providers.
Customers who do not want to bear the swap cost may go to the swap-free account opening. However, it is beneficial to get detailed information as there may be certain conditions.
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