A forex broker is a financial services company that gives traders access to the foreign exchange market. Since the forex market is decentralized and operates through a global network of banks and institutions, individual traders need a broker to act as an intermediary. But how exactly do these brokers work, and how do they make money? Understanding this is crucial for choosing the right broker and avoiding potential conflicts of interest.
The Three Main Broker Models
1. Market Maker (Dealing Desk)
A market maker acts as the counterparty to your trades. When you buy EUR/USD, the market maker sells it to you from their own inventory. They "make the market" by providing both bid and ask prices. Their profit comes primarily from the spread — the difference between the buy and sell price.
With a market maker, there's a potential conflict of interest: when you lose, they profit. However, reputable regulated market makers manage this conflict through hedging and risk management. Not all market makers are bad — many large, well-regulated brokers use this model.
2. STP (Straight Through Processing)
An STP broker routes your orders directly to liquidity providers (banks, hedge funds, other brokers) without a dealing desk. The broker adds a small markup to the spread they receive from liquidity providers, which is how they earn revenue. This model eliminates the conflict of interest since the broker profits regardless of whether you win or lose.
3. ECN (Electronic Communication Network)
An ECN broker connects you directly to a network of liquidity providers. You see the raw, unmodified spreads from the interbank market (which can be as low as 0.0 pips), and the broker charges a separate commission per trade. ECN brokers offer the most transparent pricing and the tightest spreads, making them popular among professional and high-volume traders.
| Feature | Market Maker | STP | ECN |
|---|---|---|---|
| Spread Type | Fixed or variable | Variable (marked up) | Raw (from 0.0 pips) |
| Commission | Usually none | Usually none | Yes (per lot) |
| Conflict of Interest | Potential | Minimal | None |
| Best For | Beginners | Intermediate | Professional/Active |
| Minimum Deposit | Low ($5-$100) | Medium ($100-$500) | Higher ($200-$1000+) |
| Execution Speed | Good | Very Good | Fastest |
How Forex Brokers Make Money
Brokers generate revenue through several mechanisms:
- Spreads — The primary revenue source. The difference between bid and ask prices.
- Commissions — ECN brokers charge a fixed fee per lot traded (typically $3-$7 per standard lot per side).
- Swap/Overnight Fees — Charges for holding positions overnight, based on interest rate differentials.
- Deposit/Withdrawal Fees — Some brokers charge fees for funding or withdrawing from accounts.
- Inactivity Fees — A monthly fee charged if you don't trade for an extended period.
- Currency Conversion — Fees when your account currency differs from the traded instrument's currency.
Red Flags to Watch For
- No regulation or regulation from obscure jurisdictions
- Promises of guaranteed profits or unrealistic returns
- Extremely high leverage (1:2000+) without adequate risk warnings
- Difficulty withdrawing funds or excessively slow processing
- No transparency about spreads, commissions, or execution policy
- Aggressive sales calls pressuring you to deposit more
Always verify a broker's regulatory status directly with the regulator's website. Use BrokersDB to compare 539+ brokers and check their regulation, spreads, and infrastructure data before opening an account.
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