How Do Forex Brokers Make Money?

Unless you don’t want to exchange currencies with random people on the street to make a buck, you need a forex broker.

And, so do millions of other traders worldwide—naturally, there is a forex broker for everyone, but never for free. One big question many newbies have is “how do forex brokers make money?”

In other words, you want to know what is normal and to be expected as you begin to work with a forex broker and what may be a scam or an attempt to rip you off. (We talk a lot about this topic specifically in another article, but for our purposes here, you will get a good grounding in the basics to get you started on the right foot).

The first thing you need to know is what a forex broker is and does. As it turns out, there is more than one answer to this question and we will get into that here in a moment.

You also need to know how forex brokers make money and which income streams are industry-standard versus extras you may or may not want to contribute to.

By understanding where the forex broker sits in the greater mix of forex transactions, you can protect yourself, make economical investing decisions and exercise good judgment about which forex brokers you choose to work with.

So now let’s get to it!

Forex Brokers in the News 📰

Late last year in the United States, a whopping 47 forex brokers were arrested after a six-month FBI investigation that spanned six states.

How can this happen, you might be wondering?

It actually stems from widespread confusion about what forex brokers are and are not legally permitted to do to earn a living here in the United States.

We are quite lucky in this country in that we have two incredibly active organizations, the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), that keep continual tabs on the operations of forex brokers doing business within our borders (we also talk a lot more about this topic in another article).

But the CFTC and the NFA also rely heavily on consumer tips to identify when forex brokers may be making money by defrauding you, the forex investor.

You can bet the estimated 1,000+ investors who gave those 47 forex brokers their hard-earned cash really, really want it back.

And we don’t want you to ever find yourself in that position. So on that cautionary note, read on to learn about making an honest living as a forex broker operating in the United States.

Your Forex Vocabulary Primer 📖

Let’s start with some basic vocabulary that will form the foundation of the information we are about to give you.

What is Forex? 📘

Forex, sometimes abbreviated as FX, is an acronym that stands for “foreign exchange currency marketplace.”

The Forex marketplace is the biggest single marketplace in the world. Because it is a global marketplace and takes place across a network of financial centers, there are trades happening nearly continuously five days per week, 24 hours per day.

The forex marketplace represents trillions of dollars worth of investments taking place every single day. At its most fundamental level, forex trading always involves a pair of currencies.

What is a Forex Broker? 💭

The term “forex broker” is used interchangeably with the following terms: retail forex broker, currency trading broker. A forex broker is an entity—a company or firm—that facilitates transactions between a customer (buyer/investor) and a counterparty (seller).

There are six main entities that are registered and licensed to facilitate forex transactions in the United States (though the list is growing every year). These entities are (in no particular order) as follows:

1. Ally Invest
2. Forex.com
3. Interactive Brokers
4. Oanda
5. TD Ameritrade
6. ATC Brokers

Remember our example earlier of the 47 forex brokers who were arrested late last year and their 1,000+ clients? Chances are very good none of those clients were working with any of the forex brokers on the list you just read.

While you may find entities other than these seven that accept U.S. citizens, you will quickly notice it takes some sleuthing to find these firms and their “open door” policy regarding United States forex traders can change without warning.

Take note: this is not a good sign overall. You invest with these types of brokers completely at your own risk, you should try to prevent cybercrimes before they happen, rather than trying to deal with them. And if you do end up getting taken for a ride (so to speak) you will not have the protection of the U.S. regulatory agencies to pursue recourse.

Types of Forex Brokers 🗃

Forex brokers come in two main flavors: market makers and non-market makers.

1. Market Maker Forex Brokers ⚖️

Also called DD (for dealing desk) brokers, market makers provide their customers, that is you, with two important things:

• ☑️ Liquidity
• ☑️ A market

In these roles, market makers work with the major interbank Forex markets worldwide to do three things:

• ☑️ Set the bid/offer prices for each currency pair.
• ☑️ Set the constraints within which deals will be accepted for each currency pair.
• ☑️ Bear the initial exposure (assume the counterparty role) at the time each deal is transacted.

Because a market maker forex broker takes on the counterparty role from within, they have some minor degree of control over pricing for each currency pair.

One other major difference that sets market maker forex brokers apart from the rest is that they typically offer fixed spreads.

2. Non-Market Maker Forex Brokers 🏛️

Non-market maker forex brokers go by various names, including no dealing desk brokers, NDD brokers, STP (straight-through processing) brokers, ECN (electronic communication network) brokers and STP+ECN brokers.

A non-market maker forex broker acts as a middleman broker to connect you with a third party that provides the liquidity you need to make forex transactions. In some cases, that bridge may extend to other forex traders as well.

Non-market maker forex brokers typically offer variable spreads only.

So why do these brokers have so many interchangeable names? There are actually further sub-divisions within this broker classification. These sub-divisions relate to how each broker facilitates forex trades:

STP (Straight Through Processing) Forex Broker 📈

When you place a forex trade order with a STP forex broker, that broker then forwards your order to external liquidity providers connected to the greater interbank forex marketplace. When a matching order pops up, your order will be fulfilled.

ECN (Electronic Communications Network) Forex Broker 📉

When you place a forex trade order with an ECN forex broker, that broker is only acting as the impartial platform through which various participants in forex trade orders can meet and interact.

ECN+STP Forex Broker 💰

As you likely already guessed, ECN+STP (sometimes also written as STP+ECN) forex brokers offer both services you just read about above here.

Traditional Ways That Forex Brokers Make Money 🤲

There are two main pathways through which forex brokers can make money.

The first pathway is what we will call the “traditional” pathway. This is how the majority of brokers earn their money, regardless of what type of forex broker they happen to be (as per the broker classification information you just learned about earlier here).

The second pathway is what we will call the “alternate” pathway. Some innovative forex brokers are now branching out and using alternate income-generating models, which we will explain in more detail here in a moment.

So how have forex brokers traditionally made money? Next, we will look at both market maker and non-market maker income streams in turn.

How Do Market Maker Forex Brokers Make Money? 💸

The simplest way to explain how market maker forex brokers make money is to say this:

When you lose money, they make money. While it is not always quite that simple, you get a general idea. In other words, remember how this classification of forex broker takes the counterparty role when you place a forex trade order?

If you make money from that order, your forex broker loses money. But if you lose money from that order, your forex broker makes money.

This is also why market maker forex brokers generally offer fixed spreads—because they are the ones who are ultimately in charge of setting the bid/offer pricing for each currency pair and so they can control their own exposure to some extent.

How Do Non-Market Maker Forex Brokers Make Money? 🤔

Non-market maker forex brokers can make money in three different ways: via spread or via commissions or through a combination of the two.

If you are new and just learning the lingo of the forex world, here is a helpful primer:

• ☑️ Spread: the difference between the bid/ask prices for each currency pair.
• ☑️ “Going long:” ask price is the result.
• ☑️ “Going short:” bid price is the result.
• ☑️ Fixed spread: the spread between the bid and ask price does not change.
• ☑️ Variable spread: the spread between the bid and ask price changes.
• ☑️ PIP: percentage in point or unit of change in the bid/ask price of a currency pair.
• ☑️ Commission/fee: typically assessed on a per-trade basis, a commission or fee is reflective of the forex broker’s role in supporting the transaction.

How Do Forex Brokers Make Money in These Scenarios? 💳

First, when there are fluctuations between the bid/ask price of a currency pair, the difference goes to the forex broker as profit.

Next, NDD forex brokers may also attach a commission or fee to your forex trade order as a reflection of their service to support the transaction.

Yet another way that NDD forex brokers can make money is through your use of the trading platform itself.

For example, a forex platform may offer a suite of free services to traders (that is, you). Then the platform may also offer a “VIP” or “upgraded” suite of services that you can gain access to with payment of an additional optional fee.

Still another way that NDD forex brokers may make money is by providing more personalized services—again, for an extra optional fee. Examples of such services may include a wider range of asset classes or currency pairs, individualized investing education or financial guidance, advanced research and investing tools—you get the idea.

To summarize:

• ☑️ Dealer brokers, or market maker forex brokers, make money when you lose money.
• ☑️ Non-dealer brokers make money through spreads, commissions and fees and additional services.

However, remember that these are not the only revenue streams that forex brokers have available to them, and we will cover this topic in a great deal more detail in later sections here.

Alternate Ways that Forex Brokers Make Money 🏦

Now let’s turn our attention to some less common, yet still legitimate, ways that forex brokers are making money today.

1. Affiliate Marketing 💵

This probably sounds like a strange way for a forex broker to earn some extra cash. After all, the whole concept of affiliate marketing is for the forex broker to give up some potential profits (in the form of commission payouts to affiliates) in exchange for hopefully welcoming new forex traders to the platform and profiting from their trades.

That is why the Instagram trading craze has occurred—a lot of new brokers and a lot of new traders. In this way, affiliate marketing could be seen as a type of “quantity over quality” marketing program. When it works, the forex broker perhaps makes less per trader but makes more overall with more traders placing trade orders.

This is the theory, at least.

But what if—and this is just an “if” since it is hard to confirm these sorts of things—the forex broker actually padded the commissions and fees assessed for each forex trade with their marketing overhead?

In this perfect world (for the broker, not for you), they are earning more in quality and quantity—higher fees all around from more traders placing forex trades through their platform.

It is just something to watch for. 

Forex brokers are permitted to set their own fees for services rendered. If you run across a forex broker that appears to be charging higher fees than the competition and offers an affiliate program with revenue sharing as a side perk, it might just be worth shopping around a bit further to see what else is available to you as a forex trader.

This is especially the case if you are not at all interested in participating in any type of affiliate marketing relationship with a forex broker.

Forgoing Affiliate Marketing 💴

There is one thing you can always count on in highly competitive markets, which describes the forex marketplace to a “t.” That one thing is variety.

In other words, for every forex broker that launches an affiliate marketing program as part of their greater marketing strategy, there will likely be an equal and opposite forex broker who forgoes the same as a part of their greater marketing strategy.

The underlying gamble is one and the same: winning new customers by differentiating themselves in a marketplace where the basic product remains pretty much identical. This is particularly the case in heavily restricted markets such as the United States, where the basic product can only be stretched so far in terms of making a profit.

In this way, you could think of forex like car insurance. It is heavily regulated in terms of the minimums each driver must carry. So how do all those different insurance providers compete for customers? They must differentiate based on the extras—the perks.

Affiliate marketing revenue is one such perk. Some forex brokers offer it and others do not and in both cases, this will appeal to a certain customer segment. Here is a great example. Oanda is one of the seven regulated forex brokers that is licensed by the CFTC and the AFN to operate in the United States.

Guess what Oanda does not offer? (If you guessed “affiliate marketing” you are already on it.)

Although to be fair, there is some small evidence on Oanda’s website that they may, in fact, have some level of affiliate marketing relationship that is offered to IBs (introducing brokers). However, it does not appear at this time that this program is offered to U.S.-based IBs. Oanda has also consistently gotten high marks for low spreads. Perhaps there is a correlation.

2. API Partner Programs 💶

Yet another creative way that some forex brokers are generating income is through licensing of their proprietary software—the software running the platforms that facilitate your forex trade orders.

Licensing APIs typically deliver the option to customize the software to suit the needs of the licensee’s own user base and may offer co-marketing opportunities as well (where the licensee in turn is featured on the licensor’s own website).

Oanda is yet again a good example of this type of income strategy, as they have a vibrant API program for all clients interested in using their trading platoform.

Unfortunately at this time there is little information on the Oanda website regarding the details of this partnership program. This may or may not have to do with CVC Capital Partners’ acquisition of Oanda in mid-2018.

3. Liquidity (Loan) Financing 💷

Some well-known forex brokers like fintech giant TD Ameritrade make a hefty profit annually with what are called “sweeps.”

Sweeps involve investing their customers’ un-invested idle cash with one of the forex broker’s own banking partners or subsidiaries, which in turn can then use it to fund other loan requests, with interest of course. Once suitably invested, the cash begins to accrue interest. Customers earn a small portion of that interest, usually in the form of high-yield savings account or checking account interest accrued only on the value of their account.

But these earnings remain quite minimal compared with the combined might of that (now twice) reinvested cash that is now earning interest for the forex broker itself.

Bloomberg reports that TD Ameritrade made $5.4 billion in net revenue in 2018. 23 percent of that came from—you guessed it—loans made using customers’ reinvested idle cash.

4. Interest or Fees on Margin Loans 💲

Forex brokers can also make interest on loaned money in another way: by offering (and funding) trades on margin.

This is where forex brokers operating under CFTC and NFA licensure in the United States are really taking a big hit because in order for a forex broker to accept U.S. customers, they are not legally permitted to offer leverage above 50:1. Contrast this with the 1000:1 leverage offered to forex traders in many other places around the world.

Now granted, the interest rate that you, the customer, agree to pay is typically only in the neighborhood of one to two percent. In the U.S., the only way to make any kind of substantial interest income is in the quantity of customers carrying margin accounts rather than in the quantity of leverage per customer.

As well, interest is generally only assessed in the following scenarios:

• ☑️ The trader’s margin account remains open after close of business or over a weekend or holiday (called “overnight forex swaps” or “overnight swap spreads”), in which case fees or interest may be assessed, although this is not always the case.
• ☑️ The trader may begin to lose money, in which case the forex broker can do something called “making a margin call.” This alerts the customer to either deposit additional funds in their forex account or forfeit what remains in the account, which may include a portion of the original loaned funds.

Forex Brokers Make Money When You Lose Money 💱

To put this income stream in its proper perspective, it can help to remember that forex brokers make money when you lose money.

Clearly, interest on margin loans is not going to represent a significant chunk of any forex broker’s main income streams. But it is still a legitimate pathway to earning a few extra pennies and it is a pathway that the end customer (you) is unlikely to even think about, let alone factor in when you make your choice of forex broker.

5. Payment for Order Flow 🧾

Yet another lesser known income stream for many forex brokers is what is known as “payment for order flow.”

This is not to be confused with the fees customers (you) pay to place a forex trade order. This is a different fee that the forex broker earns in exchange for sending trade orders to certain third-party trading firms who then broker those orders on your behalf as well as on behalf of the forex broker.

As Bloomberg describes, these third-party trading firms can earn small but significant commissions from tiny changes in spread, and in fact, this is their bread and butter.

But there is a lot of competition among trading firms for your trade orders. So some firms will develop arrangements with certain forex brokers that can send more of your trade orders their way. Like trading forex itself, the trading firms are hoping they will make more in spreads than they pay out in fees giving them the right to broker your trade orders.

This may sound shady. But it is currently legal and the reason is that both forex brokers and trading firms state that it gives you, the end customer, the chance for a better deal all around once your trade order is placed. It is actually quite similar to how many affiliate marketing programs are structured, albeit with micro-payouts per transaction.

6. Fees for Payment Processing 📚

Yet another way that forex brokers can earn extra income comes in the form of payment processing fees. Not all brokers will charge for payment processing, and so it represents one of those differentiating perks we were talking about earlier—the kind of perks that forex brokers use to appeal to one customer group over another.

The most common payment processing fees are those assessed for making wire transfers or depositing funds from or withdrawing funds to credit cards.

7. Additional Fees 📗

Some forex brokers will also charge additional fees for account maintenance, account inactivity, account balance penalties (such as if your account balance falls below a certain set minimum), et al.

While these fees are like gravy on mashed potatoes—they will always be the gravy and never the mashed potatoes—fees like these can really add up in the broker’s favor and cut into any profits you make by placing forex trade orders on the platform.

Other common fees may crop up if you want assistance from a human being. Here, more typically you will find this if you want to talk to a financial expert rather than if you just need general customer support. However, some forex brokers will charge for some or all of the above and others will not charge for any of it, so it pays to check in advance.

Making Sure You Make Money Trading Forex

Trading on the forex currency exchange markets is hands-down one of the riskiest investing activities you can undertake. If you’re wondering how much forex traders make, it can really depend on a variety of factors. On some level, forex shares more in common with gambling than it does with traditional investing.

It is vitally important to know going in that you should only trade with the amount of capital you can afford to lose. You are just one small set of trade orders to the average forex trade broker—and in fact, forex brokers bear far less risk than you do overall in that they have multiple ways to earn revenue even if you lose everything and have to bow out entirely.

You can give yourself the best possible start to your forex trading endeavors by carefully reviewing this article (and others in this series) and then using what you learn here as a benchmark from which to select a reputable, U.S.-registered and licensed forex broker through which to place trade orders.

Don’t rush into forex trading. Start small. Do your due diligence and select a highly rated forex broker with transparent pricing, business practices, commissions and fees.

Going into forex trading alone is not recommended but there are some instances when you don’t need a financial advisor.

Use each trade order you place as a learning opportunity and make use of all available educational tools, charts and analysis as you select your trades.

And remember this: your forex broker will be making money regardless. The only question to ask now is, will you?

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