How Forex Brokers Make Money
There are generally 3 ways in which Forex brokers book or clear client trades and also how they make money. This is what we will explore in Wiki.
How Forex Brokers Make Money
This is where a broker passes the client trade flow through to the Interbank market or another currency dealer who has access to the Interbank market. The profit is made from marking up the raw spread, by adding a commission to each trade, or a combination of both.
This is where the broker doesn’t send the client trade flow to the Interbank market. Instead, they choose to manage the client trades through their own internal market-making efforts. This would normally involve making money on the back of client losses by using the individual client profile and trading activity history. If they know a particular client loses all the time then they will not hedge them.
If a broker is lucky enough to have a client that has a proven track record and a high probability of success based on certain risk metrics then the broker may feel inclined to trade with the successful client. If you have great traders in your network then why not make some extra money by following along with the client’s trades? This is one of the benefits that a broker enjoys because they get to see all of the client order flow and can choose to do whatever they want with that information in the backend. This is of course, as long as they are being fair in the front-end platform to the client.
This is quite literally the opposite of B-Booking but it’s still a market-making effort and does involve a level of risk as well because those profitable traders could go on losing streaks.
Market Making Risk
With both B and C booking, there is a potential for the market maker to lose money. To combat this brokers have come up with extremely sophisticated risk management systems so that they don’t blow up overnight if something goes wrong. It’s possible for retail clients to go on a long winning streak on aggregate which would make B-Booking unprofitable. It’s also possible for C-Book clients to have losing streaks as well so there is no certainty that the broker will make money. This is why the management by the market maker is so tightly controlled and the methods that they use are a closely guarded secret from the public.
Many traders prefer to trade through an ECN broker because the pricing and execution are considered the most transparent. However, their main goal is to execute our trades in a timely and cost-effective manner in an environment that is stable and secure. In this case, picking a broker that has a license with a strong regulator may be the best option. No matter what the broker does with your trades, as long as the regulation is strong then you should be able to get your money whenever you need it.
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