How Do Forex Brokers Make Money On Bid/ask Price?
16 November 2009
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Q: If forex brokers charge no commissions, then how do they make money. how do they charge the traders money based on pip spreads or bid/ask price?
A: There is no commission. They make their money on the spread. When you are dealing with a forex firm, they are not brokers taking your order to the market, like with stocks. They are dealers; they are the market. They quote prices at a level where half their customers will buy at the ask and half their customers will sell at the bid. They take the pips in the middle of each deal. OK. It never works out exactly half and half, so there is some risk and if there is a sudden move, they do get stuck with some exposure, but they get it close enough to keep profitable.
It’s the spread. They just add a couple more pips onto the spread that already exists in the market, usually between 1 and 4 pips. So really there is a commission, it’s just built inot the price.
Actually, the spread is not how brokers make there money. The broker dealers make their money by taking the customers trade and will make money on their losses. There is a big misconception about this topic and should be researched throughly.
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