How Forex Brokers Make Money: Spread, Commission, Swap and Client Losses
A forex broker gets paid in up to four ways. It can build a markup into the spread, the gap between the buy and sell price. It can charge a commission on each trade. It earns from overnight swap when you hold a position past the daily rollover. And when it takes the other side of your trade itself, it keeps what you lose. Small account fees come on top.
All of it is paid before your trade can show a profit. Once you know which charges your account carries, you can work out how far price must move to break even. You can also see whether your broker does better when you trade more or when you lose.
What happens to your order after you tap buy
Retail forex has no central exchange behind your click. The order goes to your broker, and what the broker does with it next decides how it earns from you.
The first route is to pass the order on. The broker sends it to liquidity providers, the banks and large trading firms that quote prices to each other. This route is called the A-book. The broker collects a price markup or a fee, and it is paid the same whether your trade wins or loses.
The second route is to keep the order. The broker fills it from its own book, so it sells to you when you buy and buys from you when you sell. This is the B-book, and a firm that works this way is called a market maker, or dealing-desk broker. It sets its own bid and ask, earns from the spread, and keeps whatever its clients lose on those trades.
The diagram below follows both routes and shows what each one pays the broker.
Market maker, STP or ECN: reading your broker's label
Broker websites use three labels. A market maker is the B-book firm described above. An STP broker uses straight-through processing, which US futures rules define as offsetting your position in the market automatically, with no human stepping in. An ECN-style broker connects you to a pool of banks and other participants at prices close to raw interbank levels.
| Model | Who takes your trade | Spread you see | Separate commission | How the broker is paid |
|---|---|---|---|---|
| Market maker | The broker itself | Quoted by the broker | Sometimes | Spread, any commission, client losses |
| STP | Liquidity providers | Raw price plus a markup | Sometimes | The markup, plus any commission |
| ECN-style | The wider network | Close to interbank | Fixed fee per lot | Mostly the commission |
The right-hand column is the point. Every model gets paid, and the only difference is where you pay.
Spread markup: turning a 0.2-pip quote into 1.0 pip
Each currency pair has two prices. The bid price is the lower one, where you sell. The ask price is the higher one, where you buy. The distance between them is the bid-ask spread.
You never get an invoice for it. A buy fills at the ask, but you close at the bid. So every new position opens slightly in the red and has to win back the whole spread before it breaks even. The chart below shows that climb back to zero.
An STP broker earns by widening that gap, the same way a shop buys at a wholesale price and sells at a higher retail one. Raw quotes come in from its liquidity providers, and you see a wider bid and ask. The extra width is the broker's pay. It is collected on every trade and never shows up as a separate line on your statement.
Here is an illustrative quote, not a real rate. Say the provider offers EUR/USD at 1.10000 bid and 1.10002 ask. One pip on this pair is 0.0001, so the raw spread is 0.2 pips. Your platform shows 1.09996 and 1.10006 instead, which is a 1.0-pip spread. The broker keeps the 0.8 pips in between on every trade. In the ladder below, 0.4 pips have been added below the raw bid and 0.4 pips above the raw ask.
A market maker also earns from the spread. The difference is that it sets the whole quote itself instead of widening someone else's price.
Commission on raw-spread accounts: why lot size changes the fee
On an ECN-style account the spread stays close to raw, and you pay a fixed commission on each trade instead. Unlike a markup, the commission appears as its own line in your trade history.
Brokers usually quote it per side, per standard lot, and the rate varies from broker to broker. This lesson uses $3 per side as its example.
Both parts of that phrase matter. Per side means you pay once to open and once to close, so $3 per side comes to $6 for the full trade. A standard lot is 100,000 units of the pair's first currency, and smaller trades pay the same fraction of the fee. The chart below applies the $3 rate to three sizes. It also shows how lots and pips connect: the dollar value of one pip shrinks with the lot, so the fee stays the same size in pips.
So a raw-spread account really costs the spread plus the commission. An advert for "zero spread" only tells you about one of the two.
Swap and idle cash: charges that run on the clock
Spread and commission are charged once per trade. Swap is charged once per night. Any position still open at the daily rollover gets a financing charge or credit.
Swap reflects the interest-rate gap between the pair's two currencies, because holding the trade works like borrowing one currency to hold the other. Brokers may add their own margin to that rate. Long and short positions on the same pair usually have different swap rates, and one can be a credit while the other is a charge.
One weekday normally books three nights at once to cover the weekend. Your pair's contract specifications list which day that is, along with the current long and short rates.
There is also a quieter source of income. Some brokers earn interest on client cash that sits unused in accounts. You don't pay anything for it directly, but it adds to the broker's revenue.
Account fees to check before you deposit
Not every charge is tied to a trade. Some sit on the account itself, and some only appear under certain conditions. Look for each of these in the broker's fee schedule and order execution policy:
- Deposit fee: a charge for funding the account, which can depend on how you pay.
- Withdrawal fee: a charge for taking money out, in some cases on every withdrawal.
- Currency conversion: a deposit in a currency other than your account currency is converted at a rate with a margin built in. The same applies to profits or losses that arrive in another currency.
- Inactivity fee: a charge once the account goes a set period without any trades.
- Spread widening: on most accounts the spread floats. It tends to widen around major news and the daily rollover, when liquidity is thin, so a trade placed at those times costs more than the usual quote.
Client losses: the conflict inside the B-book
When a market maker keeps your trade, your loss is its gain and your win is its cost. That is a conflict of interest. It doesn't mean the broker cheats, but its result runs opposite to yours. The same applies if your account trades currencies as a CFD, a contract on the price rather than ownership of the currency, with the broker as the counterparty.
Regulators expect brokers to manage this conflict. The UK's FCA requires firms to have arrangements that stop such conflicts from harming clients, and to state the conflict clearly when those arrangements are not enough.
In the US, NFA rules require dealer members to show their pay on every trade confirmation. That is either the commission or fees, the markup under straight-through processing, or the mid-point spread cost for firms that don't use straight-through processing. The mid-point spread cost is the gap between the price you were filled at and the middle of the bid and ask at that moment. The drawing below measures it on the same example quote.
The middle of 1.09996 and 1.10006 is 1.10001. A buy filled at 1.10006 sits 0.5 pips above it, so 0.5 pips is the dealer's spread cost on that side of the trade.
Worked example: the same quote on a standard and a raw account
Every number in this section is an illustrative example, kept round. The standard account uses the same quote as the spread section: 0.2 pips raw, shown to you as 1.0 pip, with the broker keeping the 0.8-pip markup. The raw account passes the 0.2 pips straight through and charges commission instead. You buy 1 standard lot of EUR/USD on each:
- Standard account: 1.0-pip spread, no commission.
- Raw account: 0.2-pip spread plus $3 commission per side.
Step one is the pip value. When the US dollar is the second currency in the pair, 1 standard lot is worth 100,000 × 0.0001 = $10 per pip. Other pairs have to be converted into your account currency, so don't assume $10 on every pair.
Step two is to price every cost in dollars, then turn the total back into pips. The calculation below runs both accounts. It then adds three ordinary nights of swap on the raw account at $4 a night.
If you close the trade the same day, the raw account costs $8 and the standard account costs $10. The account with the commission is the cheaper one, even though the fee looks like an extra charge.
Here is a rule you can reuse. Divide the round-trip commission by the pip value to get it in pips: $6 ÷ $10 = 0.6 pips. The raw account is cheaper whenever that number is smaller than the spread it saves you. Here the saving is 1.0 − 0.2 = 0.8 pips, and 0.6 is less than 0.8.
Change the commission to $5 per side in the same example and the result flips. The round trip becomes $10, which is 1.0 pip. That is more than the 0.8 pips saved, so now the standard account is cheaper.
Swap raises the total without changing which account is cheaper. If both accounts charge the same $4 a night, three nights add $12 to each: $10 + $12 = $22 on the standard account and $8 + $12 = $20 on the raw one. The bars below compare all four totals.
The swap here costs more than the entry on either account. Once a trade stays open for several nights, the overnight rate matters more than the account type.
Five beginner mistakes that hand your broker extra money
Trading into news or the rollover. The spread you saw a minute ago may not be the one you get once liquidity drains. A market order fills at whatever bid or ask exists at that moment. Fix: check the live spread in the order window right before you click. Avoid opening or closing positions in the minutes around big releases and the rollover unless your plan requires it.
Believing the label. Marketing uses "STP" and "ECN" loosely. The US CFTC found that FXCM promoted itself as a conflict-free No Dealing Desk broker while hiding a financial relationship with its largest market maker from 2009 through at least 2014. Its February 2017 order required FXCM and its founding partners to pay a $7 million penalty and permanently withdraw from CFTC registration. Fix: read the order execution policy, and ask the broker in writing whether it can be the counterparty to your trades.
Forgetting swap. An afternoon trade that turns into a week-long hold picks up a charge every night. Fix: look up the long and short swap before you enter, and add the nights you expect to hold to your cost.
Setting targets too small for the cost. In the same example, a 1.0-pip cost against a 5-pip target is 1.0 ÷ 5 = 20% of the gain, gone before price moves. Fix: work out the cost in pips first and compare it with the target. If the share is too large, widen the target or skip the trade.
Trading more to win back a loss. Every trade pays the full cost again, whatever happens to it. In the same example, ten quick 1-lot trades on the standard account pay 10 × $10 = $100 before any of them gains a pip. Fix: set a daily trade limit in your plan, and track the total you pay in costs, not only the cost of each trade.
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Forex Trading for Beginners: How a Trade Works, From Pips to Risk
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