This is How Do Forex Broker Websites Make Money – They pay hundreds of dollars in marketing costs per new user, who have a minimum deposit of something very small (like $100). And it’s not like a casino where the house takes a big edge on every bet. Most sites advertise no commissions on trades and low bid/ask spreads. So how are these websites able to make enough money to cover their huge marketing costs?….
There are other forex entities out there that thrive off of advertising or gurus that have books, videos, and training courses to sell the unwary. Granted, there’s nothing wrong with that if they are offering a quality product, but many of them do not.
An ethical broker will make their money off of the spread on each transaction executed by their traders. For some that will mean a couple dollars; for others it may be hundreds or thousands. It really depends on the number of traders that a broker is operating for.
Transactions on their end are much cheaper because many transactions between financial institutions are much cheaper than what goes out to the public.
You can find a similar methodology in a brick and mortar business buying items wholesale to sell to consumers. The difference in price allows them to make their money and pay their bills.
The sites that advertise no commission generate their revenue in a different way. It’s true that they do not charge a commission- these sites instead just charge a single flat rate for participation through their brokerage.
This option is typically not for retail spot traders though. It’s more intended for trading houses or entities that may have many people making many trades over a specific course of time. It’s typically more cost effective for a business than to pay a commission on each of their trades.
Also, your numbers are probably a bit off. Hundreds of dollars in marketing per sign up would make it impossible for the business to function. Considering these entities do their business and advertising online- it’s not like that just disappears into thin air. The marketing investment is usually working for that entity for a long time into the future.
And $100 minimum deposit is probably less common than you think. It’s more commonly $250 or $500 from what I’ve seen. Not that it’s a huge difference, but when you couple that with continued marketing benefits and whatever other strategies may bring in new traders it can add up.
Unscrupulous outfits may hedge against their traders; betting on them to lose. This isn’t an ethical practice and a number of brokers against the practice will normally promote their stance against it loudly. It can work for the unethical player but many traders are not comfortable (and should not be comfortable) with their broker trading against them.
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Hello,
Forex brokers can make money in a few ways:
1. Commissions/fees. Although most forex brokers don’t charge commission they do take it through the spread. Forex brokers usually widen up the spreads a bit so that there is a small fee hidden in the deal.
Some of the brokers do charge the ordinary commissions we know as well.
2. Interest. When you open a position using a leverage you are actually borrowing money from the broker and you will pay an interest on, for most of the time. The broker can also charge interest for the rollover of the overnight position.
3. Profiting from your loss. This can happend only in Market Maker brokers which occasionally take the opposite side of the trader and will profit an equal amount to the trader loss.
Online FX trading operators act either as “principal” or “agent” in their transactions with retail customers.
In the “principal” model, the FX operators are counterparties to client transactions – essentially taking the other side of the trade – and either do not hedge the resulting risk, or hedge on an as-needed basis once certain overall risk limits have been reached.
“principal” revenue comes from: client losses, pricing spreads, funding spreads
In the “agency” model, client transactions are automatically passed down to large liquidity providers like Deutsche, Citi, BOA, Barclays and similar. This is sometimes referred to as STP or straight-through-processing. The “agency” model is often described as the “no dealing desk” model.
“agency” revenue comes from: pricing spreads / commissions, funding spreads
In recent months, we’ve witnessed the IPO’s of companies operating under both the “principal” (Gain Capital) as well as the “agency” (FXCM) business models. [note: FXCM initially operated under the “principal” model as well]
There also exist a large number of often lightly regulated or unregulated second and third tier “principal” forex operators that are based in offshore jurisdictions. They undertake online advertising-based client acquisition strategies, supported by affiliate and similar revenue-sharing arrangements. The rates of gearing they offer are typically above-market in order to increase the likelihood that retail clients with small deposits and highly-leveraged trades would be stopped out even under typical levels of market volatility. These types of operators over time capture on average 80% of total client deposits as revenue (and are similar in this respect to the online casino industry) and are thus able to support the high levels of online marketing expenditure you are seeing.