How do Forex Brokers Make Money?
Brokers make money in one of two ways.
The first way is adding spreads and commissions onto your trade to make a profit.
The other way a broker makes a profit is to ‘make a market' and profit from you losing. In other words; the market maker broker takes the other side of your position and profits from your loss.
Difference Between Market Maker, ECN / STP Brokers
ECN and STP brokers make money when they charge you either a commission or the spread for each trade you place.
They are taking your trade and it is being automatically processed through to their liquidity providers such as banks.
The group of banks sends back a price, the broker adds a spread onto the price they offer to you and the broker profits from the spread they charge to you as the trader.
The No Dealing Desk model has three types of brokers:
- STP – Straight-Through Processing
- ECN- Electronic Communication Network
- DMA – Direct Market Access
Most retail traders prefer to trade with the ECN (Electronic Communication Network) model broker.
The ECN model of trading technology allows traders to quickly and efficiently enter orders against others in the markets who are sending in competing bids and offers. The system then sorts the orders and your trade is completed with transparency.
The market maker broker is not operating in the same way as an ECN / STP broker.
The market maker is taking your order as the trader and trying to match it with their book of orders. The market maker is making the market and creating the quotes you are given. They are able to see your targets and also your stop loss.
The market maker is the counterparty to your trade. If you win, they lose. If you lose, they win. There is a conflict of interest.
If you choose to go down the market maker broker path, then do a lot of research to ensure you are trading with an incredibly reputable broker.
What Broker Model Should You Choose?
It is up to each individual trader which broker they go with, but there are some incredibly crucial factors that you need to consider when choosing a broker.
There are also some basic standards that your broker should meet and these are discussed in the trading lesson; Recommended Forex Broker & Charts which goes through exactly what your broker should provide.