How Brokers Make Money

The spread

The broker buys from its liquidity provider at one price and sells to you at a slightly worse one. The difference, or the mark-up on the raw spread, is its margin on the trade. On a standard account this is typically the whole of the broker's fee, and it is paid whether or not your trade wins.

Commissions

Raw-spread or ECN accounts pass the market spread through almost untouched and charge a fixed commission per lot instead, commonly between 3 and 3.5 dollars per side per standard lot. For active traders the total cost is usually lower than a marked-up spread, which is why the account type exists.

Financing

Holding a leveraged position overnight means the broker is effectively funding it, and the swap it charges includes the interest-rate difference between the two currencies plus, at most brokers, a mark-up. Swap-free accounts remove this but often replace it with a fixed daily fee after a grace period.

Client losses

A broker that does not hedge a client's trade is on the other side of it: when the client loses, the broker gains. This is the B-book model, and most retail traders lose, so it is profitable. It is legal and common, and it does not by itself mean the broker manipulates prices, but it does create an obvious conflict that a well-regulated broker manages through rules on execution and pricing. The next module explains the models in detail.

What this tells you

• A spread-only broker earns most from frequent traders, so its marketing pushes activity.
• A commission broker earns from volume and has less reason to care whether you win.
• A B-book broker earns when you lose; regulation is what keeps that incentive honest.
• Every broker earns from overnight positions, so check swaps before holding for days.

Key takeaways

• Spread, commission, swap and client losses are the four revenue sources.
• Which one dominates depends on the broker's execution model.
• Each source creates an incentive, and regulation is the check on the conflicted ones.