Every day, some new Forex brokers start working. Is it really such a profitable business that is attracting so many entrepreneurs to run a Forex brokerage firm? How much money can a Forex brokerage make?
The short answer to this question is that a Forex brokerage can make a lot of money. However, it is not as easy as most people think. It is a challenging business and needs a lot of things to be managed and promote properly. It is not just a website, a sign up form and a trading platform. There is a lot more behind the scene.
So how much money Forex brokers make?
As you know, there are two kinds of Forex brokers: Market Maker and ECN/STP
The income of these two kinds of brokers are completely different from each other.
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Market Maker Brokers
A market maker broker doesn’t route the traders orders to the real currency market. It holds the trades with itself. That is why they call it market maker, because it is the broker that makes the market. So if you lose when trading through a market maker broker, indeed you are losing to the broker and the money you lose belongs to him. If you win, it is the broker who has to pay the profit you have made.
Therefore, traders losses is the main source of income for a market maker broker, because over 95% of the retail traders always lose and wipe out their accounts at least a few times before they give up or become profitable finally. So, a market maker broker makes a lot of money through the clients losses.
Market Maker brokers also charge spread and swap which is another source of income.
The other side of the story is the costs that running and managing a Forex brokerage has. A brokerage company needs a few teams for the accounting, compliance, tech, sales and marketing. For each 10,000 clients, they need at least a few account managers who take care of the clients deposit and withdrawal requests. They need a team to manage the platforms and take care of the technical issues. Also, it is not free to use the platform. It costs a $100,000 one time fee and $1,500 monthly fee to have an MT4 license. There are so many other apps and plugins that they might need to add.
If they want to be regulated, they will have to spend a lot of money and also deposit a lot more money in the banks as the guarantee and collateral. Based on the country they want to be regulated in, it can cost them from thousands to millions of dollars. Besides, they have to pay the compliance team constantly to follow up with the regulatory organizations.
When they manage to run such a complicated system, still one big problem is left. They have no clients. They have to advertise and attract people to sign up for an account. Their success depends on this. If they can promote the business and attract clients on a daily basis, they can cover the expenses, and chance are they make a lot of money. They have to keep the clients happy and satisfied. They have to offer an affiliate program that enables other webmasters to promote the brokerage and be compensated by the broker for each trader they refer.
Market maker brokers need another team which is called dealing desk. They have to sit at the computers and monitor the traders positions all the time. They have to be traders themselves. When they see a trader is doing good and goes for a position which can be potentially profitable, they take the same position with an ECN/STP broker, bank or liquidity provider, to make profit and recover the loss they might have to handle because of the profit that the trader will make (because the trader profit is their loss).
So, it is not an easy task to run and manage a brokerage. If they resist and keep on offering a good business, they will become popular and can make a lot of money. Learn more about market maker brokers: Market Maker Brokers: Is It Bad or Illegal to Be a Market Maker?
The work is much harder and a lot more complicated for ECN/STP brokers, because they don’t make any money through the traders losses, which is a great source of income for the broker. They route the traders orders to the banks, also known as liquidity providers, and charge a small fee which is called commission. Commission is the only legal and legitimate source of income for an ECN/STP broker, which is around $10-20 for each standard lot.
Although the ECN/STP brokers income is much lower than the market maker brokers, and their work can be a lot more complicated technically, they have a safer business, because they will not be affected by profitable traders who make money constantly.
Some ECN/STP brokers use some other ways to make more money. For example, they add markups to the orders. Markups are hidden to the traders, and just slip the price when they want to get in and out of the markets. For example, when a broker adds a 2 pips markup to the entry prices, then the client will enter the market with a 2 pips higher price in case of long positions, or 2 pips lower price in case of short positions. This 2 pips will be the broker’s profit also: 6 Ways Forex Brokers Cheat You
ECN/STP brokers don’t have to have a dealing desk. They just need to keep the servers up and running and allow the clients to take positions without any problems. So they don’t have to pay for a dealing desk.
Nowadays, most ECN/STP brokers have a dealing desk or market maker system too, because they want to make money from the traders losses like what market maker brokers do. When they see over 95% of the traders lose, they see no point to route their orders to the liquidity providers. They place the profitable traders accounts on the ECN/STP, and losing traders accounts on the dealing desk system. They know that most of those who open a small account, are novice traders who don’t know how to trade and make money, and will wipe out their accounts finally.
There is nothing wrong with this as long as the broker doesn’t do anything to make the traders lose faster, easier and more. It is not the broker’s fault when a trader loses based on his/her own mistake. When they see that someone is making money, they can easily move his account to the ECN/STP system and leave him alone to make his profit. But they are not allowed to do something to make him lose. Also, having hidden fees like markups is a fraud.
An ECN/STP broker can make a reasonable amount of money if he can have a reasonable number of clients. Unlike the market maker brokers, they don’t have to have too many employees, so their expenses is much lower. Also, they can hire a third party company and pay them a flat monthly fee to take care of the platforms servers. This will save a lot more money for them. They can only focus on marketing and taking care of the clients deposit and withdrawal requests.
Although it is not clear how much money each Forex broker makes every year, it looks like a profitable business for those who know how to start and promote it, and those have enough money to survive and promote the company as long as they have not become able to cover their expenses yet.
In spite of this, it looks like a too challenging business. Most people who know about trading, prefer to be a good trader and make a reasonable amount of profit every year, rather than to be a Forex broker who has to deal with too many problems every day.