Forex brokers are great mediatores, aren’t they? They provide you online access to the vast market of foreign exchange. Thanks to them, you can join the biggest capital market in the world and trade with a very small amount of investment. Commission-free trades, leverage, super tight spreads compared to banks and foreign exchange offices. All those are awesome advantages. You know that everything comes at a cost.
Forex brokers are not in this business for humanitarian causes. They have to make money so that they can survive and keep delivering you those great services. So how does your retail forex broker make money? And why are there so many retail forex brokers out there?
Let me first tell you that forex brokers are generally divided into two different categories.
The first category of the forex brokers is popularly known as “market-maker” and it is believed to be the largest group. Market makers trade in the exact opposite direction of your trade. This implies that those type of brokers make money when clients (you) lose and lose when clients profit. Since majority of forex traders lose money (sorry guys, this is the truth) because of their inexperience and emotional indiscipline, their losses go into the pockets of the market-maker. If the market makers maintain a high number of newbie traders on its platform, they will certainly make a good amount of money on their clients’ losses.
ECN Forex Brokers
The second category is called an Electronic Communication Network (ECN) broker. This type of brokers allows you access to the global liquidity pool which are compromised by regulated financial institutions. Your orders are automatically matched and executed at the best price available and the fasted execution time.
Since the broker earns commission fees on every transaction, the more you trade more they profit. Therefore this trading model encourages ECN brokers not to trade against clients or manipulate the trading conditions contrary to the brokers which are B-booking clients.
Okay, lets face it guys. Most forex traders end up losing a lot of money… Some statistics say only %5 of forex traders profit. This makes the market-maker forex brokers model way more profitable than ECN or STP forex brokers. This is why there are by far more market makers than ECN brokers. Okay, hang on now. I am giving you the tip of your lifetime. The best way to detect a market maker forex broker is by spreads and commissions. If a forex broker is offering very very low spread (lower than 0.5 pips) and not charging you any commission, that broker is a market maker with a 90% likelihood.
Beware the Wrongdoings of Scam Forex Brokers
As I mentioned, market makers profit from customer’s losses. So the more you lose, the more they earn. Tell me pals, how could a market maker maximize its profit? By providing its clients with unfavorable trading conditions so that the clients would lose money. They make it exceptionally difficult for their clients to profit by by widening spreads, delay orders and put out stops.
This intrinsic conflict of interest between forex traders and market maker forex brokers lies at the very heart of what determines a trader to be profitable or not. If a forex broker is overseen and regulated by a strict and reputable regulator, it is less likely that they would attempt to get involved into anti-client acts. This is the reason why I am emphasizing regulation and regulators in my every single blog post. I should add that none of the top five forex brokers in my list is a market maker.