Hi
I’m curious I see many new brokers come a go by doing my research. How do brokers pay their clients?
Like for example if they are new less than a year and are getting alot of customers and each clients make earns. Or if a few clients makes over $1000 per pip. Where do they get the money from to pay them? Is it money from losing clients? How?
The sad reality is most traders lose, some brokers don’t pass the trade on and bank the losing trade, other brokers make their money from the fees, but basically they make their money from new traders, it’s quite a cynical business really.
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You know that you have two main types of brokers - Dealing Desk (DD) brokers and Non-Dealing Desk (NDD, for short) brokers, right?
The dealing desk brokers are your counterparty in a trade. So, when you lose they profit and vice versa.
In this case, the broker will pay you your winnings. However, considering that the majority of traders are losing it’s not a problem for the DD broker to pay you whatever you are entitled to. Unless they are a bucketshop/scam.
With a NDD broker your trades are sent out to a liquidity pool(LP) with which the broker is working. They get paid a commission on your opening and closing of orders. While you as a trader get your money from the LP. When you lose - the counterparty in your trade wins and so on. In this case, the broker does not pay anything to you. You just have an account with them and use them as the service provider to trade.
Think of it as a trade on a selling website (like gumtree, craigslist or ebay). The website is the broker/middleman. They do not trade against you, they just provide you with the service and get paid a commission for you using that service.
You open an account, and start selling - they buyer pays you and the money is transferred to your account. Meaning you don’t get paid by the middleman, but by the trader on the opposite side of the trade.
I hope this explains it.
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So for desk brokers they can freeze your account if your making too much profits and not pay right?
This can also happens to regulated brokers (eg Forex dot com)?
Every broker can freeze your account if you’re doing something that’s not legal or trying to exploit their systems.
Like for example, if a broker does not allow EAs and you still use one - they can freeze/suspend/close your account at their own discretion.
It’s up to you to know the rules and comply with them.
Just get familiar with the broker’s terms and conditions and make sure to ask their support if something is not clear.
Pro tip: Contact them via email or any other type of communication which you can easily log/archive/save, so that you have the conversations documented in case they tell you one thing is fine and then penalize you for it.
[quote=“bradley79, post:3, topic:169551”]
How do brokers pay their clients?
You know that you have two main types of brokers - Dealing Desk (DD) brokers and Non-Dealing Desk (NDD, for short) brokers, right?
The dealing desk brokers are your counterparty in a trade. So, when you lose they profit and vice versa.
In this case, the broker will pay you your winnings. However, considering that the majority of traders are losing it’s not a problem for the DD broker to pay you whatever you are entitled to. Unless they are a bucketshop/scam.
With a NDD broker your trades are sent out to a liquidity pool(LP) with which the broker is working. They get paid a commission on your opening and closing of orders. While you as a trader get your money from the LP. When you lose - the counterparty in your trade wins and so on. In this case, the broker does not pay anything to you. You just have an account with them and use them as the service provider to trade.
Think of it as a trade on a selling website (like gumtree, craigslist or ebay). The website is the broker/middleman. They do not trade against you, they just provide you with the service and get paid a commission for you using that service.
You open an account, and start selling - they buyer pays you and the money is transferred to your account. Meaning you don’t get paid by the middleman, but by the trader on the opposite side of the trade.
I hope this explains it.
[/quote]
Not quite B, but good try. Having worked in sell side and buy side spot currency I believe I can clear this up a bit.
First, all RETAIL brokers in Spot Currency or Forex, are Market Makers and an Exchange rolled into one. What does this mean, well they “Make a Market”, in that they have enough liquidity of the pairs they carry to allow “Trades/Transactions” to take place on their hub. Now about being an exchange if you remember your Series 3 study, the part about futures exchanges, you will remember that the futures exchange acts as a buyer to all sellers and a seller to all buyers, they can also act to facilitate access to certain other clearing firms for transactions. But lets focus on the first part. In the majority of cases the retail client will be executing against the Market Maker/Dealer, and not someone else, unless there happens to be another retail trader on the opposite side that has the same price and size. That is how it works in retail, so obviously if you get a dealer that is regulated you are much better off.
Now as far as Dealing desk vs Non Dealing desk, the reality is that dealing desks are basically antiquated by now, however they still can be found, and even hooked to ECNs. (Electronic Communications Network). So first a little background on dealing desks, it used to be you placed an order and the desk manually filled it, if they did not have the liquidity at the size and price you wanted, you got re-quoted. They worked like a “Specialist” on the NYSE floor.
Along came ECNs, where you didn’t use a phone or pager anymore, but you were on an electronic network. As we all know the NASDAQ led the way with this. But the ECN in Forex has little to do with execution speed, who you execute against etc. In fact, as I stated above there are Dealers/Market Makers that use a hybrid ECN/Dealing Desk model, not that common, but they are out there. Obviously you stand more of a chance at getting a re-quote in that system then in an STP (Straight Through Processing) model.
So at any rate an ECN does not guarantee you will not get re quotes, if the dealer does not have the liquidity at the price you want, you will get re-quoted. Now, I will tell you this, I have been on 5 or 6 retail platforms, traded during high and low volume and never been re-quoted, slipped on a market order, yes, in high Vol, but never re-quoted. But it all depends on the quality of the Dealer/Market Maker, do they have enough liquidity to fill your orders?
As far as how do they make money, if you are short, and you cover, don’t think that the D/MM Purchased those units at the price you purchased them at, they buy these units in bulk at a deep discount, also they charge you a spread, rollover, fee, and they get rebates from their prime broker for adding liquidity, or “Moving” units.
Oh, how do they offset the trade? in a regulated market D/MMs have to offset the trades on another hub that is not connected to the market they are making, usually done automatically through a prime broker. So no, in a regulated market they “should” not be trading against you.
The Ever Informed VIPER
1 Like
Not so @clever1
While we won’t speak for other brokers, FOREX.com is regulated by government bodies in eight major financial centers around the world:
- Unites States (Commodity Futures Trading Commission and National Futures Association)
- United Kingdom (Financial Conduct Authority)
- Japan (Financial Services Agency)
- Hong Kong (Securities and Futures Commission)
- Australian Securities and Investment Commission
- Cayman Islands Monetary Authority
- Investment Industry Regulatory Organisation of Canada
- Monetary Authority of Singapore
The global supervisory bodies regulate forex by setting standards which all brokers under their jurisdiction must comply with. These standards include being registered and licensed with the regulatory body, undergoing regular audits, communicating certain changes of service to their clients, and more. This helps ensure that currency trading is ethical and fair for all involved.
For example, in the US, forex brokers are regulated by the CFTC and NFA. The rules governing how we must execute client orders, and then report the time and price of each and every one of these transactions to the regulators are too many to list here, but below is an excerpt from just one rule to give you an idea of the protections in place for forex traders:
NFA Compliance Rule 2-36 imposes a number of obligations on a Forex Dealer Member (FDM) regarding the manner in which it handles customer forex transactions. Compliance Rule 2-36(b)(1) prohibits an FDM engaging in a forex transaction from cheating, defrauding, or deceiving or attempting to cheat, defraud or deceive any other person. NFA Compliance Rule 2-36(b)(4) prohibits an FDM from engaging in any manipulative acts or practices regarding the price of any foreign currency or forex transaction. Also, NFA Compliance Rule 2-36© requires an FDM to observe high standards of commercial honor and just and equitable principles of trade in the conduct of its forex business. NFA’s Board of Directors (Board) adopted these provisions to ensure that an FDM acts honestly, fairly and in the best interests of its customers.
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They can refuse you as a customer yes. Same as with bookies.
Well to make this short I’ve seen guys making $200 per pips ranging from 700 to 1500 pips per week and imagine there are about 500 of these guys or maybe more. I figure how the heck do brokers pay this.
But anyway thanks guys for a bit of info this can really help.
Hi @clever1,
Retail forex brokers can manage the risk on the other side of your trades in one of three ways, and each method has its pros and cons. We discuss those three options in this post: Who is the counterparty in an exchange?
It also helps to understand what percentage of traders are profitable generally. We discuss those statistics in this post: 90/90/90 principle
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Depends on the case. Here, the brokers’ Terms and Conditions are important because usually this could happen if the broker or the LP considers certain trading strategy as market abuse. When this happens, the account is freezed and no profits will be paid. That is why, it is recommended to carefully review this policy as for each broker might be different.