Forex brokers make money through commissions, spreads and other commission charges, and their hedging or B-book activities.
Each time a client trades with a broker, they pay the bid-offer spread – the difference between the price that you can sell an instrument at and the price at which you can buy that instrument.
You cross this spread when you open a trade and cross it again when you close it. Spreads in FX trading are usually pretty small or tight. However, FX trading is leveraged and traders frequently move in and out of positions, so those spread charges can soon mount up.
On top of, and sometimes instead of the bid-offer, spread brokers will charge a commission per deal. This could be a flat fee or a small percentage of the total value of the trade. Once again, the broker is relying on trading volume to make their money for them.
The other way that brokers make money is through their hedging activities. FX brokers can choose how they route your orders. For example, they may choose not to route your order to the market and their liquidity providers. They will match their pricing but will execute against their B or principle book instead. That means they are taking the other side of the client’s trade.
In this situation, the broker is opposing their client and makes money if their client loses. However, the broker loses money if the client makes money on the trade.
In the past, this has created concerns about conflicts of interest. These days, such hedging activities are usually automated, with brokers that take on client risk, doing so only up to a certain monetary limit, before they offset their positions in the market.
It’s always worth having a conversation with your broker about their execution policy and how and where their orders are executed and routed, and they should be happy to discuss this with you.