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The foreign exchange market does not levy any fee or commission. That’s one of the good things about the world’s largest financial market. If that is the case, how do forex brokers actually earn money?

Brokers are compensated through spread, the difference between the bid price and ask price. These market makers use three types of commissions: fixed spread, variable spread, and a commission based on a percentage of the spread.

For instance, the screen shows GBP/USD is 1.1094 - 1.1098. That represents a spread of four pips. If the broker charges a fixed spread of 4 pips, it will always be 3 pips regardless of the prevailing market volatility. Or, if he offers a variable spread, it can be as low as 1.5 pips or as high as 5 pips. Certain brokers charge a minimal commission because they endorse your order to a huge dealer with whom they have a relationship. On that note, you can receive a very small spread which larger market participants could otherwise obtain.

What will be the best option? Numerous other factors are also taken into account when it comes to the compensation of these brokers.

Not all brokers can create a market equally. Since the forex market is an over-the-counter one, banks have connections with other banks and retail online brokers (or price aggregators), depending on their capitalization and creditworthiness. What links them is a credit agreement between market participant, but not backed by any guarantor or exchange. In most instances, the higher-volume forex traders are quoted tighter rates.

Some have a strong relation with several banks and can aggregate up their quotes, the firm will be able to render average bid and ask prices to its retail traders. Dealers, even if they slightly increase the spread for profit purposes, can still offer a much competitive spread to you.

If a broker can guarantee liquidity at appealing spreads, better. Conversely, traders may opt to pay a fixed spread if they can capitalize on at the money executions each time you trade. But you do not want to deal with slippage, right?

For a commission broker, if traders should give a small commission varies on what the entity can provide. For example, the broker charges a small commission, normally two-tenths of one pip (or approximately $3 per 100,000 trade). In exchange, they will provide access to a superior software platform or other benefits. Sounds a good deal, right?

When you trade forex, you pay the spread and the brokers cash on it. To maximize your trading experience, choose a broker with substantial amount of capital and firm relations with big foreign exchange banks.