Where is Commision in Forex Trading
November 18, 2016
Running a brokerage business is, like any other business, subject to incomes and expenses. While most of the expenses are related to keeping up with the technology changes and to advertising, when it comes to the incomes a broker has, things are pretty simple.
Either through spreads or commissions, or both, the forex broker earns for the services provided. It depends very much on the type of the brokerage business (ECN, STP, White Label or not, etc.) when it comes to setting up the spreads and commissions to charge clients.
A spread is a difference between the ask and the bid price and the bigger the spread, the costlier the broker is. Brokers are striving to have lower spreads to attract customers, but this depends very much on the type of a trading account one opts for.
With commissions, things are a bit more complicated both on the broker’s side, as well as on the customer’s one.
What are Forex Commissions?
From a broker’s point of view, a commission is a fixed sum or fee that the broker charges a trading account by the moment a trade is opened. This way, the commission is a fixed fee applied to any transaction.
However, this fee may be variable as well and can depend on the volume that is traded. In this case, the commission is tied to the size of the trade. As a rule of thumb, the bigger the trading volume, the bigger the commission is. This means that, for example, the commission the broker charges is percentage wise, and therefore will be bigger on a one lot trade when compared with a 0.1 lot one.
In this example, the commission is a relative fee and it is the most common way among brokers that charge a commission. The higher the trading volume, the higher the commission to be charged.
Some brokers are using different commission schemes to make traders more active. This refers to a specific volume traded by clients in a specific amount of time.
This means the broker will charge different commissions based on the volume traded. It means that the more active the trader is, the lower the commission to be paid is, even for a trade of the same size.
For example, let’s say that the broker charges 1$/0.1 lots of volume traded, and in a month the trader’s total volume was 250 lots. This means the broker earned from this trader $2500.
To stimulate the trader to be more active, the broker sets targets for lower commissions based on the volume traded. Such targets are ranges that show how the commission is changing based on the volume.
Using the example above, from 0-250 lots the commission is 1$/0.1 lots. The next interval can be 0.9$/0.1 lots for a monthly trading volume between 250 and 500 lots. And so on.
The idea with the examples above is that commissions can be used both as an incentive to make traders more active and as a classical tool part of the overall income scheme. Retail traders are rarely considering the commission charges when opening a trading account, which is a mistake.
Trading should be viewed as a long-term commitment and this implies a closer look at the commission to be paid. The lower the commissions, the better from a trader’s perspective.
As from a broker’s point of view, the best way is to keep commissions variable, both based on the actual trading volume on each trade as well as for the cumulated traded volume in a specific period.