Forex broker
Family X · Account mechanics
Not to be confused with cfd broker, white label forex broker, broker.
Forex broker is a financial intermediary that provides clients with access to the foreign exchange market. It may act as an agent, matching client orders with those of other participants, or as a principal, taking the opposite side of a client's trade. The broker's revenue comes from spreads, commissions, or a combination of the two.
How a forex broker operates
A forex broker connects buyers and sellers of currencies. In an agency model, the broker passes client orders to liquidity providers such as banks or electronic communication networks (ECNs) and charges a commission. In a dealing desk model, the broker acts as the counterparty to the client's trade and earns from the spread. Many brokers use a hybrid approach. Regulatory requirements, leverage limits, and client-money protections vary by jurisdiction; for example, brokers regulated in the United States must be registered with the Commodity Futures Trading Commission (CFTC) and are subject to specific capital and reporting rules, while other countries have different regimes.
Worked example: cost of a trade
Assume a client buys 100,000 units of EUR/USD at an ask price of 1.1050 and later sells at the bid price of 1.1048. The spread is 0.0002, or 2 pips. For a standard lot (100,000 units), one pip is worth approximately $10. The spread cost is therefore 2 pips × $10 = $20. If the broker also charges a commission of $5 per lot per side, the total cost is $20 + $10 = $30.
Regulation and client protection
Forex brokers are regulated by national authorities, and the rules differ significantly across countries. In the United States, retail forex brokers must register with the CFTC and are members of the National Futures Association (NFA). In the United Kingdom, the Financial Conduct Authority (FCA) oversees forex brokers. Other jurisdictions have their own regulators, such as the Australian Securities and Investments Commission (ASIC) or the Cyprus Securities and Exchange Commission (CySEC). These regulators impose varying requirements on capital adequacy, leverage limits, and segregation of client funds. Investors should verify a broker's regulatory status and understand the protections available in their own jurisdiction.
Often confused with
- cfd broker
- A cfd broker offers contracts for difference on a wider range of underlying assets, including forex, indices, and commodities, whereas a forex broker focuses primarily on currency pairs; the visible sign is the product list: a cfd broker's platform typically shows shares, indices, and commodities alongside forex pairs.
- white label forex broker
- A white label forex broker operates under the brand and infrastructure of an existing broker, while a forex broker may be the original entity that provides the technology and licensing; the visible sign is the branding and regulatory disclosure, which often reveals the underlying broker.
- broker
- A broker is a general term for any intermediary that executes orders for clients across various asset classes, whereas a forex broker specialises in currency trading; the visible sign is the scope of instruments offered, with a general broker listing stocks, bonds, and derivatives in addition to currencies.