How profitable is the forex broker business model? | Forex Factory

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How profitable is the forex broker business model?

  • #1
  • First Post: Oct 29, 2010 9:42pm Oct 29, 2010 9:42pm
I recently started working at a new job (Working, but hopefully saving and building my capital so that I will eventually be able to trade full time). At this new office building there is a forex broker, this is not a major broker like the ones who advertise on forex factory or other blogs or financial news sites, in fact it looks like one of the smaller brokers. I won't reveal the name because, its not necessarily fair to the company or forex factory (though I may reveal later on, the reviews on forex peace army trash the place). From the looks of it, it seems like a 20-30 person operation. New York office space so its not cheap, taxes and expenses too.

Anyway, thats a short background. I was recently thinking how many clients and how much money needs to be traded by those clients for this business to be profitable?

Its would seem to me that at a certain point its hard to find more suckers(95% of traders) to just lose their money. Assuming from the site that this place uses a dealing desk they are probably killing traders. I have also seen some things on FPA and their own site mentioning a minimum stop loss, that looks like they are practically stop hunting suckers accounts.

So how many clients (suckers or pros), trades, and money do you guys think needs to be traded for a broker like this to make money?

What about a legitimate broker?

I have my estimates, post yours and we'll compare.
  • #2
  • Oct 30, 2010 7:05am Oct 30, 2010 7:05am
I was fortunate enough to sit through hours of negotiations between a brokerage firm and a potential investor they were trying to bring on board for business expansion. Without the complexities of the hard figures, it turns out (for that brokerage at least) that on average, the broker makes the same amount that each client deposits within 6-9 months.

So if person A deposits $100,000, the broker will earn $100,000 from that 1 client within 6-9 months so long as the client is actively trading. That doesn't mean they take the clients $100K outright, but simply that they earn that much from commissions/spreads etc plus a few dubious activities that are commonplace amongst dealing desk brokers.

Obviously the amounts & time scale vary, but that was certainly the basic premise that they used for calculating profits. Whatever amount of money they had in client funds, they would expect to earn that same amount every 6-9 months. This was a small brokerage that most on here won't have heard of, but it was certainly VERY profitable. A lot more profitable than actually trading!
  • #3
  • Oct 30, 2010 7:52am Oct 30, 2010 7:52am
the holy grail of trading is being a broker
  • #4
  • Oct 30, 2010 9:34am Oct 30, 2010 9:34am
Quoting flotsom
I was fortunate enough to sit through hours of negotiations between a brokerage firm and a potential investor they were trying to bring on board for business expansion. Without the complexities of the hard figures, it turns out (for that brokerage at least) that on average, the broker makes the same amount that each client deposits within 6-9 months.

So if person A deposits $100,000, the broker will earn $100,000 from that 1 client within 6-9 months so long as the client is actively trading. That doesn't mean they take the clients $100K outright,...
Thats interesting, was it just forex? or futures, etc.? Dealing desk, straight through, or hedging?

I was calculating from the point of view of a trade of $1000 makes 20-40 cents on the bid ask. How many trades/clients would need to be made/enrolled to be profitable.


Here is a very questionable tidbit from their website:

Quote
Commissions

Commission is a one time charge for opening a position. _________ charges just 40 cents for every $1,000 traded (or 1,000 pounds; or 1,000 Euro). Forex Club returns commission charges to you automatically and instantaneously on non-profitable trades.

I have never seen this from a retail forex broker before. On top of that giving back commissions if you lose a trade. This isn't including bid/ask spreads. Also this is a dealing desk broker, they are making a killing if they are attracting enough clients. If the above statement doesn't signal scam to you, nothing will.
  • #5
  • Oct 30, 2010 10:36am Oct 30, 2010 10:36am
Quoting thesnacker

Here is a very questionable tidbit from their website:



I have never seen this from a retail forex broker before. On top of that giving back commissions if you lose a trade. This isn't including bid/ask spreads. Also this is a dealing desk broker, they are making a killing if they are attracting enough clients. If the above statement doesn't signal scam to you, nothing will.
The 40c for 1 microlot is the rough equivilent of a 4 pip spread, not going into exotic pairs. For a mini lot ($1 per pip this would equal $4) which isnt neccessarily attractive considering there are spreads of .9 on EUR/USD and USD/JPY pairs which equates to around 90c for a mini lot (10k).

They also give you back that measly, but somewhat outrageous "spread/commission" in the event that you loose because they would more than likely hold the other side of your trade equation. You buy, they sell, you loose, they win but to cheer you up heres that commission you pay.

If this was true then in the event that you started winning on there opposite dealings you might find yourself and your account at the mercy of some shody dealing tricks. I cannot speak for sure and can only go off what I have read and heard as I havent traded with small broker firms but giving back commissions when you loose just sounds a little out of place...
  • #6
  • Oct 30, 2010 11:57am Oct 30, 2010 11:57am
Let's say the spread is 0.9 pips per pair.

For every 100,000, that's a $9 commission round trip.

Let's further say the firm does something to the tune of 100M in average daily volume. Assuming there are 200 trading days in a year, that's 1.8M in revenue. That seems a feasible amount to run the operations of a brokerage.
  • #7
  • Last Post: Aug 20, 2015 1:20am Aug 20, 2015 1:20am
Quoting Ronald Raygun
Let's say the spread is 0.9 pips per pair. For every 100,000, that's a $9 commission round trip. Let's further say the firm does something to the tune of 100M in average daily volume. Assuming there are 200 trading days in a year, that's 1.8M in revenue. That seems a feasible amount to run the operations of a brokerage.
guys is it like that to know how mutch a broker earn? i mean if is like that FXCM earns something like 9B $ with an everage montly trading volume of 500B $.hope you can help me guys
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