How do broker's make money??

The way I understand it, we are buying from the dealer or selling to the dealer? I know they make money on the spread, but do they make money on losing trades and winning trades? You hear that dealers do offset and that they don't offset.

What if somebody is trading 10 or 20 lots and make 100 pips? If the trader can do that over 50% of the time with smaller losing trades, to me that's alot of money.

So, How do dealers make money?

Thanks,
Drew

the broker does not take the other side of your position. when your order for 20 lots comes through, they offset that position in the interbank currency market. they make money from the spread, as you are paying a 3 pips spread, whereas they are paying less than a pip in the interbank market.

this is how brokers are supposed make money. some of them "bucket" trades, meaning they take the other side. this is shady business as it causes a conflict of interest, and in our unregulated world of retail forex this happens all too often.

forex brokers are also make a great deal of money with those "interest payments". put simply, when they roll over the positions everyday they charge you more interest than they pay, and they pay you less interest than they make. their justification for this is that they are loaning you money via trading leverage.

Thanks Merlin!!

I have asked a lot of brokers how do they make money and I have received various answers mostly evasive answers I think. One broker told me that (apart from other ways) they trade just like me and they win and lose just like me!

I sometimes take lots of trades each day - in the order of 20-100 individual trades per day. They hate it! The reason is that they do not have time to offset the trades (see Merlin's answer.) They eventually shut me down by giving me a hard time by putting me on dealer execution and giving me wide spreads. I have had as many as 40 pip spreads on Euro. So clearly, they can't make money from me trading in and out quickly.

One broker told me that they do not make any money on short trades. About 90% of my quick trades are shorts so he doesn't want me around. I could not get a sensible answer from him regarding the reason here! Perhaps someone could enlighten me here?

Interest is surely a big earner for them. Ponder why FXsolutions actually pays you money to put more money in your account! They surely use your money to make money. A friend of mine told me that FXCM pays daily interest at the NY close for all profits on long trades. This doesn't sound very exciting until you realise how much interest! It varies by the currency and by the day. He has received as much as 98% interest on his profit for one day and frequently gets 20%. Losses on longs will cost you the same in reverse! Now I have not verified this personally so take it as hearsay at the moment but he is a trader who trades 50-70 lots per trade and I have known him for about six months and find him credible so far!

Can someone explain what it means to bucket trades and how profit is generated from bucketing trades? Is it still done today?

I've come across different defiintions for what it means.
http://www.investopedia.com/terms/b/bucketshop.asp

I've just read "Reminiscences of a Stock Operator". In the book, the main character traded in "Bucket Shops" as a youth. Eventually, he was barred from trading in all bucket shops because he usually won. I don't understand how these bucket shops lost money when traders won and make money when traders lose.
How different is the practice of bucketing trades today different than what is depicted in "Reminiscences of a Stock Operator"?

Thanks to Merlin for recommending this book. I laughed a lot.

Thanks all

that is really a great book, maybe the best i have ever read financial or otherwise. the bucket shops of yesterday are the same as today. to bucket a trade means to take the other side instead of passing it through to the market. you asked why the bucketshops didnt want Larry to trade...think about it...if someone buckets your trade, if you win they lose! thats the "conflict of interest" i was speaking about. if a broker has some control over your positions, and they are also trading against you, we then have an unfair playing feild.

Oanda clearly tells you,in the costumer agreement, they might take the other side of your trade.

I dont understand what difference it makes who takes the other side. If you are a technician using your brokers feed, shouldn't any offsetting of positions they take be discounted like any other traders. Plus, one doesn't always win when the other loses and vis versa.

Not true. Commodity trading is a zero sum game, meaning that for every winner there is a loser. And sometimes there are two losers because of commissions.

The above issues touch upon the matter of "Dealing Desk", which makes sensitve brokers set their hair on fire, and newbies stumble in confusion like deer in the headlights. We can pretend that there is a real interbank market if we wish. The truth is that many orders never leave a broker's own dealing desk.