• The forex markets are used by traders from around the globe to trade and exchange the currencies of different countries.
• When it comes to notional value, the forex markets are considered to be the largest in the world.
• Brokers are required by forex traders to help them execute a trade by buying and selling various currencies.
• Like traders of other securities, forex traders also receive a commission for every trade that they help carry out. Sometimes, they may also charge a spread, which is the difference between the buying price (ask price) and the selling price (bid price) of a currency pair.

The foreign exchange market involves traders, investors, and speculators buying and selling different currencies. This trading is based on whether the traders and speculators think the currency will grow in value or decrease in value.
 

The forex, or foreign exchange market, is seen as a high-risk avenue. Its daily trading volumes exceed US $5 trillion or Rs. 425 trillion. However, traders have to use forex brokers to execute these trades on their behalf.
 

In this article, we will understand the role of foreign exchange brokers, the fees they charge, how forex brokers make money, and the risks associated with foreign exchange trading.
 

Also read: What is forex trading
 

Role of the foreign exchange broker

Foreign exchange brokers are involved in buying and selling currencies after taking orders and then executing these trades. They function on the OTC, or the over-the-counter, market.
 

However, unlike other financial exchanges that require strict monitoring and regulations, forex brokers are not subject to as many rules and regulations that apply to other securities. Also, the foreign exchange markets do not have any central clearing mechanism. Hence, it is important to be vigilant that the counterparty involved in the trade does not make any defaults.
 

Thus, one should always be careful when selecting a trustworthy forex broker. Always do a thorough investigation of the counterparty and their capitalisations before you get involved in any trade.
 

Also read: What is share trading

Forex brokers primarily earn through commissions or spreads. A spread is the difference between the bid price (the price at which you sell a currency) and the ask price (the price at which you buy a currency). Brokers may charge a commission per trade or earn by widening the spread. Some brokers advertise commission-free trades but may offset this by increasing the spread.
 

Spreads can be fixed or variable. A variable spread fluctuates with market conditions, such as major economic events or changes in interest rates. If market volatility increases, this variability can lead to unexpected costs. Additionally, brokers may offer different spreads for buying and selling the same currency, so it's crucial to monitor pricing closely.
 

Well-capitalised brokers with connections to major foreign exchange dealers often provide more competitive pricing, benefiting from their access to better quotes. And this is how forex brokers make money.
 

Also read: What is a Demat account 

You can trade on margin by depositing a small amount to meet the margin requirement. As a result, it becomes risky for the trader and the broker to trade in the foreign exchange market.
 

For example, in 2015, an incident occurred when the Swiss National Bank ceased supporting the Euro peg, leading to a substantial increase in the Swiss Franc's value against the Euro. This sudden change caused significant losses for unprepared traders, as they were unable to meet their margin requirements, resulting in some brokers experiencing severe financial losses or even bankruptcy.
 

Similarly, inexperienced traders can be affected by mistakes like the "fat finger" error, which contributed to a 6% drop in the British Pound in 2016.
 

Also read: Bombay Stock Exchange 

So, if you are considering trading in the forex market, you should be vigilant and proceed cautiously. There have been many incidents where foreign exchange traders were scammed due to various quick-rick schemes that promise high returns in a market that is not very effectively regulated.
 

The forex market does not have enough transparency, and, as a result, each broker uses their own method of quoting. Hence, it is imperative for people who want to enter the forex markets to ensure the broker is charging them fairly and they are getting a good deal.