Why don't brokerages charge commissions on forex trades?

Question

Why don't brokerages charge commissions for forex trading but do charge them for stock trading? Is it because the high liquidity of the forex market makes it easier to buy and sell, so brokerages don't have to work as hard to match buyers and sellers?

Answer 1

Investopedia has a section in their article about currency trading that states:

The FX market does not have commissions. Unlike exchange-based markets, FX is a principals-only market. FX firms are dealers, not brokers. This is a critical distinction that all investors must understand. Unlike brokers, dealers assume market risk by serving as a counterparty to the investor's trade. They do not charge commission; instead, they make their money through the bid-ask spread.

Principals-only means that the only parties to a transaction are agents who actively bear risk by taking one side of the transaction.

There are forex brokers who charge what's called a commission, based on the spread. Investopedia has another article about the commission structure in the forex market that states:

There are three forms of commission used by brokers in forex. Some firms offer a fixed spread, others offer a variable spread and still others charge a commission based on a percentage of the spread.

So yes, there are forex brokers who charge a commission, but this paragraph is saying mostly the same thing as the first paragraph. The brokers make their money through the bid-ask spread; how they do so varies, and sometimes they call this charge a commission, sometimes they don't.

All of the information above differs from the stock markets, however, in which

The broker takes the order to an exchange and attempts to execute it as per the customer's instructions. For providing this service, the broker is paid a commission when the customer buys and sells the tradable instrument.

The broker isn't taking a side in the trade, so he's not making money on the spread. He's performing the service of taking the order to an exchange an attempting to execute it, and for that, he charges a commission.

Answer 2

Simply because forex brokers earn money from the spread that they offer you.

Spread is the difference between buyers and sellers.

If the buy price is at 1.1000 and the sell price is at 1.1002 then the spread is 2 pips.

Now think that this broker is getting spread from its liquidity cheaper (for example 1 pip spread).

As you can understand this broker makes a profit of 1 pip for each trade you place... Now multiply 1 pip X huge volume, and then you will understand why most forex brokers don't charge commissions.