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For example, you open a position: you buy EUR with some amount of GBP (and when you close the position, this amount of EUR is exchanged back to GBP). Your deposit is in USD, and you even can use leverage, so it is not your deposit which is used. My question is that how it is possible for a broker to have enough amount of money in every currency to do the exchanges that are required by their clients.

Another question: is it true that the above position is a short position in GBPEUR perspective and a long position in EURGBP perspective (so these two are equivalent)?

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  • It does not work very different from how you operate a casino. You make sure to take a healthy cut and manage your risk well (i.e if the risk gets too large for comfort, you hedge your bets, and take a larger cut to pay for the hedge)
    – Stian
    Mar 31, 2020 at 12:09

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The forex broker is a counterparty in a derivative trade with their customers. However, a forex broker can get leverged spot forex currency positions from a commercial bank just like their customers can get positions from them. So the forex broker can possibly, or will likely, keep a balanced book regardless of what their customers do.

Also, a U.S. forex broker has capital requirements of $20000000 and up to meet. Here is a link: https://www.nfa.futures.org/members/member-resources/files/forex-regulatory-guide.html .

Now leveraged currency positions are also available on futures exchanges. The futures market prices contango or backwardation while the spot forex market accounts rollover interest. Also the retail spot forex market basically allows the customer to make their own contract size.

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In some cases, they may not even carry out the transaction you are performing. They simply pretend that they do. So for small trades, they don't need any real foreign currency at all.

The brokers charge a commission on every transaction you make. This means that, averaged out over many customers, they will always make money. If you are lucky enough to carry out a trade that earns more money than they take from you in commission, then they can simply had you some of the profit they made from the other customers.

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