With web-based trading in place, many online forex brokers function as market-makers of trader actions.

As such, these online brokers are at the other side of every trade. When traders buy, they buy from brokers and when traders sell, they sell to the broker.

Therefore, brokerage firms tend to offer consistent liquidity, execution, and allow traders to trade their desired amounts of currency anytime.

 Typical Business Models

Under current brokering practices, market-makers typically adhere to two business models: those who offer fixed spreads and those who offer variable spreads.

As the term implies, fixed spreads remain constant all the time irrespective of development in the forex market. Meanwhile, variable spreads tend to fluctuate based on market interest.

Market makers who offer fixed spreads actually expose themselves to higher risk all day long.

This also applies to those who venture in thinly-traded markets as well as in volatile markets where spreads tend to widen when interbank spreads widen. For this reason, fixed spreads are generally wider than variable spreads.

Variable spreads are highest during highly liquid periods. One instance of a highly liquid period is during the overlap between London and New York where pips are as low as 2 to 3 pounds/dollars, including other currency pairs which are heavily traded.

There are also typical instances when spreads are expected to be wider such as during slower periods. An example of slow period is at 7:00 pm Eastern Time when New York is closed and Tokyo is not fully operational yet.

Ironically, experienced forex traders do not recommend either one as more advantageous over the other. Choice of forex trading spreads is a function of players’ trading style.

Since variable spreads are tightest in liquid markets, going for a variable spread favors the short-term trader who aims to make just a few pips during each trade.

Forex traders who tend to be swayed by market developments, fixed spreads may present a better option.

With a fixed spread, readers are spared from the inevitable widening of spreads which may sometimes deviate by a significant amount during fundamental announcements of interest to traders.

Another model being promoted by some forex brokers is the non-dealing desk. Those who offer non-dealing desks are not market makers.

This type of broker claims that the price forex players are trading on comes directly from the interbank market.

Moreover, non-dealing desk brokers even claim that all trades are routed directly to the bank. However, if this is really the case, why is there even a need for non-dealing desks?

Others may even ask, how do non-dealing desks make money from brokering if trades go directly to the banks.

Forex traders should beware about claims of dealing directly with the interbank market.

They actually make money since they display wider spreads and steeper price differences during volatile periods.

They profit from the spread between the bid price and the offer. Nobody plays in the lucrative forex market without making money. Everyone’s in just for the money.