Understanding Forex Transaction Costs
What are the transaction costs paid to a broker?
All US dealers who are regulated by National Futures Association must disclose their charges to retail customers. There are not rules on how much a dealer can charge for services.
There are no standard forex transaction costs in Forex trading as there are in futures and stocks (because it is “over the counter” and not traded on a central exchange). Click here to go to a page that provides an excellent explanation of details in broker transaction costs.
When evaluating forex transaction costs you should always check with several dealers and compare rates for services before you commit to any one broker. Be aware that third parties also solicit for broker services and that they may also add costs.
Some firms charge a “per trade” commission, while other firms charge a mark-up by widening the spread between the bid and ask prices they give their customers.
In our previous example, assume that the dealer can get a EUR/USD spread of 1.2173/75 from a bank. If the dealer widens the spread to 1.2170/78 for its customers, the dealer has marked up the spread by .0003 on each side.
Some brokers may charge both a commission and a mark-up. Brokersmay also charge a different mark-up for buying the base currency than for selling it. You should read your agreement with the broker carefully and be sure you understand how the firm will charge you for your trades.
The reality is that most firms in the Forex broker business try to minimize forex transaction costs to traders. Sometimes the transaction cost are even eliminated. Forex traders enjoy some of the lowest transaction costs of any markets. Since virtually all of the transactions are electronic the middlemen commissions are eliminated. Traders make their transactions directly with the market maker which increases cost efficiency.