WHY SHOULD BROKERS CHARGE SWAP FEES TO THEIR CLIENTS?
If you are a foreign exchange broker, your traders, clients, and IB partners must have asked you for a SWAP free trading account. When it comes to attracting new customers, swap-free and cost-free trading accounts are fantastic. They literally act as a magnet for both traders and prospective clients.
But, if Swap-Free accounts are so fantastic, why are we advising you to charge a swap fee? That is what this blog will explain.
Forex brokers make money in a variety of ways, one of which is by charging swap fees. If you want to start your own forex brokerage, you should look into – “How Forex Brokers Make Money”, an interesting blog that you should read.
But first, let us learn about SWAP Charges again!
WHAT EXACTLY ARE SWAP CHARGES?
The Swap Charge is a fee levied on trades that are carried forward to the following day or week. Technically, a swap fee is an interest charged on leveraged positions that are not opened and closed on the same trading day (intraday trades) but are instead rolled over or carried forward to the next day (positional trades).
As you may be aware, forex trading relies heavily on leverage, which is simply a loan provided by the broker that allows you to trade large amounts with a small margin. Forex trading leverage can reach 1000. And it is for this reason that traders are attracted to forex trading.
Loans come with two caveats: they must be repaid and interest must be paid on the loan amount. Forex brokers do not charge interest on leveraged intraday trades, but they would charge interest on positional trades by charging a SWAP fee.
Any sensible forex broker operating legally should charge a swap fee, so why do so many forex brokers offer swap-free trading accounts? Let’s break it down.
FOREX BROKERS PROVIDE SWAP-FREE TRADING ACCOUNTS, BUT WHY?
As a community, we’ve all seen that certain FX brokers, in exchange for slightly higher commissions or spreads, offer “SWAP-Free” trading accounts. They have done the math and believe they can still make a profit.
See how below!
- Swap-free trading accounts help them in attracting new traders, and after they have tried the trading platform and services, they may choose other trading accounts and services as well.
- Brokers anticipate that revenues will not be affected significantly since they will cover the losses by charging more commissions and spreads.
- Even if they suffer some loss, they would rather use it as a marketing and promotional investment in order to acquire new clients.
- Some brokers have analytics and data that most retail traders do intraday and seldom carry positions to the following day/week. Even if they do carry over a position, they only do so for a few days before either blowing up the whole account or terminating the trades in a loss.
You may be feeling a bit perplexed because, if not collecting swap fees makes so much financial sense, backed up by analytics and statistics, why are we asking you as a forex broker to charge swap fees?
WHY DO FOREX BROKERS NEED TO CHARGE A SWAP FEE?
Most forex brokers use A Books, which fill orders from third parties such as liquidity providers. Brokers of retail brokers are liquidity providers. SWAP Fees are charged. So, if they charge swap, you as a forex broker must charge it to your traders as well, or you will have to bear the cost yourself.
Some brokers work as B Book brokers, meaning they take the opposing side of their clients’ trades and fulfil their orders. Typically, these are the brokers who do not charge SWAP Fees since they believe that the leverage they provide is merely a figure in the system and that traders will lose anyhow.
Here is where the FX broker is mistaken! Taking the statistic at its value, they would lose the majority of their trading clientele. They just believe that the chances will always be in their favor. But that’s the thing with odds: they may change against you at any time, and you’ll be caught off guard if you’re not prepared.
Trading is a game of chance, and you never know when the chances may be stacked against you.
The majority of forex pairs and other instruments trade inside a price band. The volatility and variations in fractions known as pips provide traders with an opportunity to trade. However, prices do fluctuate dramatically from time to time, and traders who are holding losing positions desire to retain their positions in the expectation that the prices would retrace back to normal or their regular band.
They have witnessed the prices return to their range after a few days or a week.
Anyone who has been watching markets for a few weeks or months is aware of this.
If you run a B Book broker and your clients’ transactions are losing money owing to the price shifting drastically against them. To maintain margin, they should close the deal or replenish their accounts.
We saw traders who had to maintain their lost positions in gold last year when it plummeted dramatically, just to see the price return to its prior level. They didn’t lose any money. They simply wait on transactions. And their brokers made no money other than the customary commissions and took the risk that prices might fall against them.
How could they have done it? They were able to do so because of the SWAP Free trading accounts. If they had been charged a SWAP Fee, it would have made no sense to keep the losing positions and pay the expense of carrying these positions, which would have increased their overall losses. These positions would have to be filled. Or, at the very least, brokers profit from such deals while holding the risk of open positions.
We hope now it is clear why forex brokers must charge swap fees to traders.
The risk of giving swap-free accounts is not forgotten by forex brokers, but the other incentives are so appealing that they overlook it. Some brokers attempt to compensate by charging higher commissions and spreads, while others limit leverage to the lowest band. And how you operate your forex brokerage firm is entirely up to you. We are just sharing our thoughts after working with various forex brokers and traders.
If you want to establish a reliable and long-lasting forex brokerage firm, consider charging a swap charge and get in touch with Team OpenForexBroker.