How Are Forex Commissions Calculated and Paid to Brokers?

Forex brokers earn money through commissions, which traders pay when executing currency trades. These fees vary based on the broker’s pricing model and trading account type. Understanding commission structures helps traders manage costs efficiently.

Commission Models

Brokers charge fees in different ways, affecting trading costs. The three primary models are spread-based, per lot, and combination commissions, each catering to different trading styles.

Spread-Based

This model includes the broker’s fee in the difference between the bid and ask price. Instead of a separate commission, the broker widens the spread slightly, profiting when traders buy or sell. For example, if the market spread for EUR/USD is 0.2 pips but a broker offers 1.0 pip, the 0.8-pip difference represents their revenue.

Since fees are embedded in the trade, cost calculation is straightforward. However, spreads can widen in volatile markets, increasing costs. Scalpers and high-frequency traders often avoid this model due to its impact on execution prices.

Per Lot

Here, brokers charge a fixed commission based on trade volume, usually per standard lot (100,000 units of the base currency). Fees typically range from $3 to $7 per lot per side, meaning both the opening and closing of a position incur charges. If a broker charges $5 per lot, a round-turn trade costs $10.

This model offers transparency, allowing traders to calculate costs regardless of market conditions. It appeals to active traders who need tight spreads for precise entries, such as day traders and algorithmic traders. Predictable costs help with risk management and strategy planning.

Combination

Some brokers use a hybrid approach, applying both a spread markup and a per-lot commission. For example, a broker may offer a reduced spread, such as 0.2 pips for EUR/USD, while also charging $3 per lot. This method balances competitive pricing with consistent broker revenue.

It suits traders who need low spreads and clear fees, especially those relying on minimal price fluctuations. While this model can improve cost efficiency, traders should assess fee structures to ensure they align with their trading frequency and capital size.

Commission Calculations

Forex commission costs depend on trade size, currency pair, and the broker’s fee structure. Lot sizes—micro (1,000 units), mini (10,000 units), and standard (100,000 units)—affect commission expenses. A trader executing a 0.5-lot trade with a broker charging $6 per standard lot would pay $3 per side, totaling $6 for a round-trip transaction.

Currency pairs also influence commission rates due to liquidity and volatility differences. Major pairs like EUR/USD or USD/JPY typically have lower costs due to high trading volume, while exotic pairs such as USD/TRY or EUR/ZAR often carry higher fees because of wider spreads and lower liquidity. Brokers may adjust pricing based on these factors, leading to fluctuating commission rates.

Some brokers offer tiered commission structures, reducing fees as trading volume increases. For example, a broker might charge $5 per lot for monthly volumes below 100 lots but lower it to $4 per lot for traders exceeding that threshold. This incentivizes higher trading activity and benefits institutional or high-frequency traders. Understanding volume-based discounts helps traders optimize costs by adjusting position sizing or trade frequency.

Payment Cycles

Forex brokers process commission payments based on predefined billing schedules, varying by broker policies and account type. Payments are typically deducted automatically at trade execution, ensuring real-time fee collection. Some brokers offer post-trade invoicing for high-volume institutional clients, consolidating fees into periodic statements for streamlined accounting.

For traders using margin accounts, commissions factor into the overall cost basis, affecting margin requirements and available leverage. This can slightly impact free margin levels, requiring traders to monitor balances to avoid margin calls. Some brokers provide detailed transaction reports breaking down commission expenses alongside spreads, swap rates, and realized profits, improving cost transparency.

Payment cycles also affect tax reporting, as forex trading profits and expenses, including commissions, may be deductible in certain jurisdictions. In the U.S., forex traders can be taxed under Section 988 (ordinary income) or Section 1256 (60/40 capital gains treatment), where commission expenses reduce taxable profits. Other countries, such as the UK, exempt spread betting from capital gains tax, making it important for traders to align payment schedules with tax planning strategies.