Written by Dominic Gilbert. Published on October 24th, 2016.
Someone asked me this question on my Quora profile (click here) but wanted to share my response here too:
Forex “companies” (investment houses, managed accounts, funds, prop shops etc.) typically make their slice in 2 main ways:
- Performance fees via high watermark
“High watermark” is a very popular way in which a fee is collected from the investors account for positive returns above the prior known highest excursion in their balance or equity (which ever is agreed).
To give an example of this:
John invests $10,000 USD into a trader atand at the end of the first month he has made a gross profit of $500. This means he has $10,500 in his account or another way of looking at it, has gained 5% ((10,500- 10,000) / 10,000).
charges a performance fee of 30%. In Johns situation above, would collect $150 from his $500 gross leaving him with $350 net and a final balance of $10,350 in his account. This value of $10,350 is now known as his “High Watermark”. No fee can be collected from John again unless new profits exceed that of $10,350. Anything above this amount can be charged at 30%. In the case of , this is calculated on the 1st of each month and is based upon the clients equity which is the fairest way of doing it as it considers open positions (that have yet to close).
The second way a company can make their money in Forex is via Rebates. When a company introduces a client to one of their partnering brokers, the broker is sharing the commissions generated from that client, with the introducer. The broker is essentially sharing the revenue made from the client opening and closing trades. A simple example of this would be that John opens a 1 lot trade on EURUSD; in this instance $5.00 could be the total comms paid of which a percentage would be given to the introducer. The amount split is based upon the contract agreed and the amount of “volume generated”.
Most of the time this is a really fair way for a business to be paid for providing a service to the client / trader.