If you are a forex broker you must have been asked for a SWAP free trading account from your trader clients and IB partners. Swap Free trading accounts work like charm when it comes to new client acquisition. They are literally the new trader’s magnet!
But if Swap-Free accounts are so great, why are we encouraging you to charge a swap fee? That’s what we are going to explain in this blog.
Forex Brokers make money in different ways and charging swap fees is one of them. We have discussed them in great detail in this blog: 8 Ways How Forex Brokers Make Money. If you are planning to start your own forex brokerage, you should check it out!
But let us explain about SWAP Charges here again!
What is swap charges?
Swap Charge is the fee levied on trades that are carried forward to the next day or week. Technically swap fee is the interest charged on leveraged positions that are not opened and closed within the same trading day (intraday trades) and rather rolled over or carried forward to the next day (positional trades).
If you are getting perplexed, it will all make sense. Just hang in there for a minute and let us explain!
As you would know that forex trading is largely on high leverage and leverage is nothing but a loan that your broker provides so that you could trade large even with a smaller margin. The leverage on Forex Trading goes up to 1000. And this has been the biggest reason that drew traders to forex trading.
As for loans, they come with 2 caveats; they must be repaid and there must be interest to be paid on the loan amount. For intraday trades, forex brokers don’t levy any interest on leveraged trades but for positional trades, they have an option to charge interest by way of levying SWAP fee.
Any sane forex broker running a legit business should charge a swap fee but then why do many forex brokers offer swap-free trading accounts! Let’s understand it.
Why do Forex Brokers offer SWAP Free Trading Accounts?
We all have noticed several forex brokers offering one or more SWAP Free trading accounts by charging a little extra on commissions or spreads. Their calculations suggest that they can still make profits.
Here is how!
- Swap free trading accounts help them in getting more traders onboard and when they experience the trading platform and services, they may opt for other trading accounts and services as well.
- Broker expect that revenues won’t get hampered much as they would offset the losses by charging higher commissions and spread.
- Even if they incur some loss, they would rather treat it as marketing & pomotional expense to acquire new customers.
- Some brokers have analytics and experience that most retail traders do intraday and hardly carry positions to next day/week. Even if they do carry over a position, they do it for just a couple of days before either blowing up the entire account or closing the trade in loss.
You must be feeling a little overwhelmed that if not charging swap makes so much business sense that too backed up with analytics and data then why are we asking you as forex broker to charge swap fee.
WHY MUST FOREX BROKERS CHARGE A SWAP FEE?
Please allow us to explain!
Most forex brokers either run A Book where orders are filled by third parties like liquidity providers. Liquidity providers are brokers of retail brokers. They do charge SWAP Fees. So if they are charging swap, you as forex broker need to charge it from your traders as well otherwise you need to foot this expense yourself.
Some brokers are B Book brokers that take the opposite side of their client’s trade and fill their orders. Usually, these are the brokers who do not charge SWAP Fee as they think that leverage that they offer is just a number in the system and traders are anyways going to lose.
This is where the forex broker is wrong! Taking the number on face value that most of their trader clients would lose. They just assume that the odds will always work out in their favor. But that’s the thing about the odds; they can turn against you anytime and you would be stunned if you are not prepared.
Trading is the game of probability and you never know when the odds will go against you.
Most of the forex pairs and other instruments range from a price band. The volatility and fluctuations in fractions called pips give an opportunity for traders to trade. But every now and then the prices move significantly and this is when the traders who are holding losing positions want to hold their positions in a hope that the prices will retrace back to normal or their usual band.
They have seen the prices to get back to their range in a couple of days or a week.
Anyone who has been seeing markets for a couple of weeks and months know this.
If you run a B Book broker and your client’s trades are making losses for them due to the price moving against them significantly. They should close the trade or replenish their accounts to maintain margin.
We have seen traders who have to hold their losing positions in Gold last year when it crashed significantly only to see the price getting back to their previous price point. They did not lose a penny. They just sit on the trades. And their brokers did not make money other than the usual charges and carried the risk in case prices would turn against them.
How could they do it? They could do it because of the SWAP Free trading accounts. If they were charged a SWAP Fee, it would not have made any sense to hold the losing positions and pay the cost to carry these positions adding to their losses.
They would have to close these positions. Or at least brokers get to make money on such trades while carrying the risk of open positions.
Hope now it makes sense why forex brokers must charge swap fees to the traders.
It’s not the forex brokers who don’t understand the risk of offering swap-free accounts but the other benefits are so good that they ignore it. Some brokers try to offset it by charging higher commission and spread while some restrict the leverage to the lower band.
And it’s your choice how you run your forex brokerage business. We are just sharing what we have observed working with different forex brokers and traders.
If you are looking to run a trusted and sustainable forex brokerage business, do think over what we have talked about charging the swap fee.
Wish you the best!