The Websters Dictionary defines "broker" as one that acts as an intermediary who negotiates contracts of purchase or sale. And that is exactly what a forex trading broker is. Unless you're ready to don a white overcoat and head on over to the Chicago Mercantile Exchange for some floor trading, you'll need a forex broker to execute your orders. Most of us in Malaysia cannot trade directly with a bank either. Only those dealing with very large volume deal with the bank directly.
Instead, the bank gives the forex broker a rate based on volume. In turn, the forex broker charges us a comission percentage or a spread per trade. An example of this would be a bank charging a forex broker 2 pips spread on the Gbp/Usd who in turn charges us 4 to 5 pips on the Gbp/Usd. Although it must be noted that spread charges are a lot more common than flat commission when dealing with an online forex broker. However, most forex trading brokers do not charge a fixed spread, or rather they do not promise the spread will not fluctuate. This is mainly due to the high volatility the forex market experiences during the release of an important news event such as an interest rate change or an unemployment rate change for a given country. Every forex broker will have a clause stating that this is a possibility regardless of whether the broker has fixed or variable spreads.
There are two reasons for a forex broker to widen their spreads. The first, is to protect their positions during such times of high market volatility. The second, is simply because it is a great opportunity to increase their profits. The demand for trades during economic news releases are huge. And as demand increases, so does the price. In times of extreme volatility, spreads of up to 40 to 50 pips are not too uncommon.
