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Question: Can anybody explain, how leverage works from a forex broker perspective? not an investor's perspective.?

(Posted by: newbie on 2009-11-29 10:24:36)

All the websites related to forex basics specify how leverage works for an investor. I was trying to understand, how leverage works for a forex broker? Is it real money invested by brokers in the market on investor's behalf, or is it aggregate of money invested by multiple investors and used by forex brokers?

Posted by: Ted on 2009-11-29, 18:50:19

First, when an individual is doing forex trading, the place he's dealing with is a dealer, not a broker. The money is not put "in the market ". The dealer is taking the other side of the trade. They make their money by posting prices where half their customers are long and half are short. This means that the dealer has no risk and makes a profit on the spread, the difference between the buying price and the selling price. If the trading does get lopsided, the dealer will get on the phone and do a deal with their bank to offset the imbalance.