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How do market makers and institutional traders trade? 29 replies

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Can market makers/brokers trade without spreads?

  • Post #1
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  • First Post: Edited 10:27pm Feb 27, 2010 10:15pm | Edited 10:27pm
I found a holy grail system that can make you money whether a pair goes up or down...but the problem is spreads....

Spreads should be below 0.2 pips then you can make 1% profit when it goes up or down 100 pips....

So I wonder if brokers/market makers can trade forex without spreads or they can't do it either so it is just a dream that can never happen.
When I buy it, it moves down. When I sell it, it moves up.
they do trade with very small spreads. as low as 0.5 sometimes 0. they have negotiating rooms who are in charge of gettin the best spreads possible. but then again, trading volume is huge. if u are a retail investor, i'd say its impossible.
depends on who their liquidity providers are. if they are their own providers (very rare, takes billions of dollars of capital), then spread doesnt exist for them. they make the prices. if they have an external liquidity provider, they get veeeeeeery low spreads like mentioned above. its actually very subjective and is a case by case thing.
So for example, if a large hedge fund buys and sells from goldman sachs and trades in amounts (say e.g.) 10 million dollars, the spread they receive is actually zero ???



Quoting blacksun1
depends on who their liquidity providers are. if they are their own providers (very rare, takes billions of dollars of capital), then spread doesnt exist for them. they make the prices. if they have an external liquidity provider, they get veeeeeeery low spreads like mentioned above. its actually very subjective and is a case by case thing.
Quoting Svm
So for example, if a large hedge fund buys and sells from goldman sachs and trades in amounts (say e.g.) 10 million dollars, the spread they receive is actually zero ???

no, they would have spread. goldman sachs, however, wouldnt because they are trading with their own money. plus, to someone like goldman sachs, spread is not an issue. large isntitutions dont "trade" they "deal." they can choose at what prices they want to sell and buy at. to them, they are selling/buying a commodity, not placing a trade.
Quoting blacksun1
no, they would have spread. goldman sachs, however, wouldnt because they are trading with their own money. plus, to someone like goldman sachs, spread is not an issue. large isntitutions dont "trade" they "deal." they can choose at what prices they want to sell and buy at. to them, they are selling/buying a commodity, not placing a trade.
Ok,

That brings up one more question for me though. The larger institutions have their own custodians and back office. So, is it possible for them to have more than one broker, and thus, get the best price in market? For example, is it possible for a hedge fund to place a long trade with Goldman and close/square the same position with UBS?
Quoting Svm
Ok,

That brings up one more question for me though. The larger institutions have their own custodians and back office. So, is it possible for them to have more than one broker, and thus, get the best price in market? For example, is it possible for a hedge fund to place a long trade with Goldman and close/square the same position with UBS?
they wont be able to close the SAME trade, but they can enter an equal amount, essentially hedging their position. they do this quite a bit, hence the name "hedge fund." in forex though, there aren't really any hedge funds out there. hedging is done mainly to cut down risk. in forex, the same effect can be done by using a smaller contract size.
There are no zero spread market makers in the business, if there were, non of them would be profitable. If you had the financial backing you could negotiate the spread if you acct was at a major brokerage firm but those firms require an initial deposit od 10miliion plus before they'll talk to you. Most ECN brokers have the low spread you desire in addition to taxing on commision on every trade. Your best bet, alter your trading system to withstand a few more pips and find a broker with a low variable spread allocation.
Quoting Jhig
There are no zero spread market makers in the business, if there were, non of them would be profitable. If you had the financial backing you could negotiate the spread if you acct was at a major brokerage firm but those firms require an initial deposit od 10miliion plus before they'll talk to you. Most ECN brokers have the low spread you desire in addition to taxing on commision on every trade. Your best bet, alter your trading system to withstand a few more pips and find a broker with a low variable spread allocation.
When you open an account with 10 million euro there are more important aspects to negotiate than spread..
Quoting Northernstar
When you open an account with 10 million euro there are more important aspects to negotiate than spread..
actually, it is one of the most important. imaging trading just one percent of the account. think about how much money a two or three pip spread would be
Quoting blacksun1
actually, it is one of the most important. imaging trading just one percent of the account. think about how much money a two or three pip spread would be
Nowdays there is very little room to negotiate on spreads. You should try it for yourself and see how much you can negotiate on spreads. There are other far more important issues such as leverage, who handles your deals, backup and so on..like I said spread is one of the least important items on the list never the less it remains on the list since every little bit counts when cutting costs.
Spreads lose importance the longer you hold your trade for. If you are holding a month long position, looking to gain hundreds of pips, then a 2 pip spread is negligible. If you are scalping 10pips in 2 min, then 2 pips is extremely expensive.

Of course people trade with 0 spread. Although they instead pay commission. The bottom line is it costs money to enter the market no matter who you are.
All I ask for is a chance to prove that money cannot make me happy.
Quoting Northernstar
Nowdays there is very little room to negotiate on spreads. You should try it for yourself and see how much you can negotiate on spreads. There are other far more important issues such as leverage, who handles your deals, backup and so on..like I said spread is one of the least important items on the list never the less it remains on the list since every little bit counts when cutting costs.

yeah, theres no room if you are joe trader with 5,000 dollars. but for the people who have 3 mil plus, and do good volume on it, they can negotiate spreads. not much, granted, but the more volume they trade, the better spreads they can get. i know with Deustche Bank, if you trade a yard or two in six months, they will lower your spread a little bit. if you can do that much in three months, they will lower it enough to see a good effect. it doesnt apply here, to the people on the forum, but it does apply else where. leverage actually ISNT that important when it comes to large money. in fact, most large firms or funds DE-leverage, going for more like 50:1 even down to 10:1. i agree who handles your deals is very important. i've been priveleged enough to work with people from those types of firms and even work in one. it is a totally different culture and atmosphere. what applies to retail traders and what affects them, does not mean much to the big boys.
Quoting blacksun1
yeah, theres no room if you are joe trader with 5,000 dollars. but for the people who have 3 mil plus, and do good volume on it, they can negotiate spreads. not much, granted, but the more volume they trade, the better spreads they can get. i know with Deustche Bank, if you trade a yard or two in six months, they will lower your spread a little bit. if you can do that much in three months, they will lower it enough to see a good effect. it doesnt apply here, to the people on the forum, but it does apply else where. leverage actually ISNT that important...
Due to restrictions from the clients side we are only allowed to do business with the following banks, Handelsbanked, Danske Bank, Nordea and SEB. We chose Handelsbanken and made a 1 year contract that expired in december. Early december we made a round to see if other banks could offer better terms. One thing in common with the responses we got was that among other things tapping into the cost base including spread was not possible this year, regardles of volume. Banks are tight this year, thats a regretable fact and I don't think it's only here in norther europe. Leverage figures you mention 50:1 and 10:1, are we talking about banks? We operate with a leverage of 2,3:1.
Quoting Northernstar
Due to restrictions from the clients side we are only allowed to do business with the following banks, Handelsbanked, Danske Bank, Nordea and SEB. We chose Handelsbanken and made a 1 year contract that expired in december. Early december we made a round to see if other banks could offer better terms. One thing in common with the responses we got was that among other things tapping into the cost base including spread was not possible this year, regardles of volume. Banks are tight this year, thats a regretable fact and I don't think it's only here...
might be different here in america then. we were in talks with deusche bank regarding lowering spread just last month. 2 or 3:1 leverage here is considered so low its near impossible. probably just different styles of doing business. its interesting to see other sides of the game.
Quoting pujolshomerun
I found a holy grail system that can make you money whether a pair goes up or down...but the problem is spreads....

Spreads should be below 0.2 pips then you can make 1% profit when it goes up or down 100 pips....

So I wonder if brokers/market makers can trade forex without spreads or they can't do it either so it is just a dream that can never happen.

hey pujol

can you explain your system

thank you
Quoting blacksun1
they wont be able to close the SAME trade, but they can enter an equal amount, essentially hedging their position. they do this quite a bit, hence the name "hedge fund." in forex though, there aren't really any hedge funds out there. hedging is done mainly to cut down risk. in forex, the same effect can be done by using a smaller contract size.
BUt, as you originally said in the following post,

Quoting blacksun1
no, they would have spread. goldman sachs, however, wouldnt because they are trading with their own money. plus, to someone like goldman sachs, spread is not an issue. large isntitutions dont "trade" they "deal." they can choose at what prices they want to sell and buy at. to them, they are selling/buying a commodity, not placing a trade.
If the larger institution is buying/selling a commodity and not placing a trade, then when a hedge fund buys something from them, they might buying it with the intention of placing a trade but the hedge fund is also selling/buying a commodity in return. Thus, the trade should be settled and that money should be going to their custodian (as oppose to leaving it as an open position with the same large institution that placed the trade with).

Theoretically, it should be up to them who do they want to close their trade with. Don't you think so? Otherwise, there's not much of a difference in terms of number of options in placing a trade between a retail forex investor and a sophisticated forex hedge fund.
  • Post #18
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  • Last Post: Dec 15, 2010 11:37am Dec 15, 2010 11:37am
Many ECN account as mention on some pairs have 0 spread but if you looks carefully, they have hiiden spread that you might have never notice.
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