If you make money, does Oanda make money?

Oanda's Site states the following: (quoted on 10/25/2007)

I would like to hear everyone's take on Oanda's statement.
Taking into consideration that OANDA is a market-maker broker, is it still possible for OANDA to profit when we consistently make money?

Has anyone ever been turned away from OANDA for making too much money?

Your comments are very much appreciated.

Yes they make money with the spread. Just look at interbank spreads and Oanda's spreads. Take the difference and multiply it with about 300 million transactions so far.

Regards - Xaron

They make the money on the spreads.... ^what he said.

The spreads are pretty good most of the time.

On Sunday opens they're really high and at news times...they're just awful

Oanda really don't want you to trade the news, thats for sure!

I spoke with Oanda's customer service this afternoon. I asked this question directly, "if the client constantly makes profit from trading, does Oanda still profit?"

Her response was yes. She indicated that Oanda makes money from the spread and by hedging your orders on the Interbank market.

I still don't see how they profit from spread if the client always takes profitable trades, greater than the spread I mean.

Can someone help correct my understanding of how exactly OANDA can profit from the spread if the client never loses a single trade?

Oanda's Agreement includes this paragraph.

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When you enter into a foreign currency contract with OANDA, you will be entering into a privately negotiated contract with OANDA, as principal. OANDA may, in turn, enter into "back-to-back" transactions with others. OANDA includes its mark-up in the price it quotes to you. These foreign currency contracts are not executed on an exchange and are not cleared on a central clearing organization. They are obligations of OANDA and you will not be afforded the regulatory and financial protections offered by exchange-traded contracts. Both you and OANDA are obliged to perform their respective obligations under each transaction in accordance with its terms. The terms of each foreign currency contract are set out in OANDA's Customer Agreement, which applies to every transaction you enter into with OANDA.
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The most notable item in that paragraph is where Oanda states that your orders are never filled on an exchange. Instead, Oanda picks up your orders "privately."

My question is again... how can Oanda make money if the client does not lose a single trade? (let's forget about the spread on this one)

Can anyone help explain what Oanda means when they say here that "there is no conflict of interest?"

Also, the part about having nothing to gain when clients lose doesn't hold up in my opinion either, unless they actually take the same trade that their losing clients take on the open market...

Any thoughts?

hi shutopia,

Have you read this sticky thread in the broker section by DS http://www.forexfactory.com/showthread.php?t=7484

br,

zinc6

zinc6,

I just realized that I have read that post! I do indeed feel more like an idiot now.

hehe.

In other news, I spoke with a different Oanda representative and he explained to me that while Oanda DOES hedge your position within their fake market, they also take your same position (whether long or short) on the Interbank FX market.

I suppose that explains why Oanda profits when you profit.

I don't believe Oanda will do that with EVERY single position you take. If statistics say that 95% of FX traders lose money, then OANDA would easily go broke. So there must be some sort of filter that decides which orders are replicated onto the Interbank market, and which aren't.

Call me the devil's advocate, however, I do not believe Oanda's site 100%. The fact is Oanda is the initial counter party to every trade made by a client, even if it is for a fraction of a second before being hedged. This means they can choose to remain the counter party of a trade "if" they choose. Also, with Oanda clients and the interbank opening and closing positions constantly, I cannot see how a position can be hedged every second. For example, I enter a trade at exactly 8:00 am est., and the position is hedged one second later. The next day at exactly 8:00 am, the counter party closes their position, and I close my position five seconds later, before Oanda's server could find another suitable counter party. Who's left holding the bag? Oanda's hedging algorithm is much more complex than the picture my example shows but should prove my point.

Oanda is my favorite broker and the best retail broker around in my opinion. I have accepted the pitfalls with the good and recommend them to others. Just thought I would provide some food for thought. Lastly, I do not know exactly how Oanda operates and my reply is based on research and my gut.

Scott

They don't hedge every position but use some kind of a pool. I also think they make their main profit from spreads but also from small price variations within seconds like dealing desk brokers. To be honest I mainly use limit orders which are mostly filled exactly at the price I want to get. No cheating there.

Regards - Xaron

Don't forget that they also hold your trading capital, which their own desk can trade with.

They would also operate a synthetic internal market, aggregating all of the trades recieved and offsetting them against each other. You pay spread costs on transactions which are 'free' to them.

Whatever the bias of the pool is (say net long), they take that residual and hedge against it (using your capital which they're holding for you). They would want to remain neutral to any directional bias.

At least, that's how id do it, and there are smarter people than me out there.

The more people they have parking their money there, and the more trades that get executed, the bigger the pool, the more transaction fees, and the bigger their profit.

I'm sure they'd prefer you to win, winners will stick around longer and make more money for them. But it is unlikely to make a difference to their immediate profit if everyone loses.

There's something that most people miss, Xaron has touched on this. Different people have different views, in the same market at the same time, some people will sell some people will buy, it's what makes a market.

What you're missing is that Oanda doesn't have to hedge everyone's orders, even if they did they could make money. I'm not explaining this too well, so example time.

Oanda has 2 customers, A&B

A goes long on cable at the same time B goes short, same size, same price, Oanda takes the spread and is fully hedged.

Even if B was was trading at twice the size of A, Oanda would only have to hedge A's lot size, not 3A, which is what most of you are suggesting.

I would suspect the majority of orders are hedged by other clients.

Mostly Oanda also makes money.
It's a business.
They calculate that more trader will lose than win in the long term.
Hedging costs money in the real interbank market and is always a risk.
They try to avoid it.

You make money from the losers pool - the smaller it is the more Oanda have to pay from their own pocket.

No DealDesk broker likes successful traders especially when they're trading with big lot sizes.

They make money from your rollover too, and charge you more for negative rolls, I believe.

ya but Big traders are trading with them

even if you trade on ECN,there's someone else on the other side

it's the same thing to me you just can't name your price

If Oanda isn't a bucket shop why are they open for trading on the weekends when the interbank markets are closed?

Are the spreads fixed or variable?

The interbank forex market has variable spreads. If you are trading fixed spreads you are in effect paying for an insurance premium—unless you trade only around news events when markets tend to be more volatile—since fixed spreads are typically higher than variable spreads. Is it worth it? That depends on your trading pattern. (But if you choose fixed spreads, be sure to ask the next two questions too.)

OANDA's response:

OANDA has variable spreads. As in the interbank forex market, spreads will widen dynamically during times when liquidity is tight. This widening occurs typically around news announcements or off-market hours. OANDA FXTrade allows you to trade all weekend, but spreads will be significantly wider during weekends when liquidity is almost non-existent.

http://fxtrade.oanda.com/forex_tradi..._forex_brokers

"If you make money, does Oanda make money?"

If you are a profitable scalper, they don't make money with you.They are a specialized scalper and due to role overlapping you'll have a competitions with them for profits.

What is your definition of a scalper?

Scalper is the person that remove another person's scalp or a portion of their scalp. It can be done to someone after death, or on someone alive, in which case it may or may not be deadly.

Sorry just kidding

Trading with the tick(10 sec,1 min,5 min) chart by exemple.
Taking profit at 1,2,3... few pips
SL at few pips.