How does a broker work? How can he pay me the money? | Forex Factory

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How does a broker work? How can he pay me the money?

  • #1
  • First Post: Nov 22, 2019 6:25am Nov 22, 2019 6:25am
I have been trading for some years, but never really understood how this works.
Can anyone here help me out?

So, let's say there is a broker, and he has 10 clients. All of those 10 clients deposit 100$. For every trade the broker gets a commission of 1$.

And they are successful. The traders all make 10 trades winning 10$ for each trade. So after a month or so, they effectively doubled their accounts. 10 traders now have 200$ in their accounts. Great.
The Broker on the other hand has made money from these trades through commissions. 10 traders have made 10 trades, giving 1$ each. So the broker has made 100$ from the trades.

Now the 10 clients want to withdraw their money. They deposited 1000$ and now want to withdraw that PLUS the winnings. So 2000$ in total.

Now my question: How does the broker pay the clients here? Where do the additional 1000$ actually come from? Does someone know?
  • #2
  • Nov 22, 2019 6:51am Nov 22, 2019 6:51am
I think: A ser. regulated broker will have to have sound (sufficient) finances;
if the broker is not the counter-party to his clients, then there is no such problem;
i.g. odds are low that all clients will withdraw all their money at the same time (like in bank run);
odds are even lower that all clients will be profitable, let alone all double their money.
Return To Disorder
  • #3
  • Nov 22, 2019 6:59am Nov 22, 2019 6:59am
Quoting mankindeg
I have been trading for some years, but never really understood how this works. Can anyone here help me out? So, let's say there is a broker, and he has 10 clients. All of those 10 clients deposit 100$. For every trade the broker gets a commission of 1$. And they are successful. The traders all make 10 trades winning 10$ for each trade. So after a month or so, they effectively doubled their accounts. 10 traders now have 200$ in their accounts. Great. The Broker on the other hand has made money from these trades through commissions. 10 traders have...
Firstly, profit statistics of traders (95% lose) works in favor of the broker.
Next, I think you need to learn more about interbank hedging and market makers.
And another question if you dont mind. Which broker earns only $ 1? I have not seen less than $ 5

Regards,
  • #4
  • Nov 22, 2019 7:03am Nov 22, 2019 7:03am
Tier 1/ interbank trading and dark pool liquidity, this is where the money comes from.
One loses, another wins.

But the mist cash is made by the big market makers.
  • #5
  • Nov 22, 2019 7:17am Nov 22, 2019 7:17am
so 10 clients and all 10/10 won for a months span of time? I’m also trying to get to the bottom of this. what brokerage firm are we talking about here? it’s a joke. You should run a brokerage firm! That’s a solid theory right there
  • #6
  • Nov 22, 2019 10:09am Nov 22, 2019 10:09am
Quoting mankindeg
I have been trading for some years, but never really understood how this works. Can anyone here help me out? So, let's say there is a broker, and he has 10 clients. All of those 10 clients deposit 100$. For every trade the broker gets a commission of 1$. And they are successful. The traders all make 10 trades winning 10$ for each trade. So after a month or so, they effectively doubled their accounts. 10 traders now have 200$ in their accounts. Great. The Broker on the other hand has made money from these trades through commissions. 10 traders have...
Hi,
Not sure I understand the problem here.
The 10 clients turned $1000 into $2000 via profitable trades. The money comes from the traders who took the other side of those trades and lost $1000.
The broker simply takes commission as the middleman, he is not providing or risking capital.
In your example the broker made $100 commission. So the overall balance is:
- the broker has $100
- his clients have $1000 net profit. They have $2000 in their accounts so can just withdraw it.
- other traders who took the other side of these trades are down -$1100 (profits + commissions above)
It all nets out to a zero sum game, just a money transfer from losers to winners with brokers taking a cut out of the middle.
  • #7
  • Nov 22, 2019 10:20am Nov 22, 2019 10:20am
Quoting Oldtraderman
{quote} Hi, Not sure I understand the problem here. It all nets out to a zero sum game, just a money transfer from losers to winners with brokers taking a cut out of the middle.
Not true, you understand what a B book broker is? IG markets for example being one of the biggest.

That means they provide the liquidity themselves, so whatever you lose in trading, they take as profit, so your trades never make it to market, they are betting against you hoping you lose because they know 90% of people lose, so ok what about the winning traders?

Well if you are a winner they will make you an A book client and your trades really will make it to the market and they will only ever make commissions because they don't want to bet against you.

Simple
?
  • #8
  • Nov 22, 2019 10:28am Nov 22, 2019 10:28am
Quoting HRTrading
{quote} Not true, you understand what a B book broker is? IG markets for example being one of the biggest. That means they provide the liquidity themselves, so whatever you lose in trading, they take as profit, so your trades never make it to market, they are betting against you hoping you lose because they know 90% of people lose, so ok what about the winning traders? Well if you are a winner they will make you an A book client and your trades really will make it to the market and they will only ever make commissions because they don't want to...
Hi,
Yes, understand that. In that case the broker is acting as a marketmaker and is risking his capital as a principal. But that's not being a broker in the pure sense of it, it's being a marketmaker. If the example was then a broker acting as a marketmaker then the profits come from the broker/marketmaker's own capital. Of course, they may hedge the risk in the market and then the market, i.e. the losing counterparty, still ends up ultimately paying. It all depends who the ultimate losing counterparty is.
  • #9
  • Nov 22, 2019 10:32am Nov 22, 2019 10:32am
Quoting Oldtraderman
{quote} Hi, Yes, undertsand that, In that case the broker is acting as a marketmaker and is risking his capital as a principal. But that's not being a broker in the pure sense of it, it's being a marketmaker. If the example was then a broker acting as a marketmaker then the profits come from the broker/marketmaker's own capital. Of course, they may hedge the risk in the market and then the market, i.e. the losing counterparty, still ends up ultimately paying. It all depends who the ultimate losing counterparty is.
Pretty much all brokers are acting as market makers unless you prove to them otherwise that they shouldn't treat you that way, and some will just outright close your account because your winnings are their losses, or they will change the spreads and swaps without informing you meaning you bust your account overnight, check the terms and conditions you agree to, you agree to them to be able to do this legally
?
  • #10
  • Nov 22, 2019 12:46pm Nov 22, 2019 12:46pm
Quoting Fx-Gamer
Tier 1/ interbank trading and dark pool liquidity, this is where the money comes from. One loses, another wins. But the mist cash is made by the big market makers.
Thanks so basically interbank trading and liquidity provided by other traders.
Got it, thanks.

And yeah, I am pretty cool with my broker. They are pretty legit I think.
  • #11
  • Nov 22, 2019 3:14pm Nov 22, 2019 3:14pm
Quoting mankindeg
{quote} Thanks so basically interbank trading and liquidity provided by other traders. Got it, thanks. And yeah, I am pretty cool with my broker. They are pretty legit I think.
what broker?
?
  • #12
  • Nov 22, 2019 5:27pm Nov 22, 2019 5:27pm
Quoting HRTrading
{quote} what broker?

Global Prime
  • #13
  • Nov 23, 2019 7:07am Nov 23, 2019 7:07am
Quoting mankindeg
{quote} Global Prime
Where are they regulated?
  • #14
  • Nov 23, 2019 7:08am Nov 23, 2019 7:08am
Quoting landorra
{quote} Where are they regulated?

Based in Australia. A friend of mine lives there.
  • #15
  • Feb 8, 2020 7:02am Feb 8, 2020 7:02am
In fact, a real good broker can earn on commission thanks to the trading of each client. In short, when you open a position - you pay the spread, that is a certain amount - fixed or floating, which is equivalent to two or three percent of the amount used in the transaction. Imagine, each trader performs at least ten trades per day, and with each of them gives a certain amount to the broker. In addition, brokerage companies often charge a commission for withdrawal of funds. As a rule, these amounts are also small and vary depending on the type of payment system, but they also constitute a large cash flow, which supports the broker's position..
  • #16
  • Feb 12, 2020 3:11am Feb 12, 2020 3:11am
Good question too. Back then, I tested strategies that were profitable but lost due to the broker commission. I wonder if the broker themselves would probably profit a lot, since they don't have to pay commission
  • #17
  • Apr 1, 2020 10:43am Apr 1, 2020 10:43am
I really think that no one Brokerage can live with just a commission. Impossible, regardless of the type of regulation
  • #18
  • Apr 1, 2020 5:40pm Apr 1, 2020 5:40pm
Quoting Peter4
I really think that no one Brokerage can live with just a commission. Impossible, regardless of the type of regulation

I cannot know this, but maybe a Broker also gets a certain volume commission from their Liquidity Providor ?
  • #19
  • Apr 1, 2020 5:44pm Apr 1, 2020 5:44pm
You have to dig around to even get a clue what is happening AFTER you push a buy/sell button and enter a ‘retail” trade.


B Book is a reality. But does it matter?

Well if your broker pays out your winnings immediately to your a/c after you close your trade, then NO.
(more of an issue might be slippage/delayed trade activation)


A lot following is assumption, of course. Just imho.

I “assume” that the (retail) Broker NEVER makes the market price but uses the “dribble down” market price that is on the feed provided by THEIR Liquidity Providor (LP). This LP will be a long way down the chain from Interbank or Tier banks.

I have 3 different broker platforms open sometimes and they pretty much all have the "same" price level (coincidence or all taking the same/similar feed) and if they vary by up to 0.5 pip then it is always consistent across the platforms as bid/ask.

The broker would either hold your trade (B Book) and then hedge their “total brokerage exposure" with their LP if & when it's outside their risk parameters. Or they just send all trades straight through to the LP regardless. Up to their individual business model.


Then we introduce a pandemic into the equation.

There was an interesting post on the ASIC Factory thread (an Australian regulator) which suggested that ASICs plan to limit leverage in our country to 1:20 will be deferred to the end of Sept this year.

https://www.forexfactory.com/showthr...12846347#reply


The reasoning behind this deferment is that ASIC will devote pretty much ALL its attention during the pandemic to the ‘behaviour’ of financial operators (incl brokers) to ensure they do not use this time to ‘take advantage’ of retail investors/speculators.


If this is the case then I am surmising that many MORE trades (maybe ALL depending on the broker) will go out past the Broker and directly into their LP to avoid unnecessary internal investigation or "business risk" while this global lockdown situation is in place.

You can ask your Broker who are their LP’s. Some will tell you.


(PS spikes might become more regular imo during these times - pls watch over your trades at all times - if you don’t have a low leverage or ample equity).

All the best to all.
Pete
  • #20
  • Last Post: Apr 4, 2020 10:37am Apr 4, 2020 10:37am
It is clear that you described the situation in theory, but in fact it has never been and never will be. Typically, commissions and spreads are the income of the broker as a company that gives you access to the trading terminal, provides various services, etc. But the profit to you comes only from those traders who have lost their money in the market. You can look at any statistics, always the number of traders who have lost significantly more than the number of those who have earned. So it is absolutely normal. A broker will never be at a loss, a trader who has earned will always get his income. This mechanism has been functioning for decades and brings profit, so trading will live forever, I guarantee you.
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