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brokers exploiting

  • #1
  • First Post: May 4, 2007 3:03pm May 4, 2007 3:03pm
this whole forex trading thing started for one thing only: EXPLOITATION OF CURRENCY for a PROFIT!

Now the problem is this, brokers made this exploitation available to us with the help of leverage and a market to trade in.
they charge a "spread" and sometimes swap to make a profit while we trade through their services.

SO WHY IS IT THAT::::

1. Brokers are complaining that scalpers are making them broke
2. brokers are complaining that news traders are making them broke -er
3. Brokers are saying that latency scalpers are making them poor.

what i want to know is this...

1. Why trade forex if U dont intend to EXPLOIT?
2. why is it that when we finally find a way to win, the brokers are saying we violated section 32 of whatever rules. by exploiting such, and such

3. Why are bucket shops still around if they DONT always hedge their clients positions?


what are the Bucket shop brokers doing about it?

1. Closing people accounts
2. Widening spread
3. Not letting u in on a good fill.

now, as far as a good fill goes, i know that the REAL market it is even more difficult....but why are the market makers faking prices based on news reports?

They say 90% of traders end up losing...that's why bucket shops dont hedge...they are using statistics to their benefit
100% of traders are losers. Just that some win more than they lose!
  • #2
  • May 4, 2007 4:46pm May 4, 2007 4:46pm
Mr Demark,

This is the problem with Forex...as much as you'd like to think there was money to be made, there is no underlying value for the leverage.

Unlike stocks where we pay for the credit to purchase a stock (that has intrinsic value), The forex spot rate doesn't actually have an intrinsic value since we're buying one currency with another currency loan that we don't own.

So, as far as brokers complaining, those are the facts of the business. The problem in order for the brokers to really make money, significant volume has to be pushed through...most brokers don't have that capability because they don't have enough clients. Therefore, in order to make money, these firms have to provide their own liquidity...or they have to sell to a higher tier and collect on the spread differential (which doesn't amount to much when you pass it up the chain). So, as you can imagine, providing liquidity means that you have to minimize your risk of exposure which means pairing client orders and selling the orders to higher tier when profitability is obtained. Well, this actually takes time depending on the size of the orders that go up the chain. So what happens if most or all of your clients are betting in one direction? If you're the sole liquidity provider, you're screwed. That's why you hope that enough of your clients are betting against each other to make a difference.

The problem with scalping for brokers is that it doesn't provide them enough time to pair an order against another client and then sell it to another tier. That's why if you're identified as a pattern scalper, most realistically, you'll be placed on manual trade which means that your order will get directly routed to the best available priced secondary liquidity provider.

During times of low liquidity (like right after a news announcement), this can be difficult, so the answer is to make the cost beneficial to the broker (by either raising the spread, or by requoting, or by slipping). This is a way they pay for their risk, because as your position stays out of the money longer, the more time they have to either match your order or route it to the next tier.

You would like to believe that brokers could survive on the spread alone but because they, themselves have to pay a spread to the second tier (if they off-load the trade), the spread collected is virtually zero unless they can keep the trade in-house...which means (as stated before) providing your own liquidity.

so there you have it...THE problem. How do you deal with scalping if you make no money with the trade because you HAVE to off-load it? Simple, you discourage it...or you raise the spread to cover your costs and recover the spread.

I know it sounds unfair to you and me...but in the world of business, it's the only way to stay viable.

Let's put it this way...if you were a broker, how would you make money without "cheating" your clients? In otherwords, I challenge you to come up with a business plan on what would make you viable as a broker WITHOUT providing your own liquidity. Now, don't forget to include all the costs associated with running a business, costs of computers, internet connections, office space, customer service reps that can man 3 different shifts, website costs, annual software costs, your salary, etc...and then find out how much volume you need to do in order to cover all of that. Now, you have to assume that your BEST price in a pass through situation will be 1-2 pips better than your spreads...meaning you make 1-2 pips per trade. To put it in perspective, in order for you to MAKE $100,000 in a year, you need to do anywhere from $1.3 billion to $2 billion in volume a year...that's just for $100,000....figure out how much you REALLY need and you'll start to see how ridiculous it would be to try and be a simple pass-through only.

Quoting Mr demark
this whole forex trading thing started for one thing only: EXPLOITATION OF CURRENCY for a PROFIT!

Now the problem is this, brokers made this exploitation available to us with the help of leverage and a market to trade in.
they charge a "spread" and sometimes swap to make a profit while we trade through their services.

SO WHY IS IT THAT::::

1. Brokers are complaining that scalpers are making them broke
2. brokers are complaining that news traders are making them broke -er
3. Brokers are saying that latency scalpers are making them poor.

what i want to know is this...

1. Why trade forex if U dont intend to EXPLOIT?
2. why is it that when we finally find a way to win, the brokers are saying we violated section 32 of whatever rules. by exploiting such, and such

3. Why are bucket shops still around if they DONT always hedge their clients positions?


what are the Bucket shop brokers doing about it?

1. Closing people accounts
2. Widening spread
3. Not letting u in on a good fill.

now, as far as a good fill goes, i know that the REAL market it is even more difficult....but why are the market makers faking prices based on news reports?

They say 90% of traders end up losing...that's why bucket shops dont hedge...they are using statistics to their benefit
  • #3
  • May 4, 2007 5:24pm May 4, 2007 5:24pm
Mate that like asking why they shut down the table when your on a run at the Casino or better yet if your to good they just ban you from it.
  • #4
  • Edited 6:04pm May 4, 2007 5:49pm | Edited 6:04pm
Quoting mrmikal
Mr Demark,

Let's put it this way...if you were a broker, how would you make money without "cheating" your clients? In otherwords, I challenge you to come up with a business plan on what would make you viable as a broker WITHOUT providing your own liquidity. Now, don't forget to include all the costs associated with running a business, costs of computers, internet connections, office space, customer service reps that can man 3 different shifts, website costs, annual software costs, your salary, etc...and then find out how much volume you need to do in order to cover all of that. Now, you have to assume that your BEST price in a pass through situation will be 1-2 pips better than your spreads...meaning you make 1-2 pips per trade. To put it in perspective, in order for you to MAKE $100,000 in a year, you need to do anywhere from $1.3 billion to $2 billion in volume a year...that's just for $100,000....figure out how much you REALLY need and you'll start to see how ridiculous it would be to try and be a simple pass-through only.

Now that we have identified the problem (people exploiting each other) what would forex look like 10 years from now?

if bucket brokers continue to tighten their rules and behaviours, then forex would simply become for a casino for scalpers and newstraders traders and forex would become a market only for long term or medium term traders.

A mean c'mon, bucket shop brokers wanna make money too right? and lots of it.

FXCM was the one of largest bucketshop until they started an ECN like routing setup (which i still dont trust)

But with closing, i just want the buckets to be spilled and over with.
100% of traders are losers. Just that some win more than they lose!
  • #5
  • May 4, 2007 5:50pm May 4, 2007 5:50pm
Quoting mrmikal
Mr Demark,
Let's put it this way...if you were a broker, how would you make money without "cheating" your clients? In otherwords, I challenge you to come up with a business plan on what would make you viable as a broker WITHOUT providing your own liquidity. Now, don't forget to include all the costs associated with running a business, costs of computers, internet connections, office space, customer service reps that can man 3 different shifts, website costs, annual software costs, your salary, etc...and then find out how much volume you need to do in order to cover all of that. Now, you have to assume that your BEST price in a pass through situation will be 1-2 pips better than your spreads...meaning you make 1-2 pips per trade. To put it in perspective, in order for you to MAKE $100,000 in a year, you need to do anywhere from $1.3 billion to $2 billion in volume a year...that's just for $100,000....figure out how much you REALLY need and you'll start to see how ridiculous it would be to try and be a simple pass-through only.

I think its worth to mention that brokers do not live on commissions or adding to the spread alone. If you study the Interactive Brokers IPO prospectus, you can see they make twice what they make with execution-fees with interest revenues. I think its safe to assume that its the same for the typical FX-broker, most pay even less interest on account balances than IB.
  • #6
  • May 4, 2007 8:54pm May 4, 2007 8:54pm
i think to be registered with NFA will cost about 2% of anual revenue.... should they are registered by many , they will pay more, now they have to keep the system running , pay membership ,tax and still have to smile.

http://www.nfa.futures.org/registrat...membership.asp

it is competitive world, they have to give competitive price. we may be the lowest in this bussines food chain, but that what makes us soo important for them.
  • #7
  • May 4, 2007 11:26pm May 4, 2007 11:26pm
Mr. demark, I like your post and you have asked very good and pertinent questions. Mrmikal you have provided an excellent reply and explanation.

We are all trading the forex for speculative purposes and we each have to find an edge and trade that edge for as long as it lasts. I strongly believe that's the only way to be successful. Whether it be news trading, other forms of scalping, even exploiting price latency or any other form of arbitrage. Never mind that this edge may one day disappear through broker manual execution, wide spreads or other forms of broker control. Just collect the pips day by day using the edge that you may have. I know I do.
  • #8
  • May 4, 2007 11:41pm May 4, 2007 11:41pm
Quoting PipStar
Mr. demark, I like your post and you have asked very good and pertinent questions. Mrmikal you have provided an excellent reply and explanation.
thank u pipstar, i feel welcomed.

we need to ask ourselves these questions every now and then
100% of traders are losers. Just that some win more than they lose!
  • #9
  • Edited 8:13am May 5, 2007 8:02am | Edited 8:13am
Mr Mrmikal, you stated that after a news release there is little liquidity, actually that is when there is the most buyers and sellers. The trick is to match the buyers and sellers.
I read somewhere, do not remember where, that the average life of a new account is 45 days...Think about that, whatever the initial amount a wide eyed future millionaire sends to a broker is gone in 45 days +-. Then they must send in more money, or try to get their old job back .
Mr demark,
My guess is that the future will have a few big ECN style brokers, and fewer dealing desk brokers that offer everything...free charting, news, advise, education, heck free drinks if they could figure that out....hey, it sounds like Vegas..... which in some ways the World of Free Demos is
  • #10
  • May 5, 2007 11:15am May 5, 2007 11:15am
Quoting seeit
Mr Mrmikal, you stated that after a news release there is little liquidity, actually that is when there is the most buyers and sellers. The trick is to match the buyers and sellers.
Seeit,
Right after a news release there can be a lot of buyers OR sellers. To have liquidity you need to be able to match buyers with sellers. Having a huge number of people all wanting to take the same action creates less liquidity.
  • #11
  • May 5, 2007 5:40pm May 5, 2007 5:40pm
NV,

Thanks for the explanation...this is actually more of what I meant by low liquidity...having a mainly 1-sided market.

Quoting nvwine
Seeit,
Right after a news release there can be a lot of buyers OR sellers. To have liquidity you need to be able to match buyers with sellers. Having a huge number of people all wanting to take the same action creates less liquidity.
  • #12
  • Last Post: May 7, 2007 9:09pm May 7, 2007 9:09pm
Well said NV and Mr. Mikal-

I think people use the term bucket shop and don't even know what it means. If you don't like this market there are plenty of other games in town. If you truely think everyone is out to get you, why do you stick around?
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