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How does your broker make money from you?

  • Post #1
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  • First Post: Sep 28, 2007 11:07pm Sep 28, 2007 11:07pm
besides the pip spread you pay how do they make money? People say brokers hunt stops but I do not understand how they earn when you lose. I found that this has been answered already but I do not understand the answer. If the bucketshop takes the opposite of your trade when you lose how do they make money? Is it because they never lose as they margin call you before you start losing the money they leverage you? That sound like the only explanation to me can somebody please explain!
Quoting PiP-GiRl
besides the pip spread you pay how do they make money? People say brokers hunt stops but I do not understand how they earn when you lose. I found that this has been answered already but I do not understand the answer. If the bucketshop takes the opposite of your trade when you lose how do they make money? Is it because they never lose as they margin call you before you start losing the money they leverage you? That sound like the only explanation to me can somebody please explain!
The bucketshop holds a separate account for clients' funds. When a client loses money from his/her account, that loss of funds gets transfered to the broker's bank account as profit. This is easy for them to do since nothing is being passed through a real market. For example, you open an account for $10,000. You place trades through your trading account and the broker's software automatically logs your activity. Let's say that if you lost $5000 of your money, the other $5000 is easily the broker's profit because nothing is passed through the real market place and all they have to do is simply transfer that $5000 over to their account. The broker doesn't even need to trade against you. They already anticipate that you will lose and the trading platform is simply just recording all the activity. Your account you are trading is basically a virtual money account backed by your initial funds you deposited. Everything is all done electronically. When you decide to withdraw your money, they simply pay you out and adjust your trading account to reflect the changes. Brokers know that the large majority of traders lose so its a win win situation for them. If the reality was reversed and the majority of traders win instead of losing, bucketshops would be of a rare existence.

Bucketshops don't always do this. Sometimes they may really hedge trades and just keep the spreads as profit. It really depends on the trader. If they know you are too profitable, they will either hedge so they don't lose and keep the spreads as the profits or they will make your trading experience a complete misery so that it will force you to close your account and go elsewhere. Sometimes bucketshops can be commonly compared to a casino. The house always wins. When you find an edge to beat the house, they will kick you out and not let you play anymore. Happy trading, and always do your research before trading with any broker. If you are a consistently profitable trader, it doesn't hurt to talk to the broker privately to make sure they don't mess around with your account. They might appreciate you warning them that you're profitable and that trading against you is a bad idea. Anyways, good luck
  • Post #3
  • Quote
  • Edited 7:00am Sep 29, 2007 6:38am | Edited 7:00am
Yep... This is true.. many brokers don't like you making money. IBFX politely told me they did not want my business any more when I started to win consistantly. It certainly leaves a bad taste in my mouth knowing a broker is profiting from my losses.. but thats retail FX I guess. It always makes me think of a bookmaker who takes bets on horse racing, where the house has the edge. The bookie aims to profit from the losing players, similar to many retail FX brokers. ECN brokers are better for this though.
People get funny when it comes to money.

I remember first learning about the ease and liquidity of Forex. I was very excited and starting learning and reading. Then after studying various EA's and methods I finally found a system I wanted to try so I opened up a mini. Then I was enlightened.

Software crashes during high volatility. Watching spreads expand in the middle of the night (just to take out stops I am sure). Requotes. I am not complaining mind you. I just have had to realign my strategies to accomodate such goings on. If I went long in the EURO from 2005 and held my breath there is not much the broker could do about it. Those software crashes are what really get me. I envision some yes-man in a dark room somewhere waiting for the signal to pull the plug.

In hindsight it might actually help. I see it as me against the market AND the broker which gives it more grit.

Long term strategies based on fundamentals, hedge strategies, patience are all virtues for me.
"Its not where your at, but where your coming from"
Quoting PiP-GiRl
People say brokers hunt stops but I do not understand how they earn when you lose.
Buch of bad info in this thread. Let me break it down for you.

Brokers don't hunt "your" stops. Contrary to popular belief, your just not that important. What they hunt are "concentrations" of stops.

Say you have a nice clean up trendline. Technical trader lore says that if that trendline gets pierced, the trend is reversing so you should put your stop just the other side of it. Well guess what. Everyone has their stops in the same place. Stop hunters look for opportunities like this.

Being a broker with deep pockets (actually it's VERY rarely a broker that hunts your stops but whatever) I can move prices around by buying and selling a huge volume. What I'll do is start shorting like a madman, driving price lower. If my pockets are deep enough (or the market is thin enough) I can push the price through the trendline and trigger your stops. Knowing where your stops are I can set my TP at your SL level so in effect your selling me your position which I'm using to cover my shorts. Make sense?

And as an FYI, most retail brokers DO hedge. No, their usually not hedging every order you place in the market, but they are hedging their net exposure. Just because most people lose doesn't mean that the net positions don't pose a massive risk.
Quoting Darkstar
Buch of bad info in this thread. Let me break it down for you.

Brokers don't hunt "your" stops. Contrary to popular belief, your just not that important. What they hunt are "concentrations" of stops.

Say you have a nice clean up trendline. Technical trader lore says that if that trendline gets pierced, the trend is reversing so you should put your stop just the other side of it. Well guess what. Everyone has their stops in the same place. Stop hunters look for opportunities like this.

Being a broker with deep pockets (actually it's VERY rarely a broker that hunts your stops but whatever) I can move prices around by buying and selling a huge volume. What I'll do is start shorting like a madman, driving price lower. If my pockets are deep enough (or the market is thin enough) I can push the price through the trendline and trigger your stops. Knowing where your stops are I can set my TP at your SL level so in effect your selling me your position which I'm using to cover my shorts. Make sense?

And as an FYI, most retail brokers DO hedge. No, their usually not hedging every order you place in the market, but they are hedging their net exposure. Just because most people lose doesn't mean that the net positions don't pose a massive risk.

Good stuff, Darkstar. I had a friend at school tell me that my broker hunted my stops. Pure bollocks, people love to blame their losses on someone else.
Patience + Humility + Study = Success
Quote
Being a broker with deep pockets (actually it's VERY rarely a broker that hunts your stops but whatever) I can move prices around by buying and selling a huge volume. What I'll do is start shorting like a madman, driving price lower. If my pockets are deep enough (or the market is thin enough) I can push the price through the trendline and trigger your stops. Knowing where your stops are I can set my TP at your SL level so in effect your selling me your position which I'm using to cover my shorts. Make sense?

I don't agree fully here. I have read the Forex market is 10 to 15 times the size of the bond market and 50 times the size of the equity market. I am not convinced any one broker (or a bunch of them acting together) can move the market by buying or selling. I do agree they look at the big picture and not one individual. When things get tricky just raise the spread.

I have studied the price histories of different brokers and the difference can amaze you. This is what gives them the edge. There is no standard market so they don't have to move the market. Couple that with widening spreads at their discretion and your whole way of thinking has to re-align on how you attack the market. These are things you won't read about in those trading books you pick up at Barnes and Noble.
"Its not where your at, but where your coming from"
  • Post #8
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  • Last Post: Oct 1, 2007 11:37am Oct 1, 2007 11:37am
I think you missed his whole post. He said it is VERY RARE, that a broker hunts your stops.
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