Inside Info on Brokers.

My answer to your last question is because I have a person who is an ex employee of a brokerage firm saying this was a "normall practice"

What more can I say ?

Hi boycie,
I hadn't read your interesting post yet when I wrote that.

May I ask what kind of manipulation is a normal practice?

From a thread in this forum where arb possibilities are being investigated, I believe they found that they do happen, although 1 or 2 times a day (please someone correct me if I'm wrong). That is, the situation in which the ask price in broker B is lower then the bid price at broker B happens, but is not "normal". Therefore, my conclusion is that brokers can't move price that much only to take your position, as this would result in bigger differences between brokers and more arb opportunities than there actually exist.

What I can imagine happens is the following. If the "average" price on GBPUSD is 1.7850, and spread is 5 pips, the broker can take all the range from 1.7845/50 to 1.7850/55 (bid/ask) without creating arb opportunities. In this way, they can easily take the stops at 1.7845 when the "market" price is 1.7850.

That ¡s the only kind of manipulation I can think of; but please explain what they do and how they avoid arbitrage.

Thank you,
Bonete

SoyYoCon


It's only common sense. Many times even the FOREX news services such as IFR will state "Dealers are eyeing stops at "such and such a price"). Now who are the ones who know exactly were stops are placed? Answer: the brokers and MM's.

JohnFX

Good point John.


You can either use this information to your benefit or ignore it.

Good information.

I know from personal experience, that the mechanisms of how Brokers actually operate...was sorely lacking in my Forex "education."

There seems to be a lot of first, second, and third hand accounts of the process...with widely varying opinions. I guess this may be due to the fact that there may, in fact, be widely varying broker practices. That the market isn't as regulated as others, and there is more leeway for such variances.

Either way, my sense of paranoia seems to have become more developed as of late. A little unpleasant, but overall, for the best methinks.

With the market being as unregulated as it is, and the myriad of differing Brokers out there, I guess it would be difficult to find a definitive book or article on the subject...but, I would sure be interested to learn more about it.

Tho, now that I think about it...I guess I am

Thanks
SF

I agree that visual stops or mental stops are best, But what about putting a limit in. Would they try to avoid getting to your limit ???????????

If they can "stall" the market during low volume I'm sure they do to prevent a limit from being hit, if the trade is going against them. But, once outside volume comes in and the market gets really moving there's not much they can do except let the market go where it's going.

JohnFX

But if they "stall" the market on purpose, wouldn't they be also actually saving the opposite positions from hitting their stoploss? So they would be damaging some customers but helping others?

I'm sorry that I keep playing devil's advocate here; but I frankly fail to see how they manage to manipulate the market without creating arbitrage opportunities; or how do they manage to trade against all the other clients at the same time when obviously many of them have opposite views about where the market will go. I would be thankful if someone can enlighten me on this.

Thanks a lot,
Bonete

I'm not sure. I think they'd rather let the market hit your limit and cause you to open a new position for another three pip gain.
Although I am not a great believer in broker consipracy at all. I wonder how they could be so coordinated. I think they're not. Otherwise it would be easy for them to play against each other and the prices would be markte prices at all times. I think that the brokers might want to go for stops only when there's a really large amount of them in one place.

That's my opinion from the beginning. If you are the only short in the market, they don't want to stop you. They know that more people are long the market. They will go after the longs in this case and you are profiting.

Consider this example.

A broker has some clients. 10 of them did the following at some point of time. 7 clients went long at the EUR/USD. For simplicity, I will assume that the first one went long the EUR/USD at 1.2000/1.2003, the second at 1.2001/1.2004 and so on, that the seventh went long at 1.2006/1.2009. Now the other 3 clients went short. The first at 1.2006/1.2009, the second, 1.2005/1.2008 and the third one at 1.2004/1.2007. Now this means that the pair traded between 1.2000/1.2003 and 1.2006/1.2009 so that all 10 clients got filled at such prices.

Each client has a stop loss of 20 pips and everyone traded 1 full lot ($100k). Now let's wear the broker hat and see how can we profit from such a situation.

If the price went up first and then dropped back, i.e if the longs opened their positions first and led the prices higher, then the shorts got in, then the current price should be 1.2005/1.2008, which is the last short filled.

As a broker, I can see that the stops are like that,

1.1983, 1.1984, 1.1985, 1.1986, 1.1987, 1.1988, 1.1989 (Long Stops)

1.2026, 1.2025, 1.2024 (Short Stops)


Now we are standing at 1.2005/1.2008. The longs are putting sell orders, and the shorts are putting buy orders. The total amount for the 10 clients is $1M. Now assuming that I am a market maker, assumed that I have larger amounts to money to move than these traders, I get into the trade myself. So I short the market at a right moment where there are not too much buy limit orders on my system, i.e. when the road is clear and I am sure that shorting will cause a spike down and the market will move down. When I know that only a small limit buy order of $100k is on my system, I start the move, short the market by $100k and thus I am in a trade of $100k dollars shorting the EUR/USD. This price spike down cause the the EUR/USD to drop on everyones' screen to 1.1989/1.1992. Of course I don't want this to look like a hard rock drop, so I am prepared with bid and ask orders for myself ranging all the way down. When I short at 1.2004/1.2007 for example, I am ready with a bid and ask orders, one is at 1.2000 for the bid and the other is at 1.2003. I am buying and selling, I am the market maker, these are my limit orders now. Quickly enough and through my advanced software, I remove the orders and lower the prices once again to 1.1998/1.2001, and so on till I go down to the required price. There is no action in the market actually, no one is buying and no one is selling and I am dropping the prices quickly enough to minimize the number of traders who will enter at the market. I know that the road is clear, so I won't have to fill the orders of anyone out there.

Now bear in mind that I brought prices to this level by shorting when the road was clear, which means that I got the prices down when there was only 1 client only between the current price and the 1.1989/1.1992, so actually I moved the market to the first stop by only shorting $100k. And because there was no buyers in the range we are talking about from 1.2005 to 1.1989/1.1992, I only sold $100k short as a broker at say 1.2004/1.2007. Now the first stop to sell $100k is at 1.1989/1.1992, who will buy this?? It's me of course, the broker. I will buy the $100k from the first guy at 1.1989, I covered my $100k short position by buying back at 1.1989, I made a profit of 15 pips, and then when the trade is filled, the price will drop to 1.1988/1.1991, the next best price. I buy this too, the price drops back to 1.1987/1.1990, the next best price, I buy this too, I then buy another $100k at the next price of 1.1986/1.1989. I am now having $300k in long EUR/USD positions bought respectively at 1.1988, 1.1987 and 1.1986. Note that everytime I buy the lots from the longs at these prices, I am the other side of the market as well, offering to sell every $100k I have at the ask price, so actually when I bought at 1.1988, the price went down to 1.1987 and I quickly transfered the $100k to the ask side. I am selling back what I just bought for a 2 pips profit everytime we go down a pip. They are put for auction at 1.1990, and so on. When I buy the last lot at 1.1986, I am now having 3 lots offered for sale at 1.1989, 1.1990 and 1.1991.

Now I am long $300k, at 1.1988, 1.1987, 1.1986, etc. Since I am the market maker, I am going to rapidly increase the bid price of the EUR/USD and offer to buy at higher prices, thus bringing the prices to 1.1995/1.1998. I am now offering to buy at 1.1995, and offering to sell at 1.1998. I am now making money on the $300k I just bought, waiting for them to find buyers at 1.1998. I can even increase my offering price as long as no limit orders are there in the way, so I bring the prices back to 1.2001/1.2004. I am now offering to sell the $300k at 1.2004. I am making real good money.

I know that it sound too complicated to be done, but believe me, with computer software, it is doable. This is just a simple example. When hundreds of stop orders are there and the road to the required stops is too crowded with limit orders, it would be figured out from terms of probability and overall profit. Using software decisions for all types of situations is possible. I can see everything. Limit orders, stop orders, open trades, who is long, who is short, everything is in my system, and I have the money and the ability to twist the whole thing to my favour if everything is just in place and in the right order, so why don't I do it? I even know how many traders are online now on the platform willing to enter a trade live and I can even know how many of those online traders who are watching are actually watching the EUR/USD chart!!! Doesn't this give me an edge over everyone if I am a trader??? Sure it does. So why do I accept to just do my job and be a market maker if I can make profits as a trader???

What I really don't know is market orders and the mental stops. Those 2 are the real threats to my strategy, but nothing is risk free.

Thanks,

Nader

If anyone need to read an opinion that supports mine, please read the attached pdf document, it gives a great example of what market makers do in the thin illequid markets and/or times.

Thanks,

Nader

Are you saying that the broker does not have to pay a spread for his money? Sure he may not have to pay it on that trade if he buckets it but has he not been paying a spread on the IB all along? Ultimately everyone in the game has costs that siphon off profits. Fees are being payed all the way along by all participants. The fees siphon money out of the game. If a bunch of people are sitting round a poker table and the collective stake is 20k and nobody has any fees to pay out of that 20k then it is a zero sum game. If the game goes on for several days and 20k is the aggregate total funds for all players and it is decided that with each bet placed that 1 percent will be set aside to pay the hotel room fees then it is a negative sum game because with each bet a little more of the pot is removed and each player loses something as the game progresses. The true test of a zero sum game is that if you take a finite amount of money and declare that no more can enter the game. Now play that game forever. Does the pot eventually get smaller due to fees or other means of attrition? Then it is negative sum.

Take the same set of players with the same 20k aggregate stake. Now imagine that all accommodation and meals etc. are paid from an outside source. Is that zero sum or negative sum? If the economy has inflation you could call it a negative sum game because the collective stake will be worth less inversely less than the inflation eating away at the value of the currency. It is all a matter of perspective because the example you proposed does look like a zero sum situation. However the key to that issue is that the broker does not keep returning to the table with the same amount of money. They always come back to the other players with 3 pips less. Each player starts with a loss except the broker. Therefore the game for the broker is always positive sum and the game for the players is always negative sum. Another way to position it is to see what happens if the players were to enter and leave the market before price moved. Each bet they made had no price movement. They put 10k on the table and take 997 off. That is negative sum. Look at the broker. In each case he puts 10k on the table and if there is no price movement and he exits he takes 10,003 off. That is positive sum.

FT

Narafa, that's a good PDF you posted. It's just an example of the dishonesty that exists, which eveyone has to be aware of when trading any market.


JohnFX

I'm a little naive on this subject. Are people suggesting brokers are actually engaging in trades to move the market to hit stops? Or are people suggesting they manipulate the price feed so that it appears to have moved just on that one trader's platform?...or both.

I have to wonder even during thin maket times how much they would have to trade with to be able to make a move of 20 pips. I would think they would have to dump quite a bit into it to get the desired results and then they got to figure out how to layer their trades so they could actually cover the money they've put out to hit a measly stop on a little trader. Plus they already have gotten their spread. Why would they do that just to make someone else lose their money if it doesn't actually help them make even more.

It just doesn't make sense to me why they would do it. If they can make money while moving the market, not becuase they make you hit a stop, why would they even care where your stop is? If they are making money by moving the market, I don't see the reason why they would be stop hunting.

I guess I don't see it as much because I use strategies and margin that allow me to have huge cushions.

[quote] The term broker here is a bit misleading because a broker is normally someone who charges a comission for executing a trade with a market. Most providers are actually market makers in that they don't necessarily offload trades but often use their own money and make the market. The dealing stations are actually quote systems that quote a bid/ask spread. The quotes on your screen may or may not exactly reflect other market prices around the world. They may even be manaully adjusted to reflect what the broker believes will make him the most money. Kind of like a store owner adjusting price tags in order to make an attractive market that will sell his products.

The market maker has control over his prices and does not have to buy or sell to adjust them. In a thin market a quick move to a stop cluster and back the other way in the direction the market is going may trigger a huge bucket of orders which may blow a bunch of people out of the market at a loss especially if a signal was given in the other direction and there are a lot of tight stops sitting there. Price retreats to the stop cluster, orders are hit, and the mm has just made 23 pips or so per order. It is unlikely that they go after individuals with small orders. You'd be surprised how many people make almost identical moves. Especially scalpers with tight stops.

They only make money when they move the market quickly in small ways that causes a bunch of orders to get executed with a loss in a short period of time. This is low risk and high rewared.

Right. Scalpers are the most vulnerable to this if they are not very good scalpers.

FT

I still don't get it... for example, let's say a broker pulls a quick 20-pip spike down. This would of course take several stops on long positions; but it would also trigger a bunch of limit orders to close shorts (for a quick 20-pip gain for the clients); and would also trigger a bunch of long entry limit orders from clients, which would be filled and instantly be 20 pips up.

Is my reasoning wrong?

Thanks,
Bonete

In the case of poker, the one on the sidelines is always winning, and this makes the poker game being played a negative sum game. But in the case of the forex broker or market maker, he is into the game sometimes. He is the market maker, he buys from people who want to sell, and he sell to people who want to buy, so he is into the game, he is always having positions.

Thanks,

Nader

Pipsta & SoyYoCon, please read post #30 on this thread on page 2. You will find out when do I think the market makers hunt for the stops of the clients.

Moreover, market makers are always synchronized with each other, which means that FXCM can always see the bid/ask prices of FXSolutions and of almost all other market makers. They also have access to the interbank bid/ask rates. They can also see the volume of every order placed, just as you can see the same if you have a Nasdaq Level II quotes.

When a market maker starts to move the prices down or up, it leads the prices down, then other market makers lower their prices too, in other words, some market maker will be the leader, and then the rest follows. That's why you will see the difference in feeds widen sometimes, and then corrects itself.

Please also read the pdfs I have attached and you will have a better understanding of why the market makers have a greater opportunity to move the market in thin trading periods.

Since the market maker is the buyer and the seller for all orders, he can't actually make money out of himself, he must get the money that some traders are willing to lose on their stop orders. If I am buying pepsi for $1 and selling it for $1.05, I can't profit just because I moved the prices and decided to buy at $1.3 and sell at $1.35. There must be external buyers and sellers, willing to put their money into action so that I can profit from such a move. Someone must sell me pepsi that he don't own at $1, and then I move the prices up and go sell it to the one who wants to buy back pepsi (Stop order) at $1.35, I got my spread and I stopped him out, took his money, he is miserable and searches for better techniques to beat the market, and I am happy with my little play and profits.

Thanks,

Nader

Yes but the positions always begin with a payment made to the broker that must first be paid by the other players. When the bets are placed the game is already negative sum for the players and positive for the broker. Where do you have trouble seeing that the fees come out of the game and permanently diminish the capital available. And yes the broker can sit out any hands he wants to. If he wants to just take his commission he can just funnel the trade to the IB. For him that is guaranteed profit and for the other traders those pips are a guaranteed loss. They may win back more but they have to first win back the guaranteed loss. Then they must win still more to get a profit. However they may not even take the profit away from the broker if he pumps the trade through to the IB market.

Also when a player sits on the sideline he is not winning he is simply not in the game. The ones who are in are in a position where the outcome of the game is that the exact amounts bet will only change hands but money will not be removed. If someone sits on the sidelines they are not in the game. The only amout of money that can be said to be in the game at the time is the amount wagered. If a total of 2000.00 is bet on that hand you can be sure that 2000.00 will be lost and 2000.00 will be won. There is no diminishing capital it just changes hands.

FT