How do retail forex brokers lose money when we win? | Forex Factory

Options

Go to
Permalinks
Print Thread

Similar Threads

Why you lose money and will always lose 44 replies

Did we Lose any Brokers? Are we going to Lose a few? 1 reply

Brokers prefer to win or lose ? 46 replies

Do dealing desk brokers have to lose if you win? 2 replies

Circle Of Money We win or Lose? 6 replies

Attachments: How do retail forex brokers lose money when we win?
Exit Attachments

How do retail forex brokers lose money when we win?

  • #1
  • First Post: Feb 25, 2009 7:17pm Feb 25, 2009 7:17pm
I have heard before that forex brokers don't won't us to win, because when that happens then they lose money. If the forex market is a $2 trillion a day market, then how does a retail broker lose money? How does someone having a winning trade cost a broker money? Aren't we trading against other traders?
"Trading is a mental sport." - Ziad Masri
  • #2
  • Feb 25, 2009 8:30pm Feb 25, 2009 8:30pm
Quoting Quickdraw
I have heard before that forex brokers don't won't us to win, because when that happens then they lose money. If the forex market is a $2 trillion a day market, then how does a retail broker lose money? How does someone having a winning trade cost a broker money? Aren't we trading against other traders?
Retail Brokers (aka bucketshops) trade against us.
ie, if we go Long EURUSD, they will either match it with someone who is going Short, OR the broker itself will absorb your position. In the latter, if you lose, they pocket your money; if you win, you pocket their money. This is why broker will do all they can to give you the worse conditions such that you dont make money.


On True Non-Deal Desks, all our positions are counter matched against another trader.
  • #3
  • Feb 25, 2009 11:30pm Feb 25, 2009 11:30pm
ragnakore, thanks for the answer.

Then isn't there a huge conflict of interest with the broker trading against us? That doesn't seem right that they can trade against us. Shouldn't that be ethically wrong for a broker to do that?

Admittedly I'm no expert in regards to brokers, and I don't completely understand how they conduct their business with us, but I think there should be some laws passed to keep them from trading against their own clients. Otherwise, they can do whatever they want to affect our trading platforms and our trading accounts to their advantage.
"Trading is a mental sport." - Ziad Masri
  • #4
  • Feb 25, 2009 11:41pm Feb 25, 2009 11:41pm
Forex = UNREGULATED!!
  • #5
  • Feb 25, 2009 11:46pm Feb 25, 2009 11:46pm
Quoting Quickdraw
ragnakore, thanks for the answer.

Then isn't there a huge conflict of interest with the broker trading against us? That doesn't seem right that they can trade against us. Shouldn't that be ethically wrong for a broker to do that?

Admittedly I'm no expert in regards to brokers, and I don't completely understand how they conduct their business with us, but I think there should be some laws passed to keep them from trading against their own clients. Otherwise, they can do whatever they want to affect our trading platforms and our trading accounts...
In fact there is a specific clause about this ("Conflict of interest") which is now a requirement for every regulated broker to add in their contract with their customers, as an additional warning for the risks incurred. I can't find its exact text now on the Net but I believe it has been posted here somewhere. So it is confirmed somehow by this clause as a "normal business behaviour" of retail brokers.

I found it here:
http://www.forexfactory.com/showpost...7&postcount=30

And here is original NFA document:

http://www.nfa.futures.org/news/news...ArticleID=2104
  • #6
  • Feb 26, 2009 12:13am Feb 26, 2009 12:13am
Small profits beget small attention. They will not bother with you.
Big profits beget big attention. This is when they start doing nasty things against you such as manual execution, delayed execution, negation of winning trades, stop hunting, slippage and worst of all refusal of withdrawal requests.
  • #7
  • Feb 26, 2009 2:09am Feb 26, 2009 2:09am
What is considered big and what is considered small?
  • #8
  • Feb 26, 2009 3:51am Feb 26, 2009 3:51am
Quoting pa18
What is considered big and what is considered small?
imho more than 1 lot
  • #9
  • Feb 26, 2009 4:13am Feb 26, 2009 4:13am
Quoting Eclipse
imho more than 1 lot
pah, one lot! I'm going to start playing 9 minilots from now one
  • #10
  • Feb 26, 2009 6:26am Feb 26, 2009 6:26am
Quoting ragnakore
Retail Brokers (aka bucketshops) trade against us.
ie, if we go Long EURUSD, they will either match it with someone who is going Short, OR the broker itself will absorb your position. In the latter, if you lose, they pocket your money; if you win, you pocket their money. This is why broker will do all they can to give you the worse conditions such that you dont make money.


On True Non-Deal Desks, all our positions are counter matched against another trader.
When you trade with True Non-Deal Desk - you trade against this True Non-Deal Desk broker. Forex is OTC Market and there are no brokers. It is a dealers market. Don't be naive! All this ECN, No DD features are just another marketing way to sell.I wish you luck and profits!
  • #11
  • Edited Mar 4, 2009 10:08am Mar 3, 2009 10:04pm | Edited Mar 4, 2009 10:08am
Quoting Quickdraw
I have heard before that forex brokers don't won't us to win, because when that happens then they lose money. If the forex market is a $2 trillion a day market, then how does a retail broker lose money? How does someone having a winning trade cost a broker money? Aren't we trading against other traders?
When trading, if they disagree with your position they will trade in the opposite direction to cover your potential loses (hedge). However, if you happen to be right and they are wrong they lose money (because their hedge was incorrect).

However, if they agree with you they will trade with you. So they win when when you lose, and have the possibility of losing when you profit.

In other words it all depends on the hedging technique... but they do NOT delberately aim to get you, because to put it simply it does not do them any good to have clients going broke.

But what it really comes down to is do you have what it takes to profit, nothing more nothing less.
Don't put your stops next to pivotal points or common EMA SMA you're more likely to get hit.
  • #12
  • Mar 3, 2009 10:06pm Mar 3, 2009 10:06pm
Quoting lavatrader
When you trade with True Non-Deal Desk - you trade against this True Non-Deal Desk broker. Forex is OTC Market and there are no brokers. It is a dealers market. Don't be naive! All this ECN, No DD features are just another marketing way to sell.I wish you luck and profits!
There are some ECN brokers that allow you to have direct offers of buying and selling offered by banks and other institutions. I believe that maybe MBTrading is one of those true ECN brokers.
  • #13
  • Mar 4, 2009 9:59am Mar 4, 2009 9:59am
There is always someone on the other side of the trade whatever you might be trading. Who do you think you buy the stocks or options or commodities from? Market Makers. It is not a problem with you trying to make money. A lot of people blame the system or the broker when they lose money. There is always a counter party in every transaction of any sort of trading.

Many complain about stop hunting - put a mental one if you are suspicious of the broker or have an account with a reputable broker.

Look at the spike on usd/jpy as of 1/2 hour ago, 50 pips. Now, who ever lost money on that will blame others but it really happened bc of GE tanking and taking the market down with it. Since then it came back to where it was before. It's part of trading and taking risk.
  • #14
  • Mar 4, 2009 11:04am Mar 4, 2009 11:04am
Levent you are very correct,

However, in a market maker with forex, the opposing party is ALWAYS the broker or their hired hedging partner. Hence if the tick data that they are receiving can work in their favour or your favour but not both, guess who comes off second best.

I can assure you it is not the broker / hired hedging partner. And this is where there lies a conflict of interest in market maker based brokers, who earn via fixed spreads rather than paid commissions.

If you pay by commission (without spread) they only earn money if you able to continue making money. Hence it is in their interest for you to profit. In addition to this, commission based brokers normally have substantially lower spreads, resulting in a greater likelihood of trade completion. This does not mean that they don't hedge but means that there is less need to.

While fixed spread brokers earn via spread and always hedging, and it really does not matter if you win or lose they made their money (either hedging or spread or both). You also have a wider spread, resulting in a smaller chance of trades completing.
  • #15
  • Mar 4, 2009 2:24pm Mar 4, 2009 2:24pm
Quoting aquaart
There are some ECN brokers that allow you to have direct offers of buying and selling offered by banks and other institutions. I believe that maybe MBTrading is one of those true ECN brokers.
But this is how most trading platform designed! For example: Fxsol fed into their trading system a quote feed from EBS which is interbank feed and all customers orders are executes at these prices. But you, as a customer, have no idea whether you trade covered or not, because it is not your business anymore. You "sell to" and "buy from" your conterparty (MBT, fxclub, fxcm etc) and they decided what to do with that position.
There is nothing new on the field.
  • #16
  • Edited 7:56pm Mar 4, 2009 7:31pm | Edited 7:56pm
Quoting Quickdraw
I have heard before that forex brokers don't won't us to win, because when that happens then they lose money. If the forex market is a $2 trillion a day market, then how does a retail broker lose money? How does someone having a winning trade cost a broker money? Aren't we trading against other traders?
In the retail broker situation (normally fixed spread), the only other traders are their other clients and the broker themselves. Obviously the broker tends to be one of the main opposing traders. So very limited clientelle, hence with their hedging techniques the retail broker profits when you profit or lose.

However, with a true ECN market broker they provide access to banks, financial institutions, and other traders that are trading. This is a much broader bigger market. This is the market that your broker will get their data feed from. There is world wide set of traders (unlike one large retail broker who has their own set of traders), and as a result the ECN broker consistently produces lower spreads. Hence, ECN brokers of this nature need to charge commissions as this is normally their only way of making money. They don't benefit if you lose (unless they also hedge).

But because you have a lower spread with ECN broker there is much greater chance of your trade being completed. Hence it benefits the ECN broker if you profit, because next trade will be bigger and the broker gets to make a larger commission. However, this is also the reason why commission ECN brokers prefer larger clients. This means it also benefits the broker if they give you the best ECN feed / pricing feed possible, because it gives you the best possibility of trades that are profitable. Often starting at $5000USD or more.

However, having said all this, the real question is do they hedge? Most ECN brokers (commission based)hedge less than retail brokers (fixed spread).
  • #17
  • Mar 4, 2009 10:29pm Mar 4, 2009 10:29pm
Quoting aquaart
However, with a true ECN market broker they provide access to banks, financial institutions, and other traders that are trading. This is a much broader bigger market. This is the market that your broker will get their data feed from. There is world wide set of traders (unlike one large retail broker who has their own set of traders), and as a result the ECN broker consistently produces lower spreads.
Hello aquaart,

FXCM have $253,000,000 Customer Deposits.
I strongly believe that combined customer deposits of all ECN participants (market makers) are no more than $15M. Therefore, one retail market maker is 17 times bigger than whole “ECN”.

And again, don’t forget that any regulated forex broker in US must have at least $20,000,000 in net cap to do business. Same requirements for the Futures Exchanges in US.

Is ECN regulated?
  • #18
  • Edited Mar 5, 2009 12:08am Mar 4, 2009 11:50pm | Edited Mar 5, 2009 12:08am
FXCM is market maker, and so is IBFX and are both massive, but their trading is only dependent upon their own clientelle. 250 000 000


But ECN give you access to Deutchbank, BARCLAYS, Bank of America National Australian Bank, Westpac, HSBC, Citigroup often a prolifery of 50 international banks or more. All of these dwarf any one individual broker. As a result there are trillions of dollars in the ECN 1 000 000 000 000. The actual ECN company that you are trading through might be smaller but the market that you have access to is many times larger. The smaller broker is just a sign of that they are not making as much money out of you.

And with companies like IBFX and FXCM it depends on whether they are formally classified as a dealer or broker (technical legal discrepancies) on whether they the need 20 million or not.

ECN market 1000 000 000 000 because you trade with multiple multi-national banks. That is the reason spreads are so much more competitive.

The best of the non ECNs 253 000 000, because you only trade within them.

THE BEST of non ECN gives you access to 253 000 000
Many ECNs give you access to 1000 000 000 000

Access to the liquidity is the most important thing not the size of the company you are dealing with. Size of company is ONLY important when dealing with non-ECN brokers, because they deal within themselves only.

Just count the zeros and you will get your answer as to which is the bigger market.

And yes ECN is actually regulated by the same bodies right across the world. MBTrading for example

MBTrading have fantastic spreads because their access to financial firms other than themselves is significantly bigger than most others including most other ECN companies. But the company itself is about a quarter of the size of IBFX.
  • #19
  • Mar 5, 2009 8:15am Mar 5, 2009 8:15am
Quoting aquaart
FXCM is market maker, and so is IBFX and are both massive, but their trading is only dependent upon their own clientelle. 250 000 000


But ECN give you access to Deutchbank, BARCLAYS, Bank of America National Australian Bank, Westpac, HSBC, Citigroup often a prolifery of 50 international banks or more. All of these dwarf any one individual broker. As a result there are trillions of dollars in the ECN 1 000 000 000 000. The actual ECN company that you are trading through might be smaller but the market that you have access...
That doen't sound right to me. If daily traded volume on FX market is 2.5T. I am not positive that half traded through ECN.
And I remember a thread here on FF how ODL executed customer's order with 250pip slippage and they explaind that this was a best price in ECN. How about that?
  • #20
  • Edited 9:30am Mar 5, 2009 8:22am | Edited 9:30am
Quoting lavatrader
That doen't sound right to me. If daily traded volume on FX market is 2.5T. I am not positive that half traded through ECN.
And I remember a thread here on FF how ODL executed customer's order with 250pip slippage and they explaind that this was a best price in ECN. How about that?
ODL did not originally use true ECN, they are starting to just now and only upon request. They are and have always been a fixed spread broker.

Large banks do nearly all of the $3.98 trillion a day trading. The ten most active traders account for almost 80% of trading volume, according to the 2008 Euromoney FX survey and accounts for just over half of the number of transactions done per day. Other institutions (which is mostly includes the non top ten banks) make up about 19.9%, and lone shark professional traders make up 0.1%. (but because our volume of transactions are smaller, this accounts for about 47% of actual number of transactions)

They used variant of it ECN which as I have seen their feed, it definitely is not a good reflections of ECN liquidity.

As I have said look at MBTrading or even new folks of ATCBrokers. ATCBrokers have MT4 with standard ECN feed and an institutional ECN feed. The institutional is about the equivalent of MBTradings standard feed. http://www.atcbrokers.com/index_forexpro.htm
0 traders viewing now