MarketMakers

Quoting Insider

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Yea Rusty, awesome.

Thanks a bunch for taking the time and writing all this.

What do you mean by run offs of the moving averages?

Thanks.

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Quoting Rusty_forexman

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Run offs from the ma's is an extremely basic strategy. You have probably noticed it in the market before

Usually if the market is often focused on heading in one direction, the market tends to use ma's as support and resistence points.

Mostly the 10,20 and 50 ema work the best in this circumstance on the 4 hour and daily charts. You will often see the the price move to these levels and bounce off, or if it moves through the moving average - it will progress straight through to the next one, where the level usually holds...

When the ma's cross with each other, you start all over again, except you move in the opposite direction.

I hope that makes sense?

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Quoting MaXeY

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After i read this i think forex looks like GAMBLING !

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Quoting Rusty_forexman

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By no means is it gambling ... If you have a feel for the market, and know how it works - as well as apply sound management principles and treat your trading like a business. By no means at all is it gambling.

I consider gambling - something to be where you risk almost everything on an uncertain event. Trading isnt this - the event is uncertain, but it can be calculated.

The beauty of forex is - that there is so many participants and it is so big, that one trader or institution is irrelevant - and usually it takes a collection of traders with the same view of the market, to send the market in a certain direction.

We all know we can hit good trades a lot of the time. You probably could hit winners 4 out of 5 days in the week. It what we do during the 5th day that counts.

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Quoting Rusty_forexman

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Hey

Guys hows it going - Sorry about another broker related posting. I know i'm actually getting sick of them too.

But I wanted to post something productive, and might deter some myths about brokers - especially the marketmakers.

I use to work at a Large Australian Investment Bank here is Sydney - I'll give you a hint, the bank recently tried to take over the London Stock exchange. I worked on the FX cash dealing desk in 2003 and 2004 - which most of the guys who know dealing desks well....it is the lowest ranked dealer you can be. But I was only 18 years old at the time, and I was on a cadetship program with the bank, through university.

I was working along side some of the best salesmen and traders in the country. These guys are literally on millions or in some instances tens of millions of dollars a year in bonuses and salaries. Anyways, my dream was always to be on the otherside of the phones as a private trader, hence me being one now - cause working at banks is quite stressfull and i enjoy a laid back lifestyle, but i also have a massive passion for finance.

Anyways, enough lifestories - Basically we were the interbank market. The bank I worked for is among the top 15 investment banks in the world. So we were the end of the line so to speak, we only dealt with other major banks. (Rule of thumb was to deal with Citigroup as little as possible...lol)

However, believe it or not - We also were a marketmaker with our clients. Infact most major Investment Banks are. Contrary, to people's beliefs that banks are straight through processing, which they are - but also dealt clients prices and matched them with other clients.

We would take positions against our clients, quite frequently - as our division was not only a broker to our clients, but a trading house too. You don't understand the amount of losing volume that came from clients everyday.....millions! Through our dealing desk we had a volume on average of over US60 billion dollars. (sometimes it racked over 100-150 billion) - This was in 2003, 2004 by the way, I would imagine today the volume would be much, much larger. So, the trader's who liase with the executing dealers on the desks everyday would try to scalp off your position - so that they can take a commission, plus a greater spread.

For example - If you were long 100,000 euro's at 1.20. Our bank would take a position for 30,000 short euro's at 1.20 against you. Would wait till the market hit 1.1990 and then scalp 10 pips, with a prescribed stop loss. They would not do this all the time, but they would do this when the traders felt the time was right. Sure enough, the amount of losing trades from clients outweigh the winners, and the bank would be in profit.

We would also play clients positions against each other. Not in a bad way....but it was to offer the clients a better level of service - I'll explain why.

Part of the reason why the bank was so heavily focused on being a marketmaker - was not only to make profits. But to ensure better service for their clients. The real truth is, that we wanted our clients to do well - but the reality was that most didn't, no matter how much advise or consultancy we gave them. Some of biggest losing clients were actually large corporate accounts.

How we would ensure better service for our clients, was by trying to fill most orders (we couldnt do all of them, cause the volume through from some clients was to the tune of tens of billions - including leverage that is.) - and we could only fill orders sometimes, by playing clients up against each other.
However we didnt guarentee fills.

The dealing desk also provided 24 hour support to clients, including advisory from a trader you dealt with especially. (Most of our trades were executed over the phone by the way, we did have a web based platform - but we wanted to encourage traders to ring us up - so we can give them a better level of service through supporting them with their trading - including giving advice, and market information - so a trader could ring us up anytime and ask us for marketdepth or major buyers of certain pairs. etc)

We would often favour clients who held their positions - we liked day trading accounts for their volume.

Although we were a large investment bank, we hated scalpers and often tried to deter them from using us. Most retail marketmakers, I would imagine also -would have a hate towards scalpers, cause they would not be able to feed prices through to the client fast enough (since they are level 2 brokers - and receive the prices from interbanks then must pass them on to the client - making them a middle, middle man so to speak). This is probably why brokers like FXCM. etc place scalpers on manual execution - cause scalpers would take arbitrage opportunites from the real marketplace and play them against the price the broker is giving them.

The best place for scalpers is with ECN's perhaps. People who guarentee straight through processing. The only problem is most ECN's dont have dealing desks.

The myths of brokers, feeding through clients the incorrect market prices in order to trigger stops - is quite proposterous. To be able to do that, would not only put the whole firm in disarae, because regulatory authorities not only from Australia (whom are extremely tough), but from all around the world in exchanges we dealt in, would be on your case for fraud, misleading disception, and also theft agains the client. ASIC in Australia, who is the main regualtory body, considers it a criminal act of theft, to decieve clients in terms of pricing. And rightly so.

This would damage the banks name - and i imagine it would be all over the media in a flash. One of the strictest rules in the firm, was to have integrity, especially towards clients.

The foreign exchange market is not regualted to an extent - but if pricing can not be confirmed as being executed at market prices for that time (market prices means that there must be a record of prices from anywhere in the world being at that quote at that time), it cannot be done, legally.

I dont know if brokers elsewhere can toy with that idea - set up phony exchange houses and deal incorrect prices with them for example. But I know we didnt do it. I doubt most large sensible, even the larger retail brokers would do it either.

To the idea of chasing stops - Yes, this did occur, quite often. During news times mostly. We would see where stops were with our clients, we also had a good idea where market depth was, and we would send through volumes of trades to take them out, in order to make money for the bank.

See the bank always came first...profitability for the bank the most important thing overall. Clients would leave eventually, successfull or not....but the bank was always there, so it was our main priority.

The idea at the end of the day is that its every man for themselves in the market. Brokers, traders, hedgefunds. etc are all in it for themselves to make a buck and they will do it whatever way they can.

If you are a good trader - and know the ins and outs of the market (not placing in house stop losses. etc), you will not need to worry, cause you can play the game - then your sweet!

My advice is - pick a respectable and PROFITABLE (profitability in a broker is so important, cause the more clients a broker has, the better level of service they can offer you - and the less chance the broker has of falling to the ground), who has impeccable client service. Aim for the bigger retail brokers (if your retail)....who have great relationships with interbanks.

When questioning a broker, ask them how many interbanks they deal with. If they have a figure less than 5....than stay well away, cause the flexibility of price they will offer you as a client will be completely crap!

Also, just dont go for brokers just cause they have tighter spreads. etc. Of course you want the best deal at the end of the day...but you also want your orders filled and a dealer you can talk to - this is why I'm not really a fan of broker houses without a dealing desk.

For everyone who deals with American brokers go to www.cftc.gov - and then go to 'financial reports for FCM's'. Here you can check out the Capital of all the brokerage houses, try to stick to the retail brokerage houses with the highest amount of capital - cause this ultimately means more clients, a better relationship with more banks in the interbank market, cause they can guarentee volumes, and also a better level of service.

Most importantly....make sure your broker is licensed and registered with regulatory authorities in major financial countries around the world. For example - dont be signing up with no brokers who offer you tight spreads and guarenteed fills from Nigeria.

Brokers arent bad, they arent there to be against you. But they may not, in terms of co operation in the market itself, work with you. Most brokers who are large and service respectible numbers of clients will tend to try to help their clients become profitbale as much as they can.

But once your order is placed, its every man for themselves...

I hope I've helped some people who are just starting out create an idea of how the major brokers and institutions work.

Cheers

Rusty

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Quoting Klaka

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I wish they mentioned this kind of stuff in ebooks, you never here about this until you actually get into trading live. They should spend alot more time teaching the ins and outs of dealing and market behavior than just technical analysis.

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Quoting Rusty_forexman

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Definately - technicals although useful, arent everything.

If you know the ins and outs of the market and players work when they trade, and how things are run - your going to have a much better idea of how things end up the way they are and a better psychological approach to trading.

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Quoting TotalMadness

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Thanks for this post Rusty, it is very informative.

A few questions though:

1. Would you recommend that once the funds are large enough, use a ECN instead of a broker?

2. Currencies can move very fast, and the advantage of having a platform on the computer is that by the time you've got through to the broker, the price may have already moved 20 pips. Why do you feel that the possible service you may get is worth losing those 20 pips?

3. Could you define scalping as seen from the bank side. I hear many different definitions, I think most people are not really sure. Please give a time and gain size if you can, and where the point starts that would never be considered scalping?

Thanks

Hans

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Quoting Rusty_forexman

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Third question: Scalping to a bank, is essenitally trying to take a position against a client, a making a few pips off a move in the market. It doesnt happen all the time, but it does happen often enough. They usually aim for 5-10 pips.

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Quoting TotalMadness

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This is interesting because you didn't give a length of time. Most people say that scalping is making 1 to 5 pips within say 30 seconds. This would assume then that making 5 to 10 pips in 5 or 10 minutes would not be considered scalping when done by a private trader. Would you agree with that? I suspect that the really good scalpers are cherry pickers.

In your opinion, and ignoring the fact that making any profit is good, what would you consider to be the average number of pips a trader would need to make each week, private and working for a bank, to be considered good?

I have also heard that if you are a good private trader, sometimes you may get an offer to trade for an institution or dealer. Do you know whether this is true?

Thanks

Hans

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Quoting TotalMadness

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I suspect that the really good scalpers are cherry pickers.

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