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Is anyone here an institutional trader?

  • #761
  • Aug 5, 2015 11:26pm Aug 5, 2015 11:26pm
Hi Skenobi, Jacob and the other (ex-)institutional guys tracking this thread. Thank you very much for your answers and insights so far, it's all very interesting and generous of you. I've read the first few pages and haven't found the answers to my specific questions yet, so I hope I'm not repeating anything. If anyone thinks these questions have been asked before, please let me know and I'll dig some more

By the way, my questions relate to futures (especially indexes) as well as spot FX. So, here goes:

1. Is it true that separate (non-affiliated) institutions "work together" sometimes in order to send price their way? In other words, their main source of profit is from retail traders and big players who aren't "in the know"?
Or are the big institutions mainly trying to outsmart and make money from each other?

2. Within one institution, are there separate teams of both long-term traders AND short-term (intraday) traders? If so, do they trade the same instruments? And are the short-term traders restricted by the plans of the long-term traders, or are they pretty much given free-rein?

3. In your opinion, are false breakouts usually initiated by an institution that's trying to send price the other way, and trick traders into opening wrong positions (or get stopped out of existing ones) so that the institutional traders can take the other side?
Or are they usually caused by a misunderstanding, or a fight, between institutions with different agendas?

4. Regarding stock index futures, do institutions generally buy and sell the actual stock and arb the futures, or is it the other way around?

Sorry for all these questions, and thank you in advance for considering them.

Best wishes,
NT
You reap what you sow.
  • #762
  • Aug 6, 2015 2:42pm Aug 6, 2015 2:42pm
Quoting NorthTrader
1. Is it true that separate (non-affiliated) institutions "work together" sometimes in order to send price their way?
Sometimes.

Quoting NorthTrader
In other words, their main source of profit is from retail traders and big players who aren't "in the know"?
No.

Note: Institutionals don't make anything from retail traders. Retail traders are not in the same universe as bank traders.

To future readers: please disabuse yourselves of the notion that retail traders "matter" in the larger scheme of things. They don't.

Quoting NorthTrader
Or are the big institutions mainly trying to outsmart and make money from each other?
Institutions are trying to outsmart and make money from the Market, not specifically from each other (like in the movies).

Quoting NorthTrader
2. Within one institution, are there separate teams of both long-term traders AND short-term (intraday) traders?
Usually, yes.

Quoting NorthTrader
If so, do they trade the same instruments?
They trade whatever instruments are covered by their respective mandates. If they happen to be the same, then so be it.

Quoting NorthTrader
And are the short-term traders restricted by the plans of the long-term traders,
No.

Quoting NorthTrader
or are they pretty much given free-rein?
Yes.

Quoting NorthTrader
3. In your opinion, are false breakouts usually initiated by an institution that's trying to send price the other way, and trick traders into opening wrong positions (or get stopped out of existing ones) so that the institutional traders can take the other side?
Breakouts are only considered "false" AFTER the fact. No one (institutional or otherwise) can consistently predict or willfully "initiate" false breakouts. (I say "consistently" because some Banks CAN force false breakouts a LOT of times in SOME trading sessions, just not a lot of times ALL of the time.)

Generally, a bank trader doesn't just wake up one morning and decide, "Today I'm gonna create a false breakout." He will necessarily come to grief against market forces beyond his control. If the market thinks his initial breakout is valid, then by Golly, price WILL be taken along the new trend (i.e. no false breakout).

Quoting NorthTrader
Or are they usually caused by a misunderstanding, or a fight, between institutions with different agendas?
The Market is bigger than individual "fights".

Quoting NorthTrader
4. Regarding stock index futures, do institutions generally buy and sell the actual stock and arb the futures, or is it the other way around?
Dunno. But if I have to hazard a guess, I would say the answer is No, and No.
I'm not trying to convince anyone. I'm not in the "convincing" business.
  • #763
  • Aug 6, 2015 3:47pm Aug 6, 2015 3:47pm
Quoting skenobi
{quote} Sometimes. {quote} No. Note: Institutionals don't make anything from retail traders. Retail traders are not in the same universe as bank traders. To future readers: please disabuse yourselves of the notion that retail traders "matter" in the larger scheme of things. They don't. {quote}
So are you saying that retail traders are never participants of the "interbank market"? In other words, do you ever see trades from those retail brokers like FXCM, IC Markets, or Pepperstone for example that advertise on their website that they use banks as their liquidity providers? Can you identify trades from retail traders from say your order flow?

Just out of curiosity.
Make your losses in demo. Earn your profits live.
  • #764
  • Edited 5:34pm Aug 6, 2015 4:22pm | Edited 5:34pm
Quoting Forexia
{quote} So are you saying that retail traders are never participants of the "interbank market"?
Yes. Retail traders, never. Retail brokers, only in a manner of speaking i.e. retail brokers are just customers of Banks.

Have you ever seen the movie "The Sting"? Watch it and you'll have an idea how retail FX works. You can also read up on "off-track betting" which is also heavily featured in that film.

Quoting Forexia
In other words, do you ever see trades from those retail brokers like FXCM, IC Markets, or Pepperstone for example that advertise on their website that they use banks as their liquidity providers?
...
The Banks provide liquidity, yes. But retail brokers are not bona fide interbank counterparties. They're just corporate customers. Some brokers will disagree with me, but I don't really care if I'm wrong.

Quoting Forexia
Can you identify trades from retail traders from say your order flow?
Disclaimer: I've never personally traded against retail brokers.
Theoretically ECN broker trades should be seen by Banks, but from my observation of how Big Banks handle clusters of orders from mid-sized interbank counterparties in sweeps, I don't see how the Big Banks would give a shit about particular order clusters from ECN brokers. The order clusters are all similar and (from my observation and conversations with other market players) are handled the same way.

Let me emphasize again: Retail traders do not matter in the larger scheme of things. Watch The Sting and you'll know what I mean.
I'm not trying to convince anyone. I'm not in the "convincing" business.
  • #765
  • Aug 6, 2015 9:01pm Aug 6, 2015 9:01pm
Quoting skenobi
{quote} Yes. Retail traders, never. Retail brokers, only in a manner of speaking i.e. retail brokers are just customers of Banks.
Thank you for confirming something I've been trying to convince people of for ages!
Hopefully more people see this coming from you, and understand the reality of the meaningless terms used by retail brokers to make them sound like players in the interbank market.
Wealth comes from what you keep, not what you earn
  • #766
  • Edited 9:44pm Aug 6, 2015 9:27pm | Edited 9:44pm
Hey Skenobi, thanks for the quick reply. You're a star

That's interesting about the institutions working together sometimes. I guess that's what some folk would call "market manipulation" and get all worked up about. Personally I have no problem with this kind of manipulation, so long as I can make money out of it

Also interesting about long-term and short-term traders possibly trading against each other within the same bank! I suppose it has to be like that for the traders to work at their best.

I only asked about the index futures out of curiosity. Some people think that the stocks always lead the futures, but I find it hard to believe that big institutions don't move the futures first (sometimes) with big orders. In which case, who's trading the arbitrage opportunities on the stocks? Presumably a different team within the same institution, albeit via computer systems due to the high speed required.

You still in SE Asia, by the way? Seems like you were posting from a different timezone.
You reap what you sow.
  • #767
  • Aug 6, 2015 10:05pm Aug 6, 2015 10:05pm
Quoting skenobi
{quote} Yes. Retail traders, never. Retail brokers, only in a manner of speaking i.e. retail brokers are just customers of Banks. Have you ever seen the movie "The Sting"? Watch it and you'll have an idea how retail FX works. You can also read up on "off-track betting" which is also heavily featured in that film. {quote}... The Banks provide liquidity, yes. But retail brokers are not bona fide interbank counterparties. They're just corporate...
I have always had my doubts in that the interbank market's trading volume is several $trillion and the size of each trade is in ten's and hundreds' of millions and yet us retail traders with just hundred's of dollars down are told that we can play on the interbank market and we enjoy interbank spread. LOL Thanks for confirming this and it's good to hear the perspective from the other side.

So my next wondering (this is not really a question rather just my wondering out loud) is if we retail traders are NEVER part of the interbank market then what was LMAX bitching about news time trading? Apparently in the article it states that no banks would appreciate being hit with heavy volume before the news and because their liquidity providers all complain about this so LMAX frowns upon news trading. http://www.trade2win.com/boards/fore...at-emptor.html
But if the banks are just operating in the interbank market level and were never involved at the retail level besides filling the trades for the retail brokers. What do they care if we trade news?

And second, and this is what I have always wanted to know and there are several questions involved:

1) If the retail forex was never involved in trading with the banks, WHY did ALL of the banks stop posting prices and shut down trading during the SNB crisis?

2) I can see now that the interbank market is mainly comprised of large corporations and other banks and institutions then surly not ALL of the large corporations and other institutions would all of sudden jump on the SNB announcement and start buying the CHF against other currencies for speculations because they would still be doing their day-to-day exchange of foreign currencies and if it's only the retail brokers who were giving the speculative orders that should be a small percentage? WHY would the banks bother to stop posting the bid/ask prices for CHF currencies and shut down trading for an hour just for retail brokers which count for just a small percentage of their business?

4) Basically what were the banks DOING during the SNB crisis? What was happening in the trading rooms in the banks? Would you be able to describe?

Thanks for your honest answers once again! Good to learn from you.
Make your losses in demo. Earn your profits live.
  • #768
  • Aug 6, 2015 10:38pm Aug 6, 2015 10:38pm
Today's NFP day so my week's shut early.

By the way,

Quoting Forexia
1) If the retail forex was never involved in trading with the banks, WHY did ALL of the banks stop posting prices and shut down trading during the SNB crisis?
I don't understand this question at all. For example, what does the first part of the question (bolded) have to do with the second part? During times of dodgy liquidity, banks are known to scale back or even stop quoting altogether. They don't give a shit who they affect. Why should they NOT stop posting prices? And who is anyone to say the Banks can't do whatever they want?

I'll find the time to address the other questions on Monday when I'm back from my weekend break. Perhaps the other institutionals on this thread can chime in.

Cheers!
I'm not trying to convince anyone. I'm not in the "convincing" business.
  • #769
  • Aug 6, 2015 11:59pm Aug 6, 2015 11:59pm
Quoting NorthTrader
That's interesting about the institutions working together sometimes.
If you wonder whether the bank dealers "work" together, you can read this:
http://www.cftc.gov/ucm/groups/publi...duct111114.pdf
  • #770
  • Aug 7, 2015 12:26am Aug 7, 2015 12:26am
Quoting srmfx
{quote} If you wonder whether the bank dealers "work" together, you can read this: http://www.cftc.gov/ucm/groups/publi...duct111114.pdf
Interesting read srmfx, thanks! I suppose "nyk" means New York office?
You reap what you sow.
  • #771
  • Aug 7, 2015 1:19am Aug 7, 2015 1:19am
Hi skenobi,

I have a question about the FX market structure, that I was hoping you could answer.

I understand how prices change for exchange-traded products, but I was wondering how it happens in the FX spot market. For example, if a large fund buys 100 million worth of Euro CME futures, it will eat up the limit sell orders on the exchange and price will move until the order is filled. But if the fund gives Deutsche Bank a 100 million buy EUR/USD at market order, how does it impact the FX spot market? I mean, is Deutsche going to the Interbank market with this and then the order executed there moves the market? I just don't understand how the FX price remains in sync in all those different trading places & e-platforms, given that there is no centralized trading place.

Thanks in advance!
  • #772
  • Edited 3:01pm Aug 9, 2015 12:57pm | Edited 3:01pm
Quoting NorthTrader
Also interesting about long-term and short-term traders possibly trading against each other within the same bank! I suppose it has to be like that for the traders to work at their best.
They're not consciously trading against each other; they buy and sell against the market. If the other side of a trade happens to be another colleague, it's nothing to get excited over. Ultimately they all work for the same employer. They have no other gods before it.

Quoting NorthTrader
I only asked about the index futures out of curiosity. Some people think that the stocks always lead the futures, but I find it hard to believe that big institutions don't move the futures first (sometimes) with big orders.
The market doesn't care what you "believe". The sooner you understand that, the sooner you would realize that asking philosophical questions (e.g. "do stocks lead futures or vice versa" kind of questions) is a luxury and doesn't add anything to a trader's bottomline.

Quoting NorthTrader
In which case, who's trading the arbitrage opportunities on the stocks? Presumably a different team within the same institution, albeit via computer systems due to the high speed required.
Does it matter?

Quoting NorthTrader
You still in SE Asia, by the way? Seems like you were posting from a different timezone.
Yep... I'm still in SEA.

Quoting Forexia
So my next wondering (this is not really a question rather just my wondering out loud) is if we retail traders are NEVER part of the interbank market then what was LMAX bitching about news time trading? Apparently in the article it states that no banks would appreciate being hit with heavy volume before the news and because their liquidity providers all complain about this so LMAX frowns upon news trading. http://www.trade2win.com/boards/fore...at-emptor.html But if the banks are just operating in the interbank market level...
Erm.... I'm not gonna read that interview but I'm gonna answer anyway.

Banks or LPs in general don't give a shit about you retail trading news traders. They don't even know or care if you exist (Hint: "retail traders don't matter"). When liquidity dries up, spreads WILL widen or are practically non-existent and unavailable for trading.

When that happens, ALL counterparties are affected... from the retail BROKERS that are the customers of Banks to the retail TRADERS that are customers to retail BROKERS.

The banks are not gonna be apologetic about it; if their customers (some of whom are retail BROKERS) don't like it, they can just sod off someplace else (good luck with that, btw). This is how it has always been. All that bullshit advertising about "guaranteeing" spreads during high-volatility news events is just that: bullshit.

Quoting Forexia
And second, and this is what I have always wanted to know and there are several questions involved: 1) If the retail forex was never involved in trading with the banks, WHY did ALL of the banks stop posting prices and shut down trading during the SNB crisis?
As I've answered in my last post before I took off for the weekend: I don't understand this question at all. For example, what does the first part of the question (bolded) have to do with the second part? During times of dodgy liquidity, banks are known to scale back or even stop quoting altogether. They don't give a shit who they affect. Why should they NOT stop posting prices? And who is anyone to say that Banks can't do whatever they want?

Don't blame the Banks for trying to save their asses. Blame the retail brokers for over-extending themselves (because they were trying to be something that they're not to their customers).

Quoting Forexia
2) I can see now that the interbank market is mainly comprised of large corporations and other banks and institutions then surly not ALL of the large corporations and other institutions would all of sudden jump on the SNB announcement and start buying the CHF against other currencies for speculations because they would still be doing their day-to-day exchange of foreign currencies
Erm.... FYI, they weren't consciously buying CHF for the sake of buying the CHF, mate. They were doing it because they wanted to SELL down the EUR! The removal of the EURCHF peg allowed them to do just that. The fact that CHF was bought up was just a side effect.

Quoting Forexia
and if it's only the retail brokers who were giving the speculative orders that should be a small percentage?
It IS a relatively small percentage, which is exactly the point: They're not the ones driving the market (Hint: Retail traders don't matter.)

Quoting Forexia
WHY would the banks bother to stop posting the bid/ask prices for CHF currencies and shut down trading for an hour just for retail brokers which count for just a small percentage of their business?
To reiterate: The banks didn't stop making markets JUST to retail brokers. They stopped making markets on EURCHF to ALL their counterparties and customers (INCLUDING retail brokers). (Hint: Retail brokers don't matter, and retail traders matter even less.)

Quoting Forexia
4) Basically what were the banks DOING during the SNB crisis?
They were (for the most part) being smart and realistic about their risks, which is more than I can say about the stupid retail EURCHF traders during the SNB unpegging event.

Quoting Forexia
What was happening in the trading rooms in the banks? Would you be able to describe?
For many of the mature trading floors in the world, this was not their first high volatility event and it will definitely not be their last.

If my experience during the Asian economic crises in the 90s (and the several other crises since then) is any guide, there would be some initial gnashing of teeth but eventually savvy treasury managers should be able to quickly shut down the trading businesses that are bleeding money. Banks that don't have robustly-tested disaster recovery programmes don't deserve their banking licenses.... although admittedly no one can really test for black swan events.
I'm not trying to convince anyone. I'm not in the "convincing" business.
  • #773
  • Aug 9, 2015 1:20pm Aug 9, 2015 1:20pm
Quoting CaymanTrader
Hi skenobi, I have a question about the FX market structure, that I was hoping you could answer. I understand how prices change for exchange-traded products, but I was wondering how it happens in the FX spot market. For example, if a large fund buys 100 million worth of Euro CME futures, it will eat up the limit sell orders on the exchange and price will move until the order is filled. But if the fund gives Deutsche Bank a 100 million buy EUR/USD at market order, how does it impact the FX spot market? I mean, is Deutsche going to the Interbank market...

I can't speak for other financial market instruments and commodities, but in forex, the market will never allow arbitrage opportunities to exist between platforms for longer than a few moments due to advances in the speed of information.

In fact, I would argue that for mature First World currency pairs, the possibility of USEFUL arb opportunities to exist that can be exploited CONSISTENTLY by the average retail trader is close to zero percent. You can't have one set of prices in one platform and another wildly varying set of prices on another platform without SOMEBODY noticing. The work of noticing such things is heavily automated to the point that the opportunities commonly disappear before they can be exploited.

You'll just have to take it on faith that FX prices will somehow sync across the board.

Some institutionals here may point out the existence of NDF (non-deliverable forwards) trading that attempt to exploit arb opportunities in Emerging market currencies such as the Indonesian Rupiah or Malaysian Ringgit, but such things are beyond the scope of the ordinary retail trader, and best left to Bank traders.
I'm not trying to convince anyone. I'm not in the "convincing" business.
  • #774
  • Edited 3:44am Aug 10, 2015 3:31am | Edited 3:44am
Quoting skenobi
It IS a relatively small percentage, which is exactly the point: They're not the ones driving the market (Hint: Retail traders don't matter.) {quote} To reiterate: The banks didn't stop making markets JUST to retail brokers. They stopped making markets on EURCHF to ALL their counterparties and customers (INCLUDING retail brokers). (Hint: Retail brokers don't matter, and retail traders matter even less.)
Ok so you are saying that if say GE called up Deutsche, one of the banks that stopped the price feed and said "I want to sell 100 million CHF vs EUR after the SNB announcement and Deutsche would tell GE to f*** off because it doesn't want to provide price and trade? We understand retail traders don't matter but is that how Deutsche would've told off their corporate client as well during the SNB event if they needed to trade CHF? Just curious, nothing else.

Quoting skenobi
They were (for the most part) being smart and realistic about their risks, which is more than I can say about the stupid retail EURCHF traders during the SNB unpegging event.
Ok we all appreciate your insight here from the perspective of the institutions but there is NO NEED to put down us retail traders here. This is uncalled for. The SNB's decision could very well be continuing to uphold the peg and traders who made trading decision based on that would've profited tremendously. Anybody at any time can make trading decision that proves to be unprofitable by the market; it can happen to anybody no matter how big or small their account size and it's all part of the game. Just because us retail traders are not as capitalized as the institutions, doesn't mean that we don't deserve the same respect as any market speculators. And FYI, majority of the retail traders were only trading in micro trading size of only few thousand of currency units risking less than 5% of their account size. Retail brokers might have encouraged over-leveraging with the high margin rate but retail traders in this event didn't really trade in overly large trade size utilizing full margin available to them. And in fact, majority of the retail brokers reduced several folds of their margin on CHF-related currency pairs for months before the SNB event. So it's absolutely unreasonable to still blame retail traders and/or the retail brokers here. If you REALLY want to dig deeper, it was the banks' deliberate stopping of the price feed which created the complete absence of liquidity and then the filling of stop/loss trades at outside of market prices that widened their losses to unmanageable amount. There is no denying of that no matter how you want to slice or dice it.

And FYI further, not ALL institutions "scale down or even stop trading altogether" in adverse market conditions. Specialists in stock exchanges, during the financial crisis, during huge market turndown's, they still stood ready to buy any stocks that anybody dumped onto them. Many of them even mortgaged their house and personal assets to take in orders to maintain the market. This is what institutions do. When s*** hits the fan, they don't abandon the ship; they stay and fight to hold down the fort! Yes you might say the banks were "being smart and realistic about their risk", but to me, they were being dishonorable and irresponsible in their duties. Those LP's reap all the benefits when the market is going their way and yet when the market turns the tide, they were the first to run away and leave others to hold the bag.

Not trying to state a debate or anything just stating the obvious especially after you qualified retail traders as stupid in their risk management.

Quoting skenobi
For many of the mature trading floors in the world, this was not their first high volatility event and it will definitely not be their last. If my experience during the Asian economic crises in the 90s (and the several other crises since then) is any guide, there would be some initial gnashing of teeth but eventually savvy treasury managers should be able to quickly shut down the trading businesses that are bleeding money. Banks that don't have robustly-tested disaster recovery programmes don't deserve their banking licenses.... although admittedly...
My question was really a curiosity as to what must be going on in the trading rooms of those currency trading desks during the SNB announcement before and after? Since you might be part of the trading desk I thought you might be able to describe it for us. Anyway like I said before, I appreciate your insight.
Make your losses in demo. Earn your profits live.
  • #775
  • Aug 10, 2015 5:42am Aug 10, 2015 5:42am
Quoting skenobi
{quote} I can't speak for other financial market instruments and commodities, but in forex, the market will never allow arbitrage opportunities to exist between platforms for longer than a few moments due to advances in the speed of information. In fact, I would argue that for mature First World currency pairs, the possibility of USEFUL arb opportunities to exist that can be exploited CONSISTENTLY by the average retail trader is close to zero percent. You can't have one set of prices in one platform and another wildly varying set of prices on another...
Thanks Skenobi. I would still be curious though about the details of how the order would be executed in the market. If we take the example from my previous post, would Deutsche Bank just take the opposite side of the trade or would they actually have to go to Interbank and buy the €100 mln there?

Also, I was always curious about the difference between speculative and non-speculative flows. For example, a company may just need €10 million and will pay that in US Dollars, they will not have an open position as they are not "trading" in the way we do as speculators. How are these orders handled and do they impact the FX market in the same way as speculative trades do?

Sorry if those questions may seem stupid, I'm just very curious and wasn't able to find the answers anywhere else.
  • #776
  • Aug 10, 2015 6:15am Aug 10, 2015 6:15am
Quoting CaymanTrader
{quote} Thanks Skenobi. I would still be curious though about the details of how the order would be executed in the market. If we take the example from my previous post, would Deutsche Bank just take the opposite side of the trade or would they actually have to go to Interbank and buy the 100 mln there? Also, I was always curious about the difference between speculative and non-speculative flows. For example, a company may just need 10 million and will pay that in US Dollars, they will not have an open position as they are not "trading" in the way...
Whether the bank will take the opposite of the trade or go to the interbank market depends on the position limits and the trader's view of the market. Sometimes when GE is selling to you 100 mio GM may be buying the same amount. The dealer could be bullish on the currency he is buying but if the amount breaches the position limit he has to sell it to another bank or client.

Corporates usually don't care about the market. They just have to sell the foreign currency to pay the salaries of the employees in local currency. The order is just an order, no matter whether it is speculative or not.
  • #777
  • Aug 10, 2015 7:20am Aug 10, 2015 7:20am
Quoting skenobi
{quote}.... I can't speak for other financial market instruments and commodities, but in forex, the market will never allow arbitrage opportunities to exist between platforms for longer than a few moments due to advances in the speed of information. In fact, I would argue that for mature First World currency pairs, the possibility of USEFUL arb opportunities to exist that can be exploited CONSISTENTLY by the average retail trader is close to zero percent. You can't have one set of prices in one platform and another wildly varying set of prices...
emphasis added.

Someone had the courage to say it, glad it was one of the institutional guys.

Quoting skenobi
....
{quote} It IS a relatively small percentage, which is exactly the point: They're not the ones driving the market (Hint: Retail traders don't matter.) {quote} To reiterate: The banks didn't stop making markets JUST to retail brokers. They stopped making markets on EURCHF to ALL their counterparties and customers (INCLUDING retail brokers). (Hint: Retail brokers don't matter, and retail traders matter even less.) {quote} They were (for the most part) being smart and realistic about their risks, which is more than I can say about the stupid retail...
What about brokers/platforms that WERE still pricing during SNB (although it was a very wide spread like 20-50 pips)? Aren't private speculators / hedge funds with Direct Market Access also able to provide liquidity (voluntarily) if they want to?

Quoting Forexia
{quote} Ok so you are saying that if say GE called up Deutsche, one of the banks that stopped the price feed and said "I want to sell 100 million CHF vs EUR after the SNB announcement and Deutsche would tell GE to f*** off because it doesn't want to provide price and trade? We understand retail traders don't matter but is that how Deutsche would've told off their corporate client as well during the SNB event if they needed to trade CHF? Just curious, nothing else....
I would imagine the same reason why when a hurricane is coming or has already come, people board up their homes and businesses and shut down until it passes. I think Skenobi has said it and others have reiterated it. No one HAS to enter into a new contract with any of their clients. Sure, certain institutions (including banks) have a negative selection portfolio. And the idea is to make the market temporarily to net out the portfolio at a certain profit, after commissions are taken into consideration. If the market maker detects that they can no longer balance their order flow, why would they continue to make the market? Wouldn't it make sense to wait a bit until the storm passes until it is safe/feasible to open back the shop?

SNB was actually a perfect example of what happens when liquidity nearly completely dries up: price discovery is very loose and virtually unpredictable during the dry period. This is the importance of a 'true ECN' and developing relationships with different liquidity venues for direct access because when you really need to get in or out of a position, you need the proper access in order to submit orders. Most retail flow is suitable for aggregation and some b-booking until it is large enough to pass off to the larger market, if it needs to be done.

Quoting Forexia
{quote}And FYI further, not ALL institutions "scale down or even stop trading altogether" in adverse market conditions. Specialists in stock exchanges, during the financial crisis, during huge market turndown's, they still stood ready to buy any stocks that anybody dumped onto them. Many of them even mortgaged their house and personal assets to take in orders to maintain the market. This is what institutions do. When s*** hits the fan, they don't abandon the ship; they stay and fight to hold down the fort! Yes you might say the banks were "being...
Different venues and traders will have different risk tolerances, which includes counterparty risks. No venue can and or will guarantee unlimited liquidity or pricing all the time. Even specialists at an exchange have their limits. And they wouldn't take the seat without certain privileges or advantages that outweigh the risk and make it worth their while. Any a-book broker (or even b-book/hyrid) that claims to offer negative balance protection....ask them where they are getting their money from or insurance policy to pay this. That discussion would be as honest as the SNB's announcement they would hold their floor with "upmost determination" and buying "unlimited quantities" of foreign currency as little as 2 days before Black Thursday. What does the market really owe you, GP, etc? Skenobi has been trying to nail this point down.

In every industry, there is usually one entrance or period for vendors (institutional/wholesalers) to setup, and a different entrance or period of time for the retailers to come in and shop. This is similar for retail trading vs wholesale or inter dealer trading. There are lots of risks associated with vendors and wholesalers that do not apply to retail participants. There may be rules placed by a retail broker that may not or may only partially exist for wholesale or institutional traders. The rules are usually designed to make the broker's operation sustainable for the long term and/or comply with regulators (which usually put up rules to sustain growth). Why would any savvy business owner of any industry intentionally take on inventory or business that is likely to harm them long term [without getting some payoff in return]?

I've spoken to asset managers who have managed 7-9 figures AUD and sometimes they do come across as being arrogant when they explain how they manage funds and particularly their attitude towards retail brokerages in general. But if you put your ego to the side temporarily and just analyze the gist of what they are communicating, you can see they are being very honest. Spending between $3k and $20k USD/month or more to maintain ECN access, including bridges, aggregators, server maintenance, etc and having to (in some cases) provide a certain amount of flow to these venues. Not to mention where to place and safeguard these funds. You cannot afford an Alpari UK or PFG best with $50MM of client funds (can you?) . You find that the honesty of people like Skenobi is very refreshing; perhaps even a wake up call to those who may be tempted to allow the markets to make a victim out of them.
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  • #778
  • Aug 10, 2015 8:22am Aug 10, 2015 8:22am
Quoting Forexia
{quote} Ok so you are saying that if ssureay GE called up Deutsche, one of the banks that stopped the price feed and said "I want to sell 100 million CHF vs EUR after the SNB announcement and Deutsche would tell GE to f*** off because it doesn't want to provide price and trade?
Yes. Deutsche would've been well within their rights to say so because even if GE had threatened to take their business elsewhere, it is very doubtful they would've found another Bank willing to quote for that amount during the SNB unpegging event.

Quoting Forexia
We understand retail traders don't matter but is that how Deutsche would've told off their corporate client as well during the SNB event if they needed to trade CHF?
Yes. A corporate client is, more often than not, a hedger not a trader. It would've been irresponsible for a CFO of any large company to leave a large requirement or exposure open to the last minute (as a sudden 100 mio order would seem to be). Under normal market conditions, a large order would've been worked slowly to avoid spooking the market. During the SNB unpegging, it's every man for himself and GE can go fvck itself.

Quoting Forexia
{quote} Ok we all appreciate your insight here from the perspective of the institutions but there is NO NEED to put down us retail traders here. This is uncalled for.
If you've read my post closely, you will see that I only put down EURCHF retail traders and similar gamblers who trade on pegged currency pairs i.e. I did not put down ALL retail traders. To me, all gamblers are stupid. I can't bring myself to apologize to these people, I'm afraid. Sorry about that!

Quoting Forexia
The SNB's decision could very well be continuing to uphold the peg and traders who made trading decision based on that would've profited tremendously.
If you say so. Personally I don't like to dwell on "would have" and "could have", and prefer to stay on focused on the present.

Quoting Forexia
Anybody at any time can make trading decision that proves to be unprofitable by the market; it can happen to anybody no matter how big or small their account size and it's all part of the game. Just because us retail traders are not as capitalized as the institutions, doesn't mean that we don't deserve the same respect as any market speculators.
Well, as I mentioned before, I only dissed EURCHF traders. I respect retail traders who know when to stop making rookie mistakes.

Quoting Forexia
And FYI, majority of the retail traders were only trading in micro trading size of only few thousand of currency units risking less than 5% of their account size.
I respect that opinion. I just don't think you can prove that observation.

Quoting Forexia
Retail brokers might have encouraged over-leveraging with the high margin rate but retail traders in this event didn't really trade in overly large trade size utilizing full margin available to them.
Again, if you say so.

Quoting Forexia
And in fact, majority of the retail brokers reduced several folds of their margin on CHF-related currency pairs for months before the SNB event. So it's absolutely unreasonable to still blame retail traders and/or the retail brokers here.
I did not blame all retail traders. I just put down the EURCHF traders. Let's call a spade a spade. In actual fact, I "insulted" the EURCHF traders. To these traders who can't get past that and feel slighted in any way by my harsh comments, for their sake I have to recommend that they put me on their Ignore list so that they will never have to read my harsh "truths" ever again.

Quoting Forexia
If you REALLY want to dig deeper, it was the banks' deliberate stopping of the price feed which created the complete absence of liquidity and then the filling of stop/loss trades at outside of market prices that widened their losses to unmanageable amount. There is no denying of that no matter how you want to slice or dice it.
1. The banks are obliged (by their responsibility to their shareholders, NOT their customers) to stop quoting during wholly unexpected events (where the process of price discovery has completely broken down) to stop the bleeding. Such deliberate-ness is something that even other Bank traders have to accept.

2. "outside of market prices"? Who is the retail trader (or any single Bank trader for that matter) to decide what is really "market prices"? If the ONLY Bid in the market and the ONLY Offer in the market happen to be far away from each other, is the retail trader going to deny that THAT is the market price (however screwed up it may look)? Sounds naive to me.

Let's not forget where "market prices" ultimately come from: The institutional trading world... which is a fact that even I have to accept now that I'm a retail trader myself these days.

Quoting Forexia
And FYI further, not ALL institutions "scale down or even stop trading altogether" in adverse market conditions. Specialists in stock exchanges, during the financial crisis, during huge market turndown's, they still stood ready to buy any stocks that anybody dumped onto them. Many of them even mortgaged their house and personal assets to take in orders to maintain the market. This is what institutions do.
I totally agree! But... where they're not stopping making markets, they're definitely widening bid/offer spreads. Institutions have a responsibility to shareholders not to make stupid bets.

Quoting Forexia
When s*** hits the fan, they don't abandon the ship; they stay and fight to hold down the fort! Yes you might say the banks were "being smart and realistic about their risk", but to me, they were being dishonorable and irresponsible in their duties.
Sorry.. Tight spreads is not a counterparty's right. It's a privilege. Bank traders accept this when dealing with other market makers. Retail traders have to accept this too. Bank traders' duty is to enhance shareholder equity first, and customer relationship is only somewhere down in the list of priorities.

Quoting Forexia
Those LP's reap all the benefits when the market is going their way and yet when the market turns the tide, they were the first to run away and leave others to hold the bag.
C'est la vie.

Quoting Forexia
Not trying to state a debate or anything just stating the obvious especially after you qualified retail traders as stupid in their risk management.
You assumed I qualified ALL retail traders as stupid, when in fact I only insulted a small subset of them. Honest mistake on your part.

Btw, "retail traders don't matter" is not an insult in my book. It's plain fact.

Quoting Forexia
{quote} My question was really a curiosity as to what must be going on in the trading rooms of those currency trading desks during the SNB announcement before and after? Since you might be part of the trading desk I thought you might be able to describe it for us. Anyway like I said before, I appreciate your insight.
I believe I've already answered, unless I'm mistaken.
I'm not trying to convince anyone. I'm not in the "convincing" business.
  • #779
  • Aug 10, 2015 9:00am Aug 10, 2015 9:00am
Quoting ybfjax
What about brokers/platforms that WERE still pricing during SNB (although it was a very wide spread like 20-50 pips)? Aren't private speculators / hedge funds with Direct Market Access also able to provide liquidity (voluntarily) if they want to?
Private specs with deep enough pockets COULD do that if they wanted. Would they actually want to, however, is the question. Especially since professional market makers have access to better market intelligence than private specs.

Quoting ybfjax
{quote} I would imagine the same reason why when a hurricane is coming or has already come, people board up their homes and businesses and shut down until it passes. I think Skenobi has said it and others have reiterated it. No one HAS to enter into a new contract with any of their clients. Sure, certain institutions (including banks) have a negative selection portfolio. And the idea is to make the market temporarily to net out the portfolio at a certain profit, after commissions are taken into consideration. If the market maker detects that they...
Good alternative way of thinking about this.

Quoting ybfjax
SNB was actually a perfect example of what happens when liquidity nearly completely dries up: price discovery is very loose and virtually unpredictable during the dry period. This is the importance of a 'true ECN' and developing relationships with different liquidity venues for direct access because when you really need to get in or out of a position, you need the proper access in order to submit orders. Most retail flow is suitable for aggregation and some b-booking until it is large enough to pass off to the larger market, if it needs to be...
Some retail guys (I dare not say "most" in case somebody gets uppity) don't get this because they think they're the centre of the universe.
I'm not trying to convince anyone. I'm not in the "convincing" business.
  • #780
  • Aug 10, 2015 9:17am Aug 10, 2015 9:17am
Quoting CaymanTrader
{quote} Thanks Skenobi. I would still be curious though about the details of how the order would be executed in the market. If we take the example from my previous post, would Deutsche Bank just take the opposite side of the trade or would they actually have to go to Interbank and buy the 100 mln there? Also, I was always curious about the difference between speculative and non-speculative flows. For example, a company may just need 10 million and will pay that in US Dollars, they will not have an open position as they are not "trading" in the way...
srmfx's reply was pretty concise, methinks. I don't think I can add anything more useful than that.

Good luck.
I'm not trying to convince anyone. I'm not in the "convincing" business.
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