[TheSundanceKid]

Originally posted by glennki
Great - you just confused a bunch of people with your cryptic reply. Would you care to share your wisdom and extrapolate on your reply so that others may learn from you?

What exactly is it that you're confused about?
Let me try to clarify, if I can, on behalf of Pinger.

Originally posted by pinger



internal hedging is made automaticaly you cannot get into trade otherwise external is made based on total difference between short/long positions ...

the right question is how much you/if you are marketmaker/ whanna steal this is why you get slippage and error quotes which are far far away from current bid/offers realtime and don't tell me you don't know just accept that or pay at least ~900euro/month and trade with real info with volume and who is behind that call/put ...

Based on my understanding...
Internal hedging is where the market maker "matches" trades up to elimite/reduce their risk. So for example, if I go long on EUR for $100K, and you go short on EUR for $100K soon after, then we would be matched up, essentially taking the other side of each other's trades. The market maker's net exposure would be nill.
This is usually all done automatically by software. In reality it's much more complex/difficult than the example I gave you, but the general concept is the same.
External hedging is when the market maker takes positions through interbank to reduce/eliminate their risk from their clients' positions. Every clients' trades will not have a counterparty at all times. For example if two traders are long on EUR for $100K each, and one trader is short on EUR for $100K, then the market maker is net long for $100K. So in this case they might decide to short EUR on interbank for $100K to offset their exposure and eliminate their risk.
Alternatively, they may decide to not offset. In that case they would act as the counterparty to their client's trade(s). So they would profit from their clients' losses, or lose from their clients' profits.
How much risk they offsett, and which trades they take the other side of is at the sole discretion of the market maker and based upon many different factors, market conditions, etc.
Considering that 90% of traders lose money, you can imagine how profitable acting as the counterparty of their trades has the potential to be. It also carries inherent risk, but that can be controlled - statistically. Retail forex brokers are often referred to as "bucket shops" because a lot of times they choose not to offsett their clients' trades. However, it really does make financial sense, if you ask me...

Good Trading,

Sundance