How do brokers pay your leverage? How does it work?

[TraderABC]

Originally Posted by MickMason

Hi ABC

Ummm....huh?......No really....what

your PL seems to be instanteneously added or subtracted... How can that be so fast if it takes 2 days as you've said?

[MickMason]

Originally Posted by TraderABC

your PL seems to be instanteneously added or subtracted... How can that be so fast if it takes 2 days as you've said?

Ok, perhaps I should have said 'within' 2 days.

[socrates]

ABC

On the whole, brokers act like a bookie. Most orders are not laid off in the market, but are kept in-house.
However the broker himself will balance his books by buying or selling at the when imbalance in his order books is noted. This will be happening often of course.
(Please note that large positions will generally get a quote and you will not be filled at market. That is because the broker will not treat large positions in-house, but rather lay them off in the market straight away, hence the quoted price, not chart price.)
That is how you get your instant fill. The broker does not need to lay off every position as you lay your money down.

Your profit and loss is instanteneous because once you close the trade, their computers work out fill price, minus (or plus) exit price equals profit or loss. The 2 day settlement period is for interest to be calculated on the position that was held.

Hope this helps.

[cornellj]

The broker covers himself with a trade in the opposite direction from the one I placed. My stop loss position becomes his take profit and vice versa. In this sense the broker covers your position by a trade of his own. He can balance trades between buyers/sellers and cover only the differential with a layoff position in the market. The safest however would be to cover each trade individually.

For this reason the broker likes to know your intentions beforehand. Orders, limits and stop losses placed in advance makes their job easier. This led to my belief that if he counters my trade, my stoploss position becomes his takeprofit limit on his countertrade. If the broker is dishonest it would now be easy to hunt stops, and when taking out your position on the stoploss, they make a corresponding profit on their counterposition. In this way the unscrupulous broker can add to his normal pipspread profits also profits on all the losing trades taken out on stoplosses.

The broker has to cover each transaction you do, I think they cover the position to the exact detail of your transaction, including leverage.

My thinking might be off, but I believe in caution, so do they.

[MickMason]

I see the myths surrounding marketmakers are still alive and well, and being propagated by those who know no better

Internet forums, doncha just love 'em......



Mick

[socrates]

Beginner's Corner

What is a Market Maker?

You probably take for granted that you can buy or sell a stock at a moment's notice. Place an order with your broker, and within seconds, it is executed. Have you ever stopped to wonder how this is possible? Whenever an investment is bought or sold, there must be someone on the other end of the transaction. If you wanted to buy 1,000 shares of Disney, you must find a willing seller, and visa versa. It's very unlikely you are always going to find someone who is interested in buying or selling the exact number of shares of the same company at the exact same time. This begs the question, how is it that you can buy or sell anytime? This is where a market maker comes in.

A market maker is a bank or brokerage company that stands ready every second of the trading day with a firm ask and bid price. This is good for you, because when you place an order to sell your thousand shares of Disney, the market maker will actually purchase the stock from you, even if he doesn't have a seller lined up. In doing so, they are literally "making a market" for the stock.

How do Market Makers make their Money?

Market Makers must be compensated for the risk they take; what if he buys your shares in IBM then IBM's stock price begins to fall before a willing buyer has purchased the shares? To prevent this, the market maker maintains a spread on each stock he covers. Using our previous example, the market maker may purchase your shares of IBM from you for $100 each (the ask price) and then offer to sell them to a buyer at $100.05 (bid). The difference between the ask and bid price is only $.05, but by trading millions of shares a day, he's managed to pocket a significant chunk of change to offset his risk.

Just substitute forex instead of shares. This is the way it works. They do not lay off in the market every trade placed. That would be ludricrous.

I see some people claim to know too much, doncha just love 'em...

[MickMason]

Originally Posted by socrates

They do not lay off in the market every trade placed.

lol, well of course they don't, any fool should know their individual 100k trade isn't going anywhere near a bank!

Sorry, was that supposed to be a revelation of yours, the great marketmaker conundrum solved by socrates

Too funny.....


Mick

[socrates]

Mick
Your humility is exceeded only by your wit, which is made conspicuous by its absence.

The original poster was of the opinion that every trade is laid off in the market and was asking where they (the brokers) get the money to do such.
Your fist post, post No 6, and reply to his question was about as helpful as an ashtray on a motorbike.

His question
Originally Posted by TraderABC
Hello all. I have this question that I've couldn't find answer for:

What happens when you open leveraged (i.e. 1:100 ) position? Where do your broker find the money to shell out 99K for your 1K? Considering there maybe thousands of clients opening positions (and perhaps many lots at once), where do your brokers find the money of their own to put? Basic math can show that brokers may require to pay HEAVY sums of money. So, who pays your brokers? How are they protected? If you open a position, does that mean that there have to be 99 other people opening at the same price? Is that why slippage occurs (they get the closest bucket fill?)
Thank you.

Your answer to his question
Spot forex deals have a settlement date 2 working days forward, and positions left open overnight are rolled-over, in effect closing and re-opening the position which starts the 2-day clock ticking again.
Mick

Was that your revelation?
I did not post a helpful answer in the hope of being flamed by you.
Happy trading and stay nice.