What are brokers doing?

[Practical-1]

I have a few questions regarding the fxtraders relationship with brokers.Being new in the forex market I early on got the picture that when a trader opened a position on a brokers trading station that we were kind of tapping directly into the international market. A recent post on another thread by someone called Pittsburghfx who said he was a former FXCM employee painted a different picture. So here it is…if I open a position EURO/USD with a spread of 3 pips give myself a 15 pip stop and the position closed at my stop me loosing 15 pips…who gets the 15 pips? I know the broker gets the 3 pip spread…that’s understood, but it isn’t understood (to me at least) that because my little 1 lot transaction was traded “inhouse” that the broker kept my loss…that most transactions are done “inhouse” with brokers.

That being the case (and I may be mistaken again) doesn’t it open the door for some misdealings? Is there not an incentive or temptation on the broker’s part to “tip the scales” in the direction that profits them (using the “live”feeds on price)… is that what slippage is about...that means we are not just putting money against a particular position but against what may best for the broker as well.

I’ve seen posts on this forum that have been gripes about such things but have dismissed them because I’ve not seen this point of view before. Could someone help me out on this one? Simply please!

Practical-1

[activefxtrader]

This is exactly what I asking for the last week. However, still did not got exact answer. Your example give a losing situation. But what happen if you in a winning streak ? What are the best clients (traders) for their business : chronic LOSERS or consistent WINNERS ? I think, if we trade against market makers (our brokers) they must be prefer losers instead of winners. Still it is a complicated situation especially account holders less than 100K. Or am I completely wrong ?

[Rendist]

Practical-1

Market makers will most likely hedge their postions by doing the exactly the same as what you do in the interbank markets. If you lose 15 pips the broker will take that to pay for their loss, the only profit that they will make is the spread.

activefxtrader

As brokers profit from the spread I believe they would much rather have winning traders as the more money going through their hands equals the more they profit.

[activefxtrader]

Originally posted by Rendist
Practical-1

Market makers will most likely hedge their postions by doing the exact opposite of what you do in the interbank markets. If you lose 15 pips the broker will take that to pay for their hedge, the only profit that they will make is the spread.

activefxtrader

As brokers profit from the spread I believe they would much rather have winning traders as the more money going through their hands equals the more they profit.

I think, they are not offsetting positions (our trades) at interbank until the positions become really dangerous for their side or still it is an unknown phenomena.

Also, PittsburghFX said that they hate scalp traders, I dont know what he is actually think as a scalping, but I understand scalping as not only at news conditions (NFP, etc.), but ultra-short term trading as well less than 15 min trading. If this argument is true, your hedge explanation may be wrong. Or same are true which means, brokers also use hedging against your position and only profit from spreads. But my instincts tell me the truth --- They love chronic losers especially clients (traders) less than 10 K accounts (standard or mini-accounts).

[bobnat]

The reason they don't like scalpers is because it doesn't give them enough to time to offset their positions with the IB.

While it's true that they can't offset your 1 lot position, they wait until they have a large enough amount to do so.

So for sake of argument, if they have 100 traders buying the Eur at about the same price at 1 lot each, they can then offset that $10 million with the IB. If you consistently enter and exit without giving them time to aggregate your position, sure it's going to piss them off. Then they put you on manual execution. What exactly constitutes "enough time" though is up for grabs.

Pittsburgh stated in one post that a position held for 2 minutes would not attract their attention. I don't scalp, but I imagine there are some folks out there that will jump in and out in a matter of seconds, looking to grab 5 pips with 20, 50, 100 lots at a whack.

From a purely practical viewpoint, it is in their benefit for their customers to never go broke because they make money risk free from the spread if they're able to offset. However, humans being humans, there will always be greedy pricks who want it all.

I'm sure they do cover some trades themselves but probably not as much as some might think, and it's probably more out of necessity than greed. It's not a good long term approach to staying in business, no different than a bookie. The reason they don't like people straddling NFP-type announcements is because they can't offset at a price that allows them to B/E while making the spread.

Personally, I wouldn't worry about them covering your trades. It's negative thinking as well as a waste of energy and time. There's so much more that needs worrying about. If your broker out and out screws you, then you simply change brokers.

Nat

[Practical-1]

Thanks all,

When a broker offsets with IB, how is it done? Every couple minutes....$1,000,000 , what standards are used?

From the sound of it, there's a trust matter involved...and maybe brokers do like to have winners on there account listmakes sense to me, I'd like to think so...and yes, no one really needs to be looking for the boggy man, for no reason. It seems to me that a clear understanding of what is going on will help to recognize when things are not as they should be.\

My impression was that PittsburghFx was saying that time was the critical element that brokers watched for to describe scalping.

Practical-1

[eurojunkie]

great thread!

Brokers have two ways to offset our trades. with the interbank firms, or internally with another client.

Yes, if they want to offset trades in the interbank market they have to aggregate at least a $1mm position before they can do so. They are exposed to some limited risk while doing so.

They can also offset your one lot trade with another client of theirs. This happens more often with larger brokers like FXCM. They have so many clients, that if you sell Euro, its very likely that at the same time they have another client buying Euros. So if you loose 15 pips, the broker isn't the one who made it. Rather their other client that went long Euros made that 15 pips.

The broker will have just made the spread on the execution of both positions.

For a market maker to hold the other side of your trades, would be like a casino risking its gambling license to cheat a few low rowlers. It doesn't make any sense to do so. They're much better off being legit, and collecting risk free on the spread.

[autofx]

Finally, a post on this topic that makes sense.

Thanks, eurojunkie.