How do FX dealers make money trading against you?

Hi,

I am slightly baffled by how FX dealers make money trading against you?

Say I am trading GBP/EUR and I go long with a stop loss of 50 and exit at 200 pips.
DOes that mean they will go short with the same stop loss/exit ratio?

So Assuming they go ahead and do that, but my trade suceeds and I walk away with 200pips - comission/spread. So now they have lost 200pips but gained soem spread/comission. Which puts them at roughly ~190pips loss.

I mean wtf? How is that good?

FX dealers don't live or die based on one trade. Yes, whoever you're trading against in that example will lose money. But that example won't always be the case.

OK so lets assume I place a total of 3 trades all with same stop losses. 2 trades lose and 1 trade wins.

Soo I lose total 100 pips and say 10 pips as comission per trade, ergo 130 total, but gain 200 pips.

Like wtf?

I mean why would they want to bet against me, isnt it just better for them to forward my order to the market let me win/lose and then cash out on my spread. Why do they have to open their own deals? I dont get that

Alexander0884 said:

Hi,

I am slightly baffled by how FX dealers make money trading against you?

Say I am trading GBP/EUR and I go long with a stop loss of 50 and exit at 200 pips.
DOes that mean they will go short with the same stop loss/exit ratio?

So Assuming they go ahead and do that, but my trade suceeds and I walk away with 200pips - comission/spread. So now they have lost 200pips but gained soem spread/comission. Which puts them at roughly ~190pips loss.

I mean wtf? How is that good?

Click to expand...

Its good because the opposite of your scenario happens much more often. The vast majority of people trading retail forex lose money, some people may make money but overall the vast majority lose, just like some people make money gambling but the bookie always wins at the end of the day.

On top of that you have all the illegal activites such as scamming you on slippage etc. Google 'fxcm fine', 'Gain Capital fine', 'FXDD fine' and 'virtual dealer plugin' and you'll see plenty of instance where they have been caught doing this.

Alexander0884 said:

Soo I lose total 100 pips and say 10 pips as comission per trade, ergo 130 total, but gain 200 pips.

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...and how often have you actually done that?

pboyles said:

...and how often have you actually done that?

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Ok Lets put that aside, as my experience is very limited. WOuld it simply be safer for them to simply take my order and forward to the market, wait for result and cash out?

The LOGIC of them simply betting against me is pure stupid (apologies but I can not see the picture) there is absolutely no LOGIC of placing a blind bet that I am wrong since the way I see it:

200$ long 200$ long
ME --------------> DEALER------------> SPOT MARKET
200$ Short
------------>

So In this scenario if I win, I get hypothetically 1000$, the dealer losses 1000$ and gains comission.
If I lose, I pay dealer 1000$ + comission and the dealer wins 1000$ from the market, however his basis on winning that 1000$ is completely illogical and is independant on my action its like playing roulette.

I mean it makes no sense, why would he even place a bet against me JUST for sole purpose of counter bettering my order. WOuld it not be wiser to do technical analysis of their own and invest accordingly?

This is what happens...

100 people are long, 50 people are short. For arguments sake let’s say they are all trading the same size @ £1/pip. The Broker/(or dealer as you put it) has a total exposure of £50/pip. (longs-shorts). They’ll put this trade on the real market and will pay 1pip spread round trip – total cost to them £50. But they will charge their clients 2pips spread, they have 150 clients each paying £2 each – that’s £300 revenue.

So total profit for taking those positions risk free is £250.

Obviously positions are changing all the time and it’s impossible to hedge every minute change in exposure – but you get the drift.

Hoggums said:

This is what happens...

100 people are long, 50 people are short. For arguments sake let’s say they are all trading the same size @ £1/pip. The Broker/(or dealer as you put it) has a total exposure of £50/pip. (longs-shorts). They’ll put this trade on the real market and will pay 1pip spread round trip – total cost to them £50. But they will charge their clients 2pips spread, they have 150 clients each paying £2 each – that’s £300 revenue.

So total profit for taking those positions risk free is £250.

Obviously positions are changing all the time and it’s impossible to hedge every minute change in exposure – but you get the drift.

Click to expand...

Very well explained I might add......
A lot of posters believe that all retail brokers are active on the opposite side of the trade.......
There may be some evidence that some are, but its not universal.
They are "supposed" to make their profit via the Spread and in my opinion many do just that.

jungerns said:

Very well explained I might add......
A lot of posters believe that all retail brokers are active on the opposite side of the trade.......
There may be some evidence that some are, but its not universal.
They are "supposed" to make their profit via the Spread and in my opinion many do just that.

Click to expand...

Sure they make money from the spread.

They just like to make a little extra with other things.

Hoggums said:

This is what happens...

100 people are long, 50 people are short. For arguments sake let’s say they are all trading the same size @ £1/pip. The Broker/(or dealer as you put it) has a total exposure of £50/pip. (longs-shorts). They’ll put this trade on the real market and will pay 1pip spread round trip – total cost to them £50. But they will charge their clients 2pips spread, they have 150 clients each paying £2 each – that’s £300 revenue.

So total profit for taking those positions risk free is £250.

Obviously positions are changing all the time and it’s impossible to hedge every minute change in exposure – but you get the drift.

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Plus triangulation on net positions too

The Leopard said:

Sure they make money from the spread.

They just like to make a little extra with other things.

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Certainly not on Slippage on CS or Tradefair......
Never ever knowingly seen it occur but thats not to say it may well happen.

jungerns said:

Certainly not on Slippage on CS or Tradefair......
Never ever knowingly seen it occur but thats not to say it may well happen.

Click to expand...

Slippage often is rare. It was rare for me for a long time when I used IG.

I won't ask what size you are trading (you can say if you want, but obviously many don't, which is understandable) but the larger you go, the worse it is.

But slippage is only one of many tricks. For example if you are trading forex, they can easily skew their prices. The clients don't see this because they can't know what price the bucket shop is getting (only what it's giving), they don't get slipped and they get a 1 pip spread. So they think everything is fine when in reality they are getting shagged without even suspecting it.

And who is to say otherwise? "We derive prices from over 10 of the world's largest liquidity providers and blah blah blah". You basically can't argue.

Their list of tricks is endless. Fractional pips? Doesn't sound like a big deal, but if you shave a little off the vast volume of transactions the big shops do, it adds up pretty seriously.

On and on it goes.

The Leopard said:

Their list of tricks is endless. Fractional pips? Doesn't sound like a big deal, but if you shave a little off the vast volume of transactions the big shops do, it adds up pretty seriously.

On and on it goes.

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In other words, it's just like the stock market!

jungerns said:

Very well explained I might add......
A lot of posters believe that all retail brokers are active on the opposite side of the trade.......
There may be some evidence that some are, but its not universal.
They are "supposed" to make their profit via the Spread and in my opinion many do just that.

Click to expand...

The way it works on MT4 (and at most spread betting companies) is the Broker/Dealer has the option to catagorize each account.. they will have 2 books - an "a-book" and a "b-book"
If the broker thinks you are a good trader and likely to be profitable they will stick you in the a-book and hedge all of your trades.. you'll probably find your executions are a bit slower and you get more trade rejections - the broker will "make the spread" on all this type of business.

If they think your rubish they will stick you in the b-book - they will not hedge any of your trades - you have to pay the spread and comm all the same (putting you at a disadvantage) but they will make the big money from "client drop" i.e your losses - the statistics are on the side of the broker because you are paying spread/comm and are statistically likely to lose.. it's all a numbers game -!

Alexander0884 said:

Hi,

I am slightly baffled by how FX dealers make money trading against you?

Say I am trading GBP/EUR and I go long with a stop loss of 50 and exit at 200 pips.
DOes that mean they will go short with the same stop loss/exit ratio?

So Assuming they go ahead and do that, but my trade suceeds and I walk away with 200pips - comission/spread. So now they have lost 200pips but gained soem spread/comission. Which puts them at roughly ~190pips loss.

I mean wtf? How is that good?

Click to expand...

think of them like bookmakers.....they are always taking a % piece of you buy or sell on the spread.........and then if they really want to screw you they will take a position against your trade and not lay it off in the market

bookmakers never lose ...shame my family got out of the business

NVP

Rhody Trader said:

In other words, it's just like the stock market!

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much worse games in FX, but the games in stocks are played in a different way. think sub pennying, dark pools, order internalization, toxic fills.

ChocolateDigestive said:

much worse games in FX, but the games in stocks are played in a different way. think sub pennying, dark pools, order internalization, toxic fills.

Click to expand...

and high frequency front running.. sorry i meant trading (HFT!)

All of these replies are good, but probably don't cover all the little tricks they play. Somebody said "just like the stock market." Exactly.

My career goes all the way back to 1967, and it occurred to me then that the specialist was in the catbird's seat with a license to steal. Spreads have always been around and are a legitimate way for the brokers to make money. Some push it to the edge, though.

The point is that you have to realize that there are dark forces on the other side of the trade, if you want to become a winner. If not dark forces, then very sophisticated professional forces just waiting to take your money.

Hey guys these are very interesting points, Leopard, I currently trade through IG, but do notunderstand entirely what slippage is?

Is slippage basicaly the concept that the prices shown on the platform are not entirely accurate?

Alexander0884 said:

Hey guys these are very interesting points, Leopard, I currently trade through IG, but do notunderstand entirely what slippage is?

Is slippage basicaly the concept that the prices shown on the platform are not entirely accurate?

Click to expand...

No, that's something else really, although I guess it adds up to the same thing, namely you getting f ucked by them.

Slippage is an entirely natural thing that happens in the real market. It is replicated in the bucket shops, sometimes a little too enthusiastically.

Let's say you want to buy at 12000. You place an order to do so.

But there are no sellers until 12002. Your order is filled (assume it's a market or stop order - which becomes a market order).

You just got 2 pts slippage. That is genuine and nobody's fault. If someone is willing to do the opposite of what you want to do at the same price, you don't get slipped.

If they aren't, you do. This assumes you don't use a limit order - in which case you can't get slipped (negatively, that is to say, against you), but you might not get filled either.

Now with the bucket shop, maybe they replicate the real market exactly (they won't, but let's just say). They give you a worse price (12002) in their own internal market. That's the equivalent of slippage.

But why stop there? It's not a real market anyway, so f uck it - why not fill you at 12004 instead? That's you getting shagged in the dirty box.

Some "brokers" have been caught using software which creates 'asymmetrical slippage' - that is slippage, but only in their favour. There have been some big fines handed out for this.

Of course, in the real market, slippage can work in your favour as well as against you.