trading against brokers?

[Christiaan]

hey guys

help a fellow out and explain to me how this work.We don't trade against the broker directly right?I have some thoughts on this but I'm not sure how it works exactly.I just read another forum about a guy talking about conflict of intrest trading against the broker directly

if anybody can explain this to me I would be very gratefull

 

[Rhody Trader]

Forex brokers (excluding the ECNs) are dealers, meaning they are market makers. As such, when you make a trade you are doing so with the broker. Just like a market maker in futures or stocks or anything else, though, they are then looking to have that position offset against another customer position in the opposite direction such that all they do is book the spread and end up with no directional risk. To the extent that their book is overbalanced they hedge in the market.

 

[Christiaan]

thank you for clarifying for me.That's more or less what I thought but I had some doubts after reading that some traders think their broker trade against them directly.

 

[Technically Fundamental]

Thats because they expect new traders to lose money.

 

[mrsoul]

Forex brokers (excluding the ECNs) are dealers, meaning they are market makers. As such, when you make a trade you are doing so with the broker. Just like a market maker in futures or stocks or anything else, though, they are then looking to have that position offset against another customer position in the opposite direction such that all they do is book the spread and end up with no directional risk. To the extent that their book is overbalanced they hedge in the market.

Let me ask you a question Rhody.
I trade with one of the largest Forex brokers.
They have 2 types of accounts: micro and standard.
They claim that on the micro accounts they take the other side of the trade; however, they claim that with standard accounts the banks take the other side of the trade and that they are, somehow, just making part of the spread in this case.
I have heard of "Currenex", supposedly alot of retail orders get routed through Currenex and then aggregrated and passed on to the banks.
I don't know what to believe and my guess is that this particular broker takes ALL the action on both micro ad standard accounts because they know that most traders lose and are quite content taking the other side of those trades, plus they make the spread on all trades.
Any thoughts on this?

 

[Vaco]

mrsoul,

read here for a full explanation of what they do http://www.trade2win.com/boards/forex-brokers/58846-open-letter-alpari-uk.html

 

[Rhody Trader]

Let me ask you a question Rhody.
I trade with one of the largest Forex brokers.
They have 2 types of accounts: micro and standard.
They claim that on the micro accounts they take the other side of the trade; however, they claim that with standard accounts the banks take the other side of the trade and that they are, somehow, just making part of the spread in this case.
I have heard of "Currenex", supposedly alot of retail orders get routed through Currenex and then aggregrated and passed on to the banks.
I don't know what to believe and my guess is that this particular broker takes ALL the action on both micro ad standard accounts because they know that most traders lose and are quite content taking the other side of those trades, plus they make the spread on all trades.
Any thoughts on this?

Aside from reading the aforementioned thread I would add the following...

From a risk management perspective my feeling is that once a broker nets out the offsetting micro account positions it doesn't leave that much of a net exposure to the broker. This is especially so when you figure on potential cross match-ups. My guess is that directional exposure to any one currency tends to be very small relative to capital, making hedging virtually meaningless.

When you get up to the standard lot size, though, things change considerably. That's where the broker is going to want to hedge because they could potentially face sizeable imbalances.

 

[Hotch]

Also consider, that brokers will have clients taking both sides of the trades, so they can just take the spread and be risk free.

 

[TheBramble]

Also consider, that brokers will have clients taking both sides of the trades, so they can just take the spread and be risk free.

That's pretty much what RT said "once a broker nets out the offsetting micro account positions it doesn't leave that much of a net exposure to the broker. This is especially so when you figure on potential cross match-ups. "

 

[lancehibner]

The leaning is that when executing orders, brokers would not prefer market makers that offer the best price. They would kind of route the trades to their clients to earn rebates. Brokers is relatively cheaper and within anyone’s reach Anyone with an internet joining and a credit card can acquire one.The major disadvantage of brokerage is the fact that it promotes slow order execution Speed is of the essence in trading.

 

[lancenicolase]

you never ever trade against your broker as they're just market makers, all they do is bringing buyers and sellers together. It applies to forex, spread betting, cfds and share dealing. your broker just executes your orders.

 

[foredog]

In most cases the market maker takes the position and then has to decide whether to offset it or run it so until they decide either they are taking on your risk