I have been trying to ascertain exactly how spread betting brokers generate income in addition to the advertised spread and over-night interest so that I can assess the likelihood of making a profit in reality and avoid excessive direct/hidden charges that some may have. There appear to be many currently operating, which if nothing else indicates that they think there is plenty of money to be made either now or in the future.
If you look at all the comments there are those who believe that such companies can fix the market through price feed manipulation and stop loss hunting for example. Such blatant attempts do not seem likely in most cases at least as it would surely show up on the historic price record for instance. I have also compared feed prices from several different sources and they do show remarkably similar prices and movements. If anything the fixed spread brokers show less volatility than say those quoted by FXCM with a variable spread. In well regulated jurisdictions gross market manipulation would presumably also be illegal and it would be difficult to silence all those involved in setting up and running such a system.
There are however other opportunities to hide charges which I am not sure can be so easily dismissed. The most obvious is rejecting positions / exits if the market moves in favour of the client while always accepting them if it does not. This would probably not occur on every event, only those where there has been significant movement and the broker can claim legitimately that it was within its rights to reject while not giving you a better price when it moves a similar amount in your favour. Averaged over all positions it is not hard to believe that this could gain them at least another pip spread. There is also the opportunity for overnight interest rate manipulation, but by my calculation this is only a fraction of a pip and unlikely to be as high unless the position is held for a significant length of time.
I suspect that the route cause of any price issues would be the business model of quoting fixed spreads in a fundamentally variable spread market. This means that the often repeated statement that brokers simply hedge your bet in the market and don't care if you make money can not always happen unless they are prepared to make an initial loss if the market spread is higher than their quoted values, which it usually is. My guess is that in order to make their own market function they simply take the other side of your position for anything other than significant amounts and those with a proven track record of winning. If this is true then they obviously do then have an interest in you loosing, which history probably shows that on average more do than don't.
I doubt I have got everything right or thought of everything so comments welcome.
If you look at all the comments there are those who believe that such companies can fix the market through price feed manipulation and stop loss hunting for example. Such blatant attempts do not seem likely in most cases at least as it would surely show up on the historic price record for instance. I have also compared feed prices from several different sources and they do show remarkably similar prices and movements. If anything the fixed spread brokers show less volatility than say those quoted by FXCM with a variable spread. In well regulated jurisdictions gross market manipulation would presumably also be illegal and it would be difficult to silence all those involved in setting up and running such a system.
There are however other opportunities to hide charges which I am not sure can be so easily dismissed. The most obvious is rejecting positions / exits if the market moves in favour of the client while always accepting them if it does not. This would probably not occur on every event, only those where there has been significant movement and the broker can claim legitimately that it was within its rights to reject while not giving you a better price when it moves a similar amount in your favour. Averaged over all positions it is not hard to believe that this could gain them at least another pip spread. There is also the opportunity for overnight interest rate manipulation, but by my calculation this is only a fraction of a pip and unlikely to be as high unless the position is held for a significant length of time.
I suspect that the route cause of any price issues would be the business model of quoting fixed spreads in a fundamentally variable spread market. This means that the often repeated statement that brokers simply hedge your bet in the market and don't care if you make money can not always happen unless they are prepared to make an initial loss if the market spread is higher than their quoted values, which it usually is. My guess is that in order to make their own market function they simply take the other side of your position for anything other than significant amounts and those with a proven track record of winning. If this is true then they obviously do then have an interest in you loosing, which history probably shows that on average more do than don't.
I doubt I have got everything right or thought of everything so comments welcome.
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