Hey guys, I'm just demotrading now, but I read in a book that the counterparty is the entity on the other side of your deal. In Dealbook 360 it says something to the effect of "GFT is the counterparty to all transactions" and the guy who's trying to get me to get a real account said there is free forex training if you put X dollars in your account or whatever so I asked him what this counterparty thing meant, and he said it didnt mean what I thought, that it meant that GFT is providing the leverage. Is this true?
My understanding is that these brokers are acting pretty much like a bookie. If they get too much action on one side of a trade they lay it off. They want to collect the spread as risk free as possible. I am opening an account with Oanda after using their sim for a few days. It seems to me to be a reasonable way to learn forex trading while risking a very small amount of cash. So far the spreads dont seem too far out of line from what you would pay in commissions if trading currency futures.
A market maker is the counter party to all your trades. GFT, Oanda, fXCM, etc are all market makers/dealing desks. A MM will try to offset your trade with a counter trade from his system. This, obviously, is all done using computers. If you are buying a 100k lot of euro, they will find a similar offer to sell on their system, first, to settle the trade. The 2-3 pip spread they pocket. that is how they make their money. if they can't lay off the trade, it is they who have to go into the interbank market to buy or sell for their own account to offset a customer trade, at which point the customer is trading with the dealing desk. since every trade goes thru the desk, they act as counter parties to ALL your trades. If still confusing, PM me and I'll go into more elaborate detail. BTW, GFT is one of the better (top 3?) fx dealing desk brokers out there. generally, their clients don't get screwed. But understand their system - if you hold a trade overnight, they settle your trade at the close and re-open the trade at a new price to adjust for interest. it's a little confusing at first.
Even on ECNs your broker will act as formal counterparty to your trades, and settle with the participating institutions, because an individual trader will not meat the criterias to be recognized as counterparty by banks and the likes. This passage in your broker-agreement doesnt say anything good or bad about your broker, its normal.