Well I donât know the exact inner workings of how all these brokers work, but right now FXCM is quoting EUR/JPY at 134.441 X 134.453. I donât see how a bank can quote inside of that. Iâm inclined to believe that they just take the other side and wait till their books become too weighted and then unload it. I donât know how actual physical currency exchange works, but it doesnât seem too efficient. I have looked over the past couple of weeks on how to actually exchange currencyâs, and itâs quite rediculous. I mean the best Iâve found is literally 1000 pip spreads. Iâm sure this is the retail rate, and FXCM has access to the interbank or whatever market. But it still seems that all the banks would be quoting bigger spreads than retail forex broker. Feel free to correct me if Iâm wrong, but thatâs what it seems like to me.
here is a good broker explaining how FXCM and Oanda bucket shop works - The client clicks on bid or ask to ask for a quote (therefore divulging his intention). - The broker (knowing the client's intention) quotes him a worse quote. - The client accepts the quote because the difference remains minimal in his eyes. - The client probably doesn't realise that doing this repeatedly can be extremely costly. http://www.ac-markets.com/online-forex/best-forex-broker.aspx
First, I would like to say that I hope it doesn't feel like I'm picking on you, because I am certainly not. I have respect for you and everyone one on these forums (although with some people it's tough). Because I have a lot of experience and, it seems, I am one of the few very profitable traders that frequents these boards, I make posts where I have something to add from my experience and knowledge. So, with that said, my earlier statement on how an FX dealer makes money off of the spread, is how it works (I should note that this is how it works if the dealer passes off your trade, if it doesn't, obviously there is another strategy being implemented by the dealer). I should also state that I know this not just from my trading experience but also from interviewing with an actual Fx dealer a few years ago. My Usd/Cad 2 pip difference was just an example to show the general mechanics. The real difference varies from pair to pair, based on many factors including, liquidity, competition, and possibly volatility and expected volatility, etc. The Eur/Jpy that you used as an example is one of the most liquid pairs around so it is very realistic for the best inter-bank rate to be .5 pips or less, sometimes even zero (Yes, zero pip spreads does happen from time to time in extremely liquid and competitive pairs). So, even the small spread that you quoted is enough to make a profit on that pair. This spread profit model, and its relative low risk ease of use, is why there were so many dealers popping up for a while there. Then of course the firm capital limits were raised and this in turn made entry more difficult. I, and a fellow investor of mine, were in talks to start one until they raised the limits. These conclusions should also be some what evident from the fact that you don't see nearly as many stock or futures market makers popping up because those require more skill and capital. The stock and futures guys may also have tighter, liquid, spreads to pass their trades off to (especially in the mini market, YG vs ZG for example) but it probably is much less consistent and likely, so they are required to do what you are stating in actually making money off of the full spread by immediately, or through an inventory method, matching customer orders. Of course those MM's have more risk then the FX dealers. I hope this clears it up, if not please ask away.
Yes cabletrader but I deleted it, I'm a busy man and don't have much time for your BS. What is your question? Post it on the forum if you got something worthwhile to ask. ------------
At this level there are very few marketmakers who operate the way you say, most hedge on aggregate, some even run two books. Think 'bookmaker' then you're closer to their business model.
If you're talking about the average bucketshop (which most of them are at these levels) then you would be right, they hedge their risk/exposure on aggregate above a certain risk threshold and according to their own business model, they don't offset each trade individually as suggested, it would not only be impractical it would also be less profitable. As I said to Eric215, think bookmaker and you're closer to how these businesses operate. The conspiracy theories and mistrust of these shops is understandable. Not only are they counterparty but they also control quotes (which loosely reflect the underlying market), spreads, fills, and fill price so naturally there is a perceived conflict of interest. Mainstream shops ie FXCM, Oanda, GFT etc use this obvious advantage to varying degrees, some have less integrity than others, and at the bottom of the barrel are the ones operated out of places like Cyprus where regulation is more or less nonexistent, they simply steal your money perfectly legally because it's so easy to do! Despite the obvious potential disadvantages (and contrary to what the inexperienced naysayers and skeptics think) there is still money to be made from trading with a (mainstream) bucketshop, as I believe my numerous posted blotters clearly demonstrate.
I will agree with your bookmaker analogy if you are referring to how these firms "inventory" their client positions with the purpose of running a "counter trade" type of strategy. Another words if the dealer is taking the other side of your trades and holding them as a separate strategy to profit off of losing traders (which most FX traders are), then I agree. However, if the broker is run with the "no dealing desk" or "pass through" model then I would disagree. Smaller trades may be held in a book (micro size) until there is an aggregate amount that is large enough to hedge, but it was in my experience with the dealer that I interviewed with (whom I saw run his desk and trade live for about an hour) that they are VERY risk averse and, if possible, would prefer to never have a net position. So, if you are stating that smaller trades may be held until the net is large enough to pass through, then I agree. This is all done mostly by computer now anyways, at least for the larger firms. This was also explained to me directly by FXCM as to how they run my trades when I was inquiring about a liquidity issue with a certain currency. Now, this may have been because I was on some "profitable trader" list, but the impression I got was that this was just how they operate. In the end, I don't work there so I am not going to bet my life that I am 100% correct, but this is my understanding of how it works. One thing I will state is that I don't believe most of these dealers are evil bucket shops who are out to screw all traders and get rid of profitable ones. Like I have said before I am quite profitable and I am treated very well. I have never had an issue with stops being gunned. If your stop is gunned then that is usually because of the larger banks running common stop levels, which means you had your stop in a spot which was too close and obvious. The markets main job is to shake people out of their positions and then move on, if you can't dance the dance then don't blame a broker, instead learn from your mistakes. Now, with all the complaints out there I'm not saying that all dealers are squeaky clean, but I have used three different dealers over the past 5 years and I have never experienced this "stop gunning" even once.
The definition of 'small' is relative. The threshold at which they hedge risk is going to depend on their business model and will be influenced by underlying market conditions, volatility, liquidity, and probably a lot of other factors, perhaps even their own company fundamental and technical market analysis. Algorithms assess and adjust on a second-by-second basis I would imagine but no marketmaker is going to reveal the intricate details of how he makes his money or protects his interests, not even to a corporate client or investor let alone to a private trader. Information on proprietary algos is often only shared on a need to know basis within the company itself let alone freely divulged to the general public, this is why customer facing helpdesk staff are so limited when it comes to understanding how the company they work for actually works. This isn't unique to financial markets, most industries operate in the same secretive way to protect their bottom line (or as is the case lately, to hide losses and non-viability!). Your chat with that dealer has to be taken on face value as his allegiance is to the company who pays his wages, he will only have shown you what he wanted you to see, the last thing a broker wants you to suspect is a potential conflict of interest. I don't believe anyone serious in this thread was suggesting they are, it's only the sad multi-alias forum clown and troll who's yanking your chain! In the real world he's ignored by pretty much everyone, invisible and insignificant, so he's looking for any kind of acknowledgment or recognition from his virtual world to confirm he's actually still alive
whatever helps you sleep at night bud Also I am serious about helping to pay for your groceries it breaks my heart you can't afford food