The "bucket" shops don't hedge trades in the market unless their exposure goes above a certain amount, say $20m. They work on the basis that 85-90% of clients get wiped out and there is therefore no point in covering trades and paying away some of the spread. This is why the conflict of interest issue can arise as the way they choose not to hedge means a client gain is their loss. There are some honest bucket shops though not many! In terms of leverage I trade in reasonable size and use the leverage to the maximum. The reason for this is that I prefer to have as little cash as possible with the counterparty due to the credit issue. I keep my surplus funds on a short term money market deposit with a bank. Furthermore by using the leverage to the max there is a kind of inbuilt stop loss in case armeggedon happened.
Your effective leverage on day one is 24:1, not 200:1. 10,000 EUR/USD x ~1.20 / USD 500 = 24 That's still many times riskier than stocks with 2:1 - 4:1 max leverage. Even taking into account many stocks' greater intraday volatility than any currency pair. You wisely didn't specify what "Set a STOP to match your maximum loss you can take, but not too tight" means. If your typical stop loss is anywhere in the 30 - 60 pip range, then someone trading this way as little as once or twice a day, without a positive expectancy method, without an edge, would be very likely to "drain" their account in less than a month. Possibly much less. Not exactly "a long time." As the account balance is declining, with 10K being the minimum trade size, your leverage can only be increasing from 24:1. Of course, with all of $500 lost, no harm done. Back to the drawing board, or back to a demo.
This is something out of the 1920s!!! If they dont hedge, why not simply open an account with 'em, for say, $500,000, buy euros up to the limt, then demand delivery? Do they deliver if you demand delivery for settlement? If they have any capital, IMHO, I'm surprised someone hasnt taken a run at them doing this.
You've lost me. No they don't deliver and nor does the client as it is in effect a future or a NDF. Nothhing odd about that at all. As for your example I fail to see what you are trying to achieve or say. Apologies.
In the heydays of bucket shops, 1920s, larger traders would push these shops to take on positions greater than the bucket shop could handle. Once that happens, the shop has to run for cover, quite often ending up bankrupt. It was a way to get at their capital. The bucket shops were routinely squeezed by players who were bigger than the shop was and could stand taking greater risk. Not really a market operation, more a liquidity squeeze.
He's saying, I believe, that if you're going to fire big bullets at Oanda, better make sure something's in the till. And why not? If Oanda is booking hundreds of these 10- and 20-million dollar trades each day, you'd think there'd be some substantial capital underpinning that business. What is it, a 100 million, 500 million, more?
Well, kind of my point - if they're shooting a gazillion bucks of trades with 100s of customers, you'd think they have adequate capital. In the past, bucket shops operated on a shoestring, so pushing them into a liquidity trap wasnt a big deal. In todays hyper-regulatory environment, I'm surprised these shops exist, considering the hoops real banks have to go through to meet capital adequacy requirements. Does anybody know how much shareholders capital these guys have? Or what their actualy gap limits are? eg, can they run 20 million positions?
Tomcole, Agree my point somewhat varies from yours. I was looking at it from standpoint of a customer who trades size taking his play to Oanda. He'd wanna know there's some recourse in addition to yelling, "Hey, I want my money." According to the other poster, there's no performance: the trade is a non deliverable forward (NDF). (The trade cannot be a future contract, else Oanda is breaking the law.) So, the customer would have only the dealer's promise to pay any profit in the position. NDFs are "rare air" instruments, aren't they, trafficked only by hedgies and the biggest houses? Of course, all of this may be so hypothetical that it's simply hot air.
From what I've read, it seems only small a/cs trade there. IMHO, the unknown size of their credit risk, their unquantifiable market exposure and unknown balance sheet, make them un-touchable for me. But, I was raised in a Tier 1 environment, so, my judgements are skewed that way. If folks make money there, carry on!