(1) If the firm that trades against its clients is not really a "broker", is there a name for such? (2) If a firm is acting as counterparty... do they keep track of results "per customer"... so in case they run across a sharp trader... they stop fading him and actually broker his trades?
If the transaction affects their balance sheet, it's a currency exchange If the transaction does not affect their balance sheet, only their profit and loss, it's a currency trade. That's your lesson for the day. P.S. You can visit your local currency exchange and do trades all day in everyday terms but in financial industry terms, a trade refers to buying/selling using a margin facility, either spot fx or futures.
Unfortunately they generally call themselves "brokers", in spite of the fact that they're not (I'm always surprised that they're allowed to do this), and indeed many specify unambiguously in the fine print that they're not providing brokerage services. Some people call them "counterparty forex market-makers". I think the great majority of their own customers imagine that they are actually brokers, and certainly that's how they present themselves, and what they want their customers to believe. I know that some do. Some (but very few, and it's really hard to know which ones) have automated systems which offset their own net liabilities through liquidity providers, and don't care which customers win/lose. Many/most maintain what they refer to internally as "A books" and "B books", distinguishing between "customers who might actually know what they're doing" and "the masses". Some are simply counterparties to all their customers' trades. This is obviously living more dangerously. I think these are the ones who are really expert at attracting the clueless, and many of them offer "deposit bonuses", which are something of a red flag - that's obviously not something genuine brokers do. They tend to be either unregulated or very lightly regulated in countries like Cyprus, the Seychelles and/or the Caribbean. They do sometimes go under.
Intuitively is seems.... wouldn't "counterparty market-makers" have the opportunity to mess with spreads and fills to the great disadvantage of customers? Seems they could skim off a "bit extra" of every trade without the customer being any the wiser...
Yes, indeed - especially the unregulated/lightly-regulated ones. I don't doubt that (a) some of that goes on, and (b) there are also many allegations by customers of that going on when it actually hasn't. (As one might expect?). "Transparency" is not the name of the game, among retail forex brokers.
I disagree with very little you've said (but I hope you'll excuse my mentioning that IMO it's of limited relevance to actually answering Keith's original question). I do disagree, however, with your observation that "the key difference between currency trading and a currency exchange is the use of leverage": with apologies if I sound argumentative about it, that's simply not so, for the reasons I mentioned in post #8, above. Respectfully, I suggest that we agree to differ, on that point.
How is it not relevant to Keith's question which is whether his transaction is regarded as a currency exchange or trade. It's self-explanatory, an exchange is where an exchange of actual currencies occurs that directly affects your balance sheet, your account or your wallet (with cryptocurrencies). A trade is the opposite in financial industry terms, there's no exchange of actual currencies, there's no direct changes to your balance sheet, your account or your wallet (with cryptocurrencies). The only way for an fx transaction to have no direct effect on the above-mentioned is if it's a margin trade of a standardised contract therefore making the key difference between an exchange and trade being the margin facility. Institutions that use the word trade for large fx transactions or positions that affect their balance sheet are not really trading so it's an inappropriate use of the word IMO. The term for that is 'dealing'.
If you want to trade forex, go thru futures as they are regulated. Trading spot thru a broker in general means they take the counterparty in their books and there is no real counterparty. And when you want to close your position, they know exactly what you want and at which price you got in. So they can manipulate the price in their favor. They will steal everywhere what they can. That was the reason why I switched to futures fairly quick. I had a realtime feed in the early 90's. My dentist was trading too but he had no realtime feed. So he came to me and called his broker while watching prices on my screen. They quoted him 10-20 ticks away from the market, knowing he had no realtime information and supposing he was home. At that time there was no internet... so only professional (expensive) realtime feed. He stopped trading immediatelly and understood why he only made losses.