Brokers get paid when traders lose

I have noticed a lot of people saying that their brokers trade against them. I don’t get this, why would a broker trade against it’s clients if they get paid from the spread. People say that the broker gets paid when traders lose money, but if traders continually lose money why would they trade. Does this statement have any truth behind it.

Who do you think trades the part lots (less than 100,00 base currency). They cant go to the real market so the market [B]maker [/B], note the name, has a choice. It can lay them off against other bids/offers on the platform or take the counter trade themselves. Since most retail traders dont have a clue what they are doing why wouldnt you trade against them. Hence they can make money from spread, commission and active trading. For them its a licence to print money. Of course that is what happens

Get away from this idea incidentally, the broker is not on your side. With an ECN it is true that they have no interest in the trade since it goes to the market and they make their commission, but how many people on this site do you think has sufficient funds to trade full lots on an ECN platform

So if i know the market inside out, I don’t have to really worry about my broker trading against me.

Actually Tony, you can trade minis and such through ECNs now. It’s not just the big stuff.

Speaking to the bigger question…

By definition, if you are trading with a market maker they are taking the other side of your trade as a mechanical function of your transaction being processed. In most cases, of course, a large broker will also take the other side of someone else’s trade in the opposing direction, so it washes out and they grab the spread.

Now on the question of whether they hold a directional exposure I would contend that the better shops would never do that to any meaningful degree. Why? Because all it would take is one surprise event to cost them a year’s worth of profits, or more. It’s the same as you or I putting on a big position with no downside protection.

My understanding though John is they are not routed to the market but dealt with internally. I stand to be corrected if you know differently. This means that liquidity, slippage etc will be based on their internal book

Someone please correct me if I am wrong but, wouldn’t it make more sense from the brokers point of view for you to win your trades? They make the same spread yes, but if you win trades, you will be more likely to trade again right?

Do you think the brokers favor a fly by night get rich quick ill-trained trader who will blow through $5000 in a week or a lifelong client who will pay them millions in spread over the course of their trading career?

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Yes, retail forex dealers of course would like you to stick around and keep trading for a long time - because they make money from the spread regardless of whether you win or lose.

While the fx dealers may appear to be exactly like the 1920’s style New York bucket shops (who would prefer you to lose and thus not have to pay out) - fx dealers are essentally middlemen between you and the interbank market - the firm will have a risk exposure to the market as a result of being a counterparty to all their clients positions - but I assume they simply hedge this net risk (and continue to make $ from the spread).

This is my assumption of how the retail fx brokers operate - so if someone has a better understanding, please step in and correct me!

I would say get real. How many retail traders making millions do you think there are versus those who are going to blow out their account and never return. Where do you think the real money is here. Anyway this is a pointless discussion really. You have to decide for yourself how you think this works and what your relationship with your broker is. However event like Refco and the numerous complaints you see (yes some will be from disaffected traders who didnt know what they were doing) suggest buyer beware. A market maker by definition makes their living from the market that they make

Whenever there is a situation where there is a large authoritative entity (such as a government, large company, or a broker) There will be people who think that the controlling entity is out to destroy them.

Tell me, what does the broker have to gain by thwarting small traders attempts to be successful in the market? The broker doesn’t get anymore if they win or loose. The broker will still get the spread no matter what.

Some traders find it hard to understand that when they loose, the other more educated trader gets the money, not the broker.

Yes, this is how I thought the process operated as well.

GBLilleyUSMC makes some interesting points.

The following hyperlink I believe, is useful to answer the questions here.

Those Darn Market Makers

hehe
Actually mate they prefer the trader who would blow $5000 in a week

because, truth be told, there are so many of them and the turn over is ridiculous,
why do you think Trading scams exist

why do think Bucket shops exist

but, you are right on one point
LOGICALLY, it would make sense to have your client winning.

but, you see, the thing is, THEY KNOW YOU THINK THAT WAY ABOUT THEM,
that’s why they do what they do, because, they know YOU WILL NEVER SUSPECT THAT THEY REALLY TRULY DO STUFF YOU OVER

but, it is a fact mate
i personally video my trades
and… i have video evidence of the following

i place a trade to go Long,
after a few seconds, it closes
(now… at this point, you could argue,… but martin, you had indicators on the chart)
no no no… Not even a support a line was drawn… Absolutely nothing but the chart and profile settings

so the trade closes on it’s own

now. IN THE TRADE HISTORY, YOU WOULD EXPECT TO SEE A LOSS… right ?
but…
the trade DOES NOT EXIST IN THE HISTORY

and here’s the kicker
what’s more is
after they closed the Long trade
a SHORT TRADE opened immediately

and… Ever so Coincidentally hehe (as if) it had the IDENTICAL ENTRY PRICE
and… can you guess which way the trade went ? hehe
that’s right

it shot up

and … the short trade showed up in the history as a loss

when i called the broker and quoted the trade number,
they said it didn’t exist

i then mentioned (around 20mins later) that i video record my sessions

and… AS IF BY MAGIC
they found that trade number
and Low and behold , it was returned to my trading history

NOW HERE’S THE OTHER FUNNY THING

that trade now showed up as a profit
but, THAT SHORT TRADE, is nowhere to be found in the history

now… if that’s not manipulation, tell me what is ?

so. does the broker take the other side
does the broker do dishonest stuff

yes they bloody do

i’m with a new broker now, though
this broker still is better
but still from time to time they try and get cheeky

but i find, if you let them know you know what they are doing,
they generally back off and let you trade without BS

otherwise, they’ll try every trick in the book to get your money

There is no reality in this statement, I would like to say that brokers only get the commission which is spread, otherwise they did not get any amount when we lose our money, they provide us the platform and get the only commission in shape of spread.

You’re free to [I][U]say[/U][/I] it, of course (and indeed it’s consistent with many other things you say).

But equally, we’re free to laugh at you and tell you that it’s nonsense. And it [B]is[/B] nonsense.

This is the general policy of market maker brokers, they open negative trade positions according to their clients! This is way, they create false market movements, slippage, execution and others technical error in their trading chart! On the other hand, regulated Forex brokers make money by trading spread! No doubt, only regulated Forex brokers are able to ensure traders capital security in the proper way!

Sorry, but this really [B]isn’t[/B] right, at all!

Whether they’re genuine brokers or counterparty market-makers is [B][U]NOT[/U][/B] determined by or disclosed by whether or not they’re regulated. There are hundreds of fully regulated counterparty market-makers, too, but they’re still not genuine brokers - hence all the confusion around this subject.

I don’t wish to re-open the old trading v’s gambling can of worms but at least when you’re a UK spread betting client, they are “honest” enough to call it betting.

Indeed … quite so.

And if you use a decent spread-betting company (they do vary greatly!), then they’re automatically off-setting their own net liabilities (above a certain “acceptable risk” figure, anyway) in the underlying market, and therefore [I]effectively[/I] not trading against their own customers in the very important sense that it doesn’t matter to them, financially, which ones win and lose. (Not to mention the tax-free benefit, of course, which give profitable customers a very significant advantage over other types of trading they’d potentially be doing instead.)

You just have though mate & it’s not only the cheap seats who call it betting, the posh(er) ones do too.

Regardless whether your facilitator is City Index or Citi Group or you’re an amateur or professional punter, you’re all simply placing bets on the movement of your chosen instrument, shelling out commissions & spreads for the privilege.

Elements of the execution process [B]known[/B] & controlled at outset are your chosen entry location, risk & capital exposure. The exit however is totally [B]unknown[/B] at outset & will be wholly determined & influenced by how far & for how long you decide to allow your stake to be exposed to the market, be it in credit or in debit. And that boys & girls is one of the definitions of gambling or betting!
Punting, betting, gambling, trading - all one & the same wrapped up in pretty bows.

Doesn’t matter how much or little analysis you undertake, what degree of mental preparation or attitude you employ, which type or grade of broker/facilitator you use - it all still amounts to nothing more than placing a bet (or a trade for the more squeamish) of which the outcome is totally [B]unknown[/B] at outset.

If it wasn’t you’d have no need or requirement to protect your stake & capital in the event of loss.