Is this how Brokers work

lets say i want to start a broker company named BabypipsTradeFX.
But i need money to provide for my client during their trades (leverage trades).
so i go to a bank/investment bank and borrow lets say 100 million$, and i pay them 2% return annually.
so it will be about 2 million dollar in costs.

so i have my 10000 clients that wants to trade. I make money from them in form of spreads, commission and interest rates/ others fees.

so since i have to provide them the liquidity, everytime they win, i as the broker lose money on the trade, but i make money on the spreads and commissions + other fees.

everytime my clients loses, i make money because as their liquidity providers i took the other side of the trade. and i made money on spread and commissions as well.

so what this says is that me as a broker makes more money on my losing clients than my winning clients.
so as a business i just want to have losing clients, right??


SO how does this differ from the ecn brokers/non dealing desk brokers, since they are not the liquidity providers. so BabypipsTradeFX has its liquidity providers such as banks and hedgefunds.
everytime a client makes an order the order goes through the broker to the liquidity providers who can see the volume and size and buy/sell. SO THE LIQUIDITY PROVIDERS MIGHT THEN TAKE THE OTHER SIDE OF THE TRADE, BUT NOT THE RETAIL BROKER IT SELF.

IM I MISTAKEN HERE ON SOMETHING?

Last question, why is it bad if the broker you choose takes the other side of your trade?

It is not so cut and dried as that. Your broker is not going to have someone sitting at a desk monitoring every little trade individually that comes and goes through their system and deciding whether to manage the other side or not separately. Besides, during the day they will have many positions opening and closing and often offsetting one another without the broker intervening at all. Of course. the actual position is equal and opposite with the broker, not directly with another customer, but the open exposure is often neutralised by other open positions and it is only the net exposure that the broker has to be concerned about.

Brokers are more interested in their overall exposure at any one time and, like any market-maker, will aim to keep their overall position exposure neutral or slightly biased in a selected direction, if they have a view - and of course their own limits for this. If their exposure is too great in one direction then they will offset it with an opposite position of their own.

It would be very short-sighted of a broker to aim to survive off customers losing all the time because they would need to constantly gain new customers to replace them. It is far better in the long run to assist customers in winning and thereby building their account size and trading volumes.

But there are less reputable brokers that will attempt to gain from losing trades by practices such as widening the spreads and scooping in gains by triggering customer stops. And it is in these instances that it is not good to have a counterparty broker.

But let’s face it, retail customers are totally capable of losing all their capital without any “help” from the broker…

1 Like

Not right.

You’d go out of business that way, and have no clients left, if they all lost all their money to you.

So that’s a short term approach.

Because they’re not acting as a broker, if they do that - that’s not what a broker is.

Well everytime i win on my trade, (depending on how much i win) the broker lose money on that right, since the liquidity comes from them that they have borrowed from other investment bank etc.

so how am i profitable for them, they dont want me there. So what they do next is hedging all my upcoming trades if i seems like a profitable trader. right??

You are taking a much too microscopic view of your trades. A broker takes thousands of trades per day and is not going to try and check and decide whether to hedge every single one of them! They are making money from you from their spread and possible commissions. Whether or not you make a profit or loss on a particular trade is of little relevance to their overall profitability.

It is the same principle with a bookmaker. He does not care which [I]individual [/I]wins as long as his overall result is a profit. Your car insurance works on the same basis, the insurance company does not care which [I]individual [/I]has an accident and makes the claim as long as their overall premium income exceeds their payouts. A pension fund has the same principle, it does not care which [I]individual [/I]happens to live to over 100 years provided the average payouts in pensions are less than the premium income. Of course all these businesses try to minimum their outgoings and maximise their incomes, but individual instances per se are not an issue in this.

Many customer positions at any one time are in opposite directions and provide an automatic exposure hedge anyway, so why would they need to consider each and every trade separately? Their risk is only their aggregate exposure in both gross and directional terms.

Naturally, if one day you prove to be [I]so [/I]successful that the size of your trades are sufficient to cause an [I]individual [/I]need for concern, then your broker will probably just tag your account and simply automatically pass your trades straight through to a liquidity provider and enjoy the spread income - but I think it might be some time before you or I present a broker with that kind of issue! :slight_smile: - and by then I think we would be beyond the realm of the common or garden retail broker relationship…

But in the meantime, maybe it would be better to concentrate on learning how to profit consistently yourself rather than worrying about your broker’s profits if you happen to win sometimes! :slight_smile:

1 Like

It looks like a scheme of market makers. I was wondering about this question too some time ago. It’s like the truth, yeah

Hey Manxx many thanks for that input. It’s very good explained and easy to understand with the examples! :slight_smile:

1 Like