How do the brokers operate, wins, losses who gets what and how exactly?

Beginner Questions
1

After reading about 20 articles on the net and 40 posts on this forum I am nothing but confused due to the highly controversial information everyone offers, I just can’t connect all the dots and create the big picture.
I hope we can clear this out in this thread once and for all so it becomes clear for all current and future newbies who are confused or have anything unclear about that matter.

[B]Few important questions that can shed some light are :[/B]

  1. How many institutions in total are involved in a single trade that I perform and which are these institutions and what is the broker’s relation to them, how do they interact? Does the broker interact anyhow with the interbank market?

  2. What exactly happens through the whole chain when a trade is executed from the trading platform from the opening of the trade until the closure of the trade? Can somebody explain the whole process step by step ?

  3. How exactly and how many ways there are for the brokers to win money from the whole trading process? Here we can include the honest brokers and the ones that use unfair methods.

  4. What is the whole process for a broker to earn money from a spread? (at what point of the whole trading process (opening of the position and closing it) exactly they get the money and how they get the money from that spread. Does the broker win from all spreads irregardless of the outcome of the trade or not?

  5. For any money that I lose, say by manually closing my negative position or the position being auto closed by the broker, where do this money exactly go ?

  6. Same question can be asked, from where do I get the money that I win, say I open a trade for 100 USD and win 50 USD, close the trade, who gives me this 50 USD in my account, where does it come from?

  7. When a broker gives me leverage, does the broker use any of his real money on the actual forex market or not ? What money goes into the actual forex market at all ?

  8. Is the broker interested in the traders losing or winning or the broker doesn’t care at all, all the broker needs is more trades irregardless of their outcome?

May be some of the questions are lame and stupid may be some are not, but I’m just confused and want to thank everybody who is willing to answer whichever of the questions.

2

As a retail trader, you are never trading against an institution. Most of your broker’s interaction with the interbank market comes in the form of an aggregate price feed, and that’s about it.

The next few questions can be summed up pretty nicely, as they are almost the same question.

Pasted from another thread:

It’s pretty simple.

Your broker trades against you.
They make their money from the spread, and also the swap/carry.

When you enter a trade, you have a floating value of unrealized gains or losses until which time you close your trade at a realized loss, or gain. During that time, your potential gain, or loss floats in a gigantic pool of gains and losses on your broker’s trade platform.

That pool of money your broker is holding in open, unrealized trader wins and losses, swells and shrinks as trades open and close. They need that liquidity available, to stay solvent. When you first open a trade, they take the other side, then hedge it off as soon as possible. After that, it floats, until which time you close the trade.
If you close for a gain, that overall pool of money diminishes slightly. If you close at a loss, that pool gains slightly. And the broker hedges are mostly internal. If you open a long, and someone else opens a short, even if the broker stays counterparty to both trades (which isn’t likely), he’s covered, because of the floating net value, and pockets the spread and swap rate only.

The broker uses none of their money for our trades in form of leverage. Only YOUR money goes into the market.

Addressed by the long post above, but for a refresher, the broker doesn’t care about the overall outcome of your trades. They make money whether you win or lose.

Never a lame question, just usually too many lame answers;)

Read some posts by Rhodytrader, and Clint. They are really good at detailed explanations. Rhodytrader has written several books on trading, and what happens in the market. Search “John Forman”. He’s got a Barnes and Noble coupon going at the moment. And Clint has tons of in depth posts on here about the market, leverage, trades, time zones… On and on.

Cheers!

3

For the record, I never tweeted that. There was some malicious activity in my Twitter account recently, though, so be careful.

4

Great answers Master Tang!

Some brokers claim that they fill and execute trades from their clients by using price feeds/quotes from the big banks. With this they claim that they only make money only from the spreads, and that the leverage they offer to their clients is from their capitalisation in the markets, even though only the trader is exposed to risk. For this reason such brokers claim that they are interested in having profitable clients as this will encourage them to trade more so that they, the broker can earn more from the spreads! To this end they often organise training programs for traders who use their services.

My question is this: Do you believe that there is any truth to this?
Thanks.

5

There may be little bit true(for some broker only) but not for all.

6

Yup, especially when you realize that some brokers are straight pass through and don’t actually make a market for their customers. Furthermore, most trader positions offset against other trader positions, so it’s highly profitable to just sit in the middle and take a piece of every trade without any need to be exposed to directional risk.

7

soo…any broker sugggestions?..or even ones to avoid like a surprise interest rate cut??

8

Well, Peterbaik,
There are many good brokers out there. Each one has its pro’s and con’s. I prefer to go for the bigger ones like fxcm, gft, alpari and tradestation, just to mention a few. Take your time and get to demo trade and get to see how promptly they respond to your emails. And even when you decide to use a particular service start with the smallest account balance possible, because its when you put in real money that you really get to fully know your broker. So take time to shop around.

9

most of them are marketmakers, you eitther make or lose form them, and they take commision on every trade

10

Hello every one why us there not a list of these scum bags to avoid.
and why can they do this to people.
I’ve been scamed also. Still keen to trade. on bloomberg there are advertising intertrader and fxpro are they anygood

14

If broker is NDD they pass your order to some dealer (liquidity provider). So their gain is your loss and vice versa. Brokers care that they offer you best available price (best offer for buy or sell asset from their their pool of liquidity providers) and simply add markup to spread and get their fixed commission per lot.

15

It’s a wrong mindset; don’t try to achieve a specific goal! And don’t push yourself to make money! Forex is a game of psychology, make a professional brain 1st!