The banks don’t consider retail traders at all since they run the primary market (create the market) and we are in the secondary (buyers and sellers). So like one guy said, retail traders do the opposite partly because we are speculating and banks see both sides of the market, so know exactly when to front run. Who wouldn’t?
Brokers are 2 kinds market makers (similar to bucket shops) and ECN (take commissions and pass on the order into a dark pool).
Most retail traders witb small cap alwayd choose market making brokers. The rest of the story we all know…
MasterTang, yes and no. Like everything in life it comes down to perspective. I know not of things of finance, economics, corporate law etc, I make things out of milk for a living, that I do know about. So if my perspective is mislead, please forgive me and point out my short comings.
Now are banks and brokers different. No. But its like two elderly ladies down at the supermarket arguing of whether Brand “A” block of cheese is better than Brand “B”. At the end of the day both blocks are made in the same factory, on the same machinery by the same company. Its just marketing.
But now if I clarify and say by “bank” I mean the worlds major investment banks who participate in the interbank market and “brokers” I mean Retail Foreign Exchange Dealer’s (RFED’s), then yes there is difference and that’s their business. They stilled might be owned by the same parent organization who is then owned by you and me as a public company.
So the “banks” don’t care about me, I am just a speculator and all I am doing at the end of the day (regardless of what marketing tells us) is placing a bet. Banks are interested in liquidity. So unless I have a spare $5 mill laying around in cash why would they be interested in me. My broker however is very interested. They take my position, your position, every-bodies position aggregate them together and are now in a position off liquidity to go to their bank. Doesn’t mean they have to. The only obligation they (the broker) has is to honor their side of the bet with me. That’s determined the moment you set your SL and TP. They know their risk and have numerous tools available to them on how to minimize that risk i.e. your trade exactly counters my trade, zero risk, take the spread on mine plus yours = profit. Which is why it’s important to know and understand the different types of brokers out there and what they do with your “order” once they get it. I trade true ECN so I know my broker gets paid commission on volume. Plus he gets his commission from me every time I trade. I know its in his interest to keep me trading.
So why do we trade opposite to banks, because we make the mistake of speculating. I bet the price will move from A to B without going to C. Banks/Brokers manage their risk. So to duplicate the banks I must manage my risk and by that I must manage my trade. This would be an interesting experiment, what would happen if nobody placed a physical SL and TP value to their trade. What if we just sat at the screen and waited. Would our brokers start stressing?
This would be an interesting experiment, what would happen if nobody placed a physical SL and TP value to their trade. What if we just sat at the screen and waited. Would our brokers start stressing?
Very nice explanation…Put quite simply.
I do use SL’s because my cash base is limited, however you make the same point as one of the Market Wizards, Kovner said the same thing about trade management, of course as it will take a colossal market catastrophe to wipe him out and with the ever stabilization of the currency market he didn’t need SL’s and just managed his trade and closed when he had lost a certain amount or hedged the trade.
He also said with near unlimited capital you cannot loose in the currency markets. He retired as a billionaire and one of the worlds foremost currency trader (He never worked for a bank started very small). Don’t get me wrong it is a different time now…
Its amazing the amount of people on here that do not know how the market works, and what role the banks play in the market.
I need to write an article today for my blog, and i was struggling with ideas on what to write about, but thanks to this thread i will be writing an article on the role that the banks play in the Forex market. Thanks guys.
Maybe you could share some of that knowledge here. You are absolutely correct, many of us know little about the mechanics of the market. If we did we wouldn’t be here. Now if you want to know something about cheese I can answer that.
So fell free to pick apart and dissect my brief understanding. I believe knowledge is the edge and if my perspective is wrong I sure as hell would like to know. Maybe you can answer this question. What effect does it have on the market when stoploss orders on a banks books “rolled” from one session into the next. Banks and institutes a heavily loaded with policies and procedures to minimize risk/exposure. Of course we all know that increased liquidity comes to the market at London open but is part of that increase due to these “roll over” stoploss orders being dealt with according to company policy. And if this does, can price action detect this.
It is not much point to get into the inner workings of how banks manage the order flows.
The concept is, the bank is market maker, they are suppose to create a buoyant secondary market so they can make money from selling to that market. This process is similar to that of an IPO for shares (a primary market activity). This process will involve providing inventory to intermediaries to manage like brokers. Some brokers simply pass your orders into a pool provided by the major banks (take a look at dark pool liquidity). The fact is that the currency market is a zero sum affair, losers pay winners.
The banks are so skillful at determining prices and managing orders so the zero state is not imbalanced in any way. This is the reason why HFT is a hot topic these days but it has little do with secondary market activity. So unless you won’t to work in primary banking activities then the technicalities don’t matter to you.
In my opinion a speculators only concern is to be on the right side of the order flow, that is to buy when large market moving institutions are buying, majority are larger speculators like hedge funds and banks obviously move money in the interbank market for corporate clients and governments all impacting currency prices. This gives the bank the unique perspective in knowing the exact direction of the order flow as they process all the orders as a group of banks. They can then set up their own accounts in the secondary market and bet safely always sure to profit. This is obviously not speculation as there is no downside risk.
These guys call themselves traders. I guess my daughter is a trader in that case. Anyway the role of banks is a primary one not one to do with speculating against you, etc. You as a speculator provide liquidity that allows the secondary market to grow in size. If the Currency market is worth $5 trillion a day, the bank makes 0.05% on average commission, then the liquidity banks share is $2.5bn every day collectively. UBS, CITI, Barclays, Morgan Stanley and Goldman are the core players. Why on earth would you want to spoil this via foul play? The brokers too are also realizing that the more you win the more everyone wins. So now most prefer to pass orders on than deal for you, this way they keep you happy and investing.
At this present time very few brokers are screwing their clients however as mentioned the banks must ensure zero sum is maintained otherwise they will have to pay the excess winners. This can’t happen. So they use all the tools in their box including the media to ensure there are enough losers and winners. This is the reason why the hypothesis you can’t win in FX is untrue. You simply need to stick to one particular technical play and base all entries on fundamental events that happen all day.
Whether a bank or a speculator, forex trading is a business concerned with making and not losing money.
Moreover, I believe that both banks and retail traders take the position they (we) see as being the most profitable. We are both “hunting” for profits.
