I’m kinda lost… again.
I’ll read the thread. Cannot reply right now.
Okay, there is no other money. It’s just a “nominal or notional amount.” But if I open a position with 100,000 units (1 lot) with 1:100 leverage using $1,000 of my money, when it reaches the Interbank Market, where are the rest $99,000? Do they also trade with nominal/notional amounts?
And I have another question: Who pays your profits in the end?
Hello, elegy
If you can dredge up that “somewhere” that you referred to, I’d be interested to read it.
18% sounds high to me, as well — as in [B]double[/B] the true figure. I’ve been using a figure of 9% for about 18 months now, based on the 2010 BIS Triennial Survey, and on further conversations I had with Michael King at the BIS. The data that went into the BIS Survey were gathered in April 2010 (and subsequently published in December 2010), so the data are a little over 2 years old, at this point. Things can change in 2 years, but I think the growth-curve of retail spot forex is beyond the point of doubling in a 2-year period.
Anyway, if you come across your source, give me a shout.
Wikipedia says 10% - not that I would trust that with my own life 
Good thread. A few things I am pondering (out loud): Is the reason leverage is offered because the banks trade such large amounts that the retail trader wouldn’t be able to profit on their low levels of $? I first wondered why not just do away with leverage, but making significant profit (to be worth the time) would require large bankrolls, often life savings size! Also, the market can provide solid earnings on pips because of position size, thereby stabilizing the global currency markets. Imagine if they only traded to the cent! (USD) One million Dollars would take quite a hit with a one cent move, and liquidity would be difficult. Big banks/treasuries could see income sheets take huge swings.
Am I somewhere near the truth?
Since most all of retail forex is in market maker status, it’s highly unlikely that any order of any size, even aggregate, would be noticed by the actual market, or futures.
We don’t register on their radar, and probably have no bearing on market movements.
[B]Leveraged trading is done only at the retail level[/B] — that is, between you and your retail spot forex broker. All transactions [I]upstream[/I] of your retail spot forex broker are [I]unleveraged[/I] transactions.
Your broker will “aggregate” the individual positions of his individual retail clients into a large net position (say, $1 million cash, unleveraged), and he will buy or sell (as the case may be) this net amount through one of his liquidity providers — one of the big banks with which he has established electronic lines of communication, and large credit lines.
The big banks which make up the so-called [I]interbank network[/I] accept these “small” ($1 million) transactions, along with similar-size transactions from large clients (commercial banks, hedge-funds, high-net-worth individuals, etc.), and they “aggregate” all of those transactions into a net position which they will either hold or trade with other banks in the “network”.
Trading between member banks in the interbank network is done through one of two systems: [I]Reuters Dealing,[/I] or [I]EBS (Electronic Brokerage Service).[/I] These two systems compete with one another for the transaction business of the big banks. (You can think of them as ECN’s for the interbank members.) All of the transactions between interbank members, passing through Reuters or EBS, are unleveraged, cash transactions, generally in amounts of $5 million to $100 million per transaction.
[B]All of the losers (as a group) pay all of the winners (as a group).[/B]
It is impossible to connect a particular winner to a particular loser. Even in the rare instance in which a market-maker, or an ECN, offsets one client order directly against another client order, only one end of each client’s transaction will be involved in the offset. Two clients, placing opposite orders of equal size in a particular currency pair, could offset one another upon entry. But, by the time they both exit, there is virtually zero chance that their exit orders will be simultaneous, and will offset one another. So, in this case, who paid the winner? And who took the money from the loser? There’s no way to know.
So that’s why Market Makers need to balance a book right? If there are not enough losers to pay the winners, they “make” them lose (stop hunting???) Do they ever use their money to pay clients? I guess not.
I still don’t understand how the Broker sends the order to the next level if it’s just a “notional amount.”
Apparently, there’s an issue with terminology here.
It’s common so refer to a forex broker passing a retail customer’s order [I]directly to the bank.[/I] There is even a widely-used term — [I]Straight-Through Processing (STP)[/I] — to describe this order-handling procedure.
If you take that phrase literally (and you seem to be a person who takes wording [I]very[/I] literally), then it seems to imply that somehow your [I]leveraged[/I] transaction just whizzed through your broker’s office (without being altered by him in any way), and then landed on the desk of a big bank somewhere as an [I]unleveraged[/I] position. Maybe this misperception about order-handling is the source of your confusion.
Let’s consider a simplified retail forex market, one that has only three components: [B]you[/B] (the retail customer), [B]JollyFX[/B] (your retail forex broker), and [B]Mega Bank[/B] (the big bank through which JollyFX transacts their forex business). We’re ignoring all the other customers of JollyFX, and we’re ignoring all the other big banks that Mega Bank is linked to in the interbank network.
Let’s say that JollyFX is an [I]STP broker.[/I] Their website, and all their advertising, touts the fact that they pass every, individual order “straight through” to the bank. Okay, let’s track one of these orders.
You place an order to go LONG one standard lot of USD/JPY, in a retail account set up for 100:1 leverage. JollyFX accepts your order, and designates $1,000 of your real money as MARGIN. Almost immediately, an order for LONG one standard lot of USD/JPY lands on the desk of Mega Bank. But, the order arriving at Mega Bank doesn’t say it’s from you, it says it’s an order from JollyFX. This is key.
The key point that you have to understand is that you have no dealings with Mega Bank. Your (leveraged) retail forex order is strictly between you and JollyFX. It is, in fact, part of a legal arrangement between you and JollyFX, which does not involve Mega Bank in any way. JollyFX is your counterparty, meaning that they have the other side of your trade. They can’t terminate their involvement in your trade, by passing it off to Mega Bank. As long as your trade remains open, it continues to be a deal between you and JollyFX, and JollyFX contiues to be your counterparty.
Likewise, JollyFX’s (unleveraged) order to Mega Bank does not involve you legally or financially; in fact, it doesn’t even have your name attached to it. JollyFX placed their LONG order with Mega Bank in order to offset the risk which they took on when they accepted the SHORT side of your order.
So, how can your leveraged transaction be transformed into an unleveraged transaction? It can’t, and it wasn’t.
You have a deal with JollyFX. But, you haven’t paid the $100,000 notional value of your deal. You do, however, have actual “skin” in the game — the $1,000 of your real, cash money, which is in “escrow” so to speak, as margin, for the duration of your trade. Your transaction with JollyFX is on margin.
JollyFX has a deal with Mega Bank. Jolly hasn’t sent $100,000 cash to Mega Bank, along with their order to go LONG one standard lot of USD/JPY, nor have they put up “margin” (as you are required to do). But, they have tapped their line of credit with Mega Bank for the $100,000 notional value of this deal. Jolly’s transaction with Mega Bank is on credit.
When your postition is closed, these relationships are unwound. Everything is settled in cash. If your retail account with Jolly is denominated in U.S. dollars, and if Jolly’s line of credit with Mega is denominated in U.S. dollars, then Jolly settles with you in U.S. dollars, and Mega settles with Jolly in U.S. dollars (and nobody handles yen at any time).
Since you guys are talking leverage, I’ve experimented and understand the concept especially after reading Clint’s great write-up. My question though, is what leverage do you guys recommend? Really, I think it’s down to a good risk management strategy, you want to have the potential for big profits but you also want to safeguard against big loss. That’s the dilemma.