In contrast to any/all other kinds of trading, for all kinds of complicated, historical reasons, there are actually plenty of crooked, lightly-regulated forex places presenting themselves to the public as “brokers” when they’re actually counterparty market-makers whose essential business model revolves around identifiying and exploiting naive/inexperienced/gullible “aspiring traders” who aren’t familiar with what a genuine broker really [B][U]is[/U][/B].
With great respect to Adrian, who posts above (and who knows me well enough to appreciate that I [I][U]do[/U][/I] have plenty of respect for him and am not “just saying it to be polite”!), I don’t think the analogy he draws with trading-floor “specialists”, regarding stock trading, is a valid one in this context, [I]the key point being that punters wishing to trade spot forex can [B][U]choose[/U][/B] between using a genuine broker or a counterparty market-maker, i.e. between choosing an agent who acts on their behalf and would prefer them to win, or someone trading [B]directly against them[/B] with every incentive for them to lose[/I].
With all forms of attempted self-employment/“own businesses” the great majority fail. Forex trading, in particular, because of the ease of access, trading hours, and huge availability of leverage, attracts huge numbers of people with a gambling mentality. They’d treat whatever sort of investing/trading they did as gambling. That’s about them; not about forex. They just happen to choose forex, partly because with forex there are so many scammy companies pretending to be brokers (but actually counterparty market-makers trading against their own clients) and they promote and advertise so heavily that they can find a constant throughput/turnover of victims. The good news is that none of this need be relevant to [B]your[/B] prospects with forex-trading, [I]provided that you start by developing an understanding of the necessary statistical and probabilistic concepts and methods needed for all successful trading[/I].
I agree that there have been many and will likely be many more scam-dealers in fx. But the devil is in the details when it comes to this issue of STPs vs MMs.
The NYSE DMM is directly trading against scalpers in hopes of killing them with no mercy or any shred of humility. In the old days, the specialists had to put incoming orders ahead of their own, but that didn’t keep them from killing scalpers regularly. That has changed somewhat however as the supplemental liquidity providers (SLPs) now share that role with the DMMs. They can get filled in front of the incoming orders if their orders are in first. Who are the SLPs? They are algorithmic robots, high frequency traders, (HFTs) that are owned and operated by major Wall Street firms that have paid to have their equipment right there in the building with the exchange’s servers. In exchange for providing liquidity, they also get depth of market information that nobody else can get. Why? So they can kill the scalpers, front-run the traders and investors, and cover the cost of providing liquidity.
Many critics of fx market makers like the security of using an STP dealer as a screen to hide their stop losses from whoever or whatever they are trading against. This only makes sense when you are scalping, and that is true at the NYSE and in fx. It is the case that trading NYSE listings through a broker hides your stops on record with your broker from the DMM and any SLPs. Your broker submits your stops when the trigger price is reached to the surprise of the DMMs and the SLPs. STP fx dealers claim to offer you this same protection (and perhaps they do) from MMs, but you are most likely still dealing with an MM when you get an fx trade filled. All of that becomes more and more important as your stops and targets become tighter and less and less important as your stops and targets become wider.
If your stop loss is outside the price range of the past few weeks or months or the whole last year, an MM is going to have a lot of market between the current spread and your puny stop. There is no reason whatsoever for him to sell or buy through the market to take it out. He would likely be out of business before he got to it.
But if your stop is one tenth of a pip away from the current spread and the only order between it and the last fill is the MM’s, you are at his mercy. But think about that scenario for a moment. Suppose he can’t see your stop, you have it hidden because you have it on record with a dealer and not with the MM. You may luck out and he may hold the market at the tenth of a pip above your stop before it turns and goes in your favor. How often will that be a factor in your trading? If you are trying to scalp and your stops are always that close, it may be often but then you have BIGGER problems. The market itself is already likely to find your stop often anyway.
So if you want to scalp in fx, this could be a big issue for your consideration. But if you want to trade longer term you can look at other more important factors such as position sizing options offered by the dealer.
(It should be noted that fx MMs can be profitable even when all of their client traders are profitable, they do not need to profit from their trader’s losses to make money).
yes you are right partially, in stocks just aswell market makers exists, but it is something entirely different. it functions on different principles and methodes. in the dow you got those market makers (theyre only called nickname that way) who jump in to boost liquidity if needed.
generally there are many differences. in dow jones you trade through your broker with a market maker. the product you buy from that market maker you not necesarrily must sell to the same market maker but can sell to other participants. basicly you choose with who you make a deal. aswell there exists more market makers who compete with each other to seel/buy from - you and you can “so to say” who to buy/sell from/to. Aswell you trade the same products that are free tradable on the market not connected to that “market maker”.
so in dow the “DMM” model is created to smoothen the market out in times of high votality and shortings of products people want to buy. they jump in a “luquidty providers” for products so to say.
in forex it is another way, there market makers aswell exists in forms of banks (yes i know that you know that Arbitrager on Acid, im just repeating it shortly for the newer people who dont know it) and brokers. the problem that is beeing faced in forex is that there are brokers who in same time are market maker. and the difference there is that you can trade only with them. you sell/buy with them and you can not sell to other entities or person, you are bound to only them and only their quotes etc. so basicly speaken there is no competition and you are never even entering the market. that is where conflict of interest comes up. when your broker is your own market maker. that is something you will never see on dow jones trading stocks but you see on forex very often. you are completely naked and exposed to your Market-Maker/broker who knows everything about you, your account balance, your stops your TP etc etc. and the problem of quotes which occurs sometimes with scam brokers that the quotes differ from the real quotes on several points (not only in volatile times) and therefor “cheats” people out of trades etc. the client usually doenst realize it and doesnt complain and even when he does the answare will likely be that the voatilty can actually never guarantee perfect execution of harmony of prices and quotes can differ from the truth by several points etc etc. but you simply cant prove it as your broker is your market maker.
I in no mway say that those things happen often or constantly, i only try to explain why everyone is so sceptical against market makers in forex. at least from what i have seen on this forum.
but as i said, thats not evil and its not necesarrily bad. its just business and nothing personal, everyone agreeing to it should know what he/she is doing.
In general if your broker is market maker and trading against you, it is a bad thing, but also not necessary. If you have a good and consistent trading strategy than it doesn’t really matter if your broker is market maker or not as long as they let you to withdrawal your earnings.
I don’t know about FXCM, if they are good or bad I have never worked with them. My broker is PaxForex, and I am trading with them for several years and never had any problem with them.
That is what I learned yes. They make their money with each transaction that is made by the trader. So obviously they don’t want you to blow your account and leave.
I came across the question, maybe in school. “What kind of a trader are you?” I am still in school and not sure yet. With my demo trading I mix things up a bit. I have been doing some scalping meaning closing the trade after seeing the market only to rally for a few seconds or a minute after some news event etc. and then boom it stalls or signals reversal. I must admit some scalps were deliberate.
Other then that most trades run until it hits the TP, SL or I manage to get a trailing stop in if the market trends well. Sometimes I close a trade manually for some acceptable reason.
I do not really have money to waste at this stage, but will have to get a 50 or $100 account and work with that 1% risk and micro lots.
With my current demo I made the mistake of taking a 50k (which is $130 short after 83 trades) account instead of a 2k one. I will have to learn the hard way, but I know I will get there.
Imagine that. Little me against the Wolfs of Wall street with their super computers and gazillion Gigabit Fibre link to the NYSE. Phew you guys scared me with all the info in this thread.
I`m over here in little Cape Town, South Africa. Hopefully my internet link does not add too much slippage to the rest of the issues on hand.
It’s very unlikely to make any significant difference (unless possibly you’re a [I]real[/I] scalper, literally trading by the split-second). Anyway, you’re clearly not doing badly at all, after 80+ trades, to be down only $130 on a $50k demo account. You and Table Mountain, there, in the background …
I am not so sure that counterparty type “brokers” want their [I]individual [/I]clients to lose on a “personal” level. That would mean a constant need to get new customers and a severe risk of a bad reputation in a highly competitive industry. I also doubt that any such “broker” has the resources or the interest to monitor every client’s position on a one-to-one basis.
Generally, a market-maker/counterparty is interested in monitoring their [I]overall [/I]exposure on a collective basis and making adjustments according to both their own view and their own exposure management policy. They are surely not concerned with the positions of their individual customers unless, and until, they reach significant levels both in terms of volume and profitability. The rest of the customer bunch can be netted out and only the net position taken into account. Afterall, individual positions change all the time and the vast majority will probably be a mass of small-scale win/loss, in/out, transactions that pretty much neutralise each other without a great deal of interverntion required from the “broker”. In the event of an abnormal exposure developing in a certain pair and direction then it would require specific action.
I guess one could describe the counterparty broker’s exposure as a constantly changing “portfolio” of open positions and the only real concern for the broker is to respond to the [I]overall [/I]risk exposure. On this basis it is surely irrelevant which individuals are winning or losing as long as there are a healthy number of clients actually participating?
If you put on a micro lot of EUR/USD in a USD based account and want to risk 1% of $100 account ($1) then your maximum stop distance will be a mere 10 pips. STPs generally limit your minimum lot size to 1000 units for reasons including the fact that they need to make at least a minimum amount for your account to be worth opening to them.
Certain MMs will allow you to put on much smaller lot sizes, some will let you go all the way down to a single unit. This can make a huge difference. You can put on a position of just 10 units with a 1000 pip stop distance and an entry to stop risk of just $1. This opens up a lot of possibilities that make the fact that you are trading with an MM meaningless.
“On DD, our dealing desk can provide our clients with liquidity but we place a limitation on our desk so that we do not have too much exposure or risk. For example, we can say that we will only take on 10 million in EUR/USD exposure. When our client trade past that, we flip a switch on our back end and all the remaining orders go on NDDAs for your positions, we are not trading against you. We simply take on a flow of orders and end up with a large amount of one position. We must manage that position. Management of this position should not affect your trading. Our DD pricing is based on the NDD feed.”
It makes sense, but It`s always better to see for yourself.
I asked the broker at FXCM about the ad that I saw on babypips about their $50 account. He says they created the $50 account so that learners can use it to work on the emotional side of trading.
So I figure it would be easier to manage a 1% risk per trade using a $100 account?
I chose FXCM because it was said that they are if not the biggest FX broker? and being from South Africa it does not seem tricky to get an account with them.
No I`m not a real scalper, but sometimes the trigger finger gets the best of me.
I like trading too much and enjoy pretending to understand why support levels aligns with Fibo retracement levels frequently etc. This is when I get confirmation again that the market respects Fibo levels… in many cases. I also enjoy planning my plans on Tradeview and using weird Batman, Cypher etc. patterns and watching them unfold while waiting for a good entry point.
My point being that I want to be a professional trader some day. I make sure I put in the time and effort to learn the art of trading. I don’t think being a permanent true scalper is for me as I will not be getting to do the fun stuff like analysing a chart and see how the market sentiment changes after the queens speech and watch investors overreact when China announces no changes to their monitory policy etc.
But then again I don`t really know how a real scalper operates. But it just sounds like bang bang bang.
In any event Im starting to sound like a trader so I guess Im on the right track…
I cant comment much about MMs i mean they do have a reputation that comes with it, but like any broker, the margin of having a good broker in general can be slim, so we tend to make the best of what we have, trial and error i guess till we find the right one.
