Broker profitability figures likely overstated

A couple weeks ago I started a thread sharing some research I’ve done into real forex trader profitability figures. Basically, it shows that the quarterly forex broker profitability numbers don’t really do a good job of telling us how profitable traders really are. I’ve done some follow-up research on that which shows even just a straight-up look at the figures the brokers report to the CFTC each quarter are likely overstating trader profitability figures. Interestingly, it shows that better traders tend to be more likely to trade multiple accounts (or sub-accounts) than are weaker ones. I’d love to hear some thoughts on why that might be.

I have two accounts. My secondary account is for testing out new ideas or concepts to improve my overall trading methodology. I opted for a live account over demo, because if I were in the off chance to strike gold, I would want the monetary reward for it.

One reason could possibly be the allure of free money. Currently, if you open an account with TD Ameritrade you can receive $500. If you open an account with e-Trade you can receive $500. If you open an account with Scottrade you can get $100. If you have the cash you can spread it around among several brokers and you are instantly $1,100 better off (meeting the terms and conditions, of course). Then it is a matter of rotating funds in and out of various brokers and getting the sign-up bonuses as well as the inevitable mailers a year or two later saying “Dear valued customer, come back to us and we will give you $500.” The companies, platforms and everything else (other than the company logos and color schemes) or virtually interchangeable for major brokers so it doesn’t matter which one(s) you trade through. In trading, the bottom line is… well, the bottom line. Money is money. I’ve done this myself.

Every now and then you see forex-dedicated brokers offering sign-up bonuses as well (just not as frequently as the three online investment brokers mentioned above which seem to always offer them).

Another reason for using multiple brokers in forex could be summed up in one word: REFCO. It went under. At the time it was one of the most well-capitalized forex brokers to be found. Many found their funds locked down and had to wait for, if I am not mistaken, the Bankruptcy Courts to run their course. Even segregated accounts can, at best, get tied up or, at worst, be lost in whole or in part if a company goes under.

Neither of the above does anything to explain sub-accounts with the same broker though.

I have different accounts and with different brokers.

Each account has its own strategy running. It helps me to limit the systemic risk and allows me to review the broker firm I am trading with.

Just in theory: May not apply to me.

I think traders with better result want to expand their trading and may perhaps have more focus on risk management with regards to : concentration risk and systemic risk. Compensating for this by opening multiple accounts with more than one broker.

But the multiple accounts may also be used to run multiple scripts.

Or to give it another colour, so that you can see what account your are trading on at the moment. This can also be done in platforms as MT4, but a lot of traders may not know that or they use webbased platforms that don;t allow that.

Perhaps traders use there old accounts to trade new strategies on, with their main trading on their higher accounts.

In all I think that more serious traders have more to spread around and have more the urge to trade multiple accounts. When you are just starting and only have $100, you cannot do that to the same extend.

That really only addresses a question of why someone, anyone, would have multiple accounts since there’s no profitability requirement to go after those bonuses. It doesn’t really explain why profitable players are more likely to have more active accounts than non-profitable ones, though.

There are minimum deposit requirements. $10K is standard. A non-profitable player isn’t likely to have tens of thousands laying around dedicated for trading to take advantage of multiple broker bonuses.

Anyway, just a thought.

Makes sense, back when poker has off the chain people would open up accounts everywhere taking advantage of deposit bonuses and building up their bankroll.

FIFO in the US is a reason IMO.

A friend of mine who was into online poker had an account with any/every poker site that offered a bonus. The minimum deposit requirement was much less but it is the same concept. They offered as much as 10% up to a certain amount if I am not mistaken. That is nothing to sneeze at if you are going to play anyway.

I have had multiple online brokers (the ones previously mentioned) for exactly the same reason. I kind of scratch my head in bewilderment at anyone who doesn’t. If someone is giving money away then I will happily take it!

This certainly doesn’t explain all or even most of the multiple accounts of the better traders that the OP is trying to identify but it is certainly plausible for a number of them (as is my other point about not putting all of one’s eggs into one basket, especially for uninsured/non-guaranteed accounts). There may be as many reasons as there are traders with multiple accounts.

Joe is a successful trader and his sister asks him to trade several thousand dollars for her… he opens another account because he trades her money a bit more cautiously than his own.

Maybe Joe wants to keep it segregated just to pass along “her” p/l report so she can see he actually lost a chunk of it in the market and he didn’t blow her money on booze and hookers.

Maybe Joe is quite profitable and his wife sees how much is in the account and suddenly wants new carpeting. Then a new kitchen. Then a new car. Joe finally opens another account to keep it from his wife.

It may be much easier to approach the problem in reverse and try to figure out why unsuccessful traders do NOT have multiple accounts. It comes down to money. They aren’t making it as successful traders with one account so there is no reason whatsoever to open up multiple losing accounts. Once trading successfully, however, there any number of reasons to open up multiple accounts.

Why would the tax consequences matter if it’s equal treatment between the accounts?

Maybe I have it wrong. I thought FIFO was first in first out. meaning if I opened a trade on the GBP/USD buy at 1.60 and then a trade buy at 1.59 I have to close out the 1.60 trade before I can close out the 1.59.

I ran into this about a month ago. I opened what I wanted to be a position trade and then I saw another good opportunity and got in again. I wanted to keep the position trade open and take profit on the second trade. It closed my first trade then I got stopped out on my second later lol. Or say I have a trade at 1.60 then 1.59 again if it hits my 1.59 SL its closes out my 1.60 trade also.

I use Oanda and have 4 accounts all in one. Solved the problem now I can trade up down and sideways whenever I want lol :D.

I would say I agree with Toekan. You can position trade on one account. day trade or scalp on another. and not have to worry about the dumb US regulations. First in First out and hedging.

And also I use one as like a test where I just mess around try out stuff.

Oh that FIFO. Was thinking FIFO in relation to tax consequences.

They are actually the same FIFO. The IRS requires FIFO accounting for trading/investing, though it really doesn’t matter in the case of futures/forex because that’s all done on a mark-to-market basis, so your taxes are based on your position at year-end, not just on closed trades.

OK. I can take that as an indirect relationship. DailyFX (I think) did something showing that larger accounts performed better.

Although whilst I must confess I didn’t read all of the article linked, I looked at the table and it seems that you are compering the “by account” and “by trader” column % . Now when you say “by trader”, are these individual retail traders (Joe and Bob per say), or also Corporate accounts, Asset Manager accounts etc. ? They would tend to have more accounts under one name.
The other scenarios , i.e. people trading sub-accounts under their name when in actual fact they are trading for their uncle, sister etc. , profitable traders splitting accounts to trade different strategies, and also the point that non-experienced traders are less likely to open sub-accounts , and they also happen to be more prone to lose, I think are all valid also.
The reality is that I think an exact picture is almost impossible to be extrapolated .
Just my 2 cents worth…