Can anyone answer this?

Beginner Questions
1

So I posted this question in forextown but nobody said boo. So I wonder if anyone has some thoughts to share here. Here it is, the ultimate question, what is the forex marketplace?

"My first boss once told me that to get the right answer you have to ask the dumb questions. So my question is, what is this beast we call the FOREX Marketplace?

So,like in Marketing 101 they teach us that a marketplace is where buyers and sellers come together to exchange goods or services and in FOREX that’s money. And as the Forex market is not centralized it therefor has multiple marketplaces. So where are these individual marketplaces? Who really are the buyers and why do they want to buy a currency? Who are the sellers and why do they want to sell? Why do they gather at these marketplaces to do these transactions? Why does this happen every minute of every hour of every day?

But most importantly, what does it really mean to me, a small part-time trader with less than $5000 in my account but realizes that even a return off 1% a month beats the 2% a year my bank pays! When I’m sitting at the screen watching the price go up and down who is really doing what out there?.

Look forward to your responces

Edit 2/22/2014

I knew the question has too hard. Must be secret business lmao.

So lets expand with this quote

"You often hear people claim that because the forex market is so large, it is relatively easy for forex traders to jump in and ride the trends in this gigantic market, the world’s largest market. However, most forex traders trade what is called the retail forex market; this is a different market (akin to a parallel universe) to the “real” forex market in which $4 trillion is exchanged each day. In essence, there are two markets in forex. There is the interbank market, where banks, hedge funds, governments, and corporations exchange currencies, and there is the retail market. Most forex traders trade in the retail forex market, an entirely different market to the “real” interbank market.

In the retail forex market, your competition is the other forex traders trading the retail forex market, and, believe it or not, your broker. When you make money trading forex, these other traders in the retail market lose, and so does your broker. Most retail forex traders do not make money. In fact, your forex broker will assume that you are going to lose money in the long run. This is a perfectly reasonable assumption, since the large majority of forex traders lose money.

Would you like to know about the secret that forex brokers don’t want you to know? Here it is: Forex brokers divide all traders into two groups. There are the winners—these are the forex traders who make money—and then there are the losers—these are the forex traders who lose money. Guess which group all new forex traders get put into? Retail forex brokers believe that all new customers are unlikely to make money, so all new accounts are placed into the loser group. After several months of consistently profitable Forex trading a trader may be placed into the winner group.

It may sound surprising, but it is true. If you start making money trading forex over several months, you will join the winners. Your retail forex broker will begin to hedge your trades. In other words, if you are in the winner group, your retail forex broker will take trades in the real forex market, the interbank market, to offset the profits accumulated by the winner group. For example, if most of the traders in the winner group have decided to buy the EUR/USD, then the broker will put in a trade to buy the EUR/USD in the interbank market in the hopes that, if the winners are correct, the forex broker can use the profits in the interbank market to pay the winning traders. This is how your retail forex broker deals with winning traders.

What about losing traders? Since most forex traders are losing traders, your forex broker assumes that you will not make money when you open up an account. Only after you have consistently made money trading forex will your broker become concerned with your trading. Guess what happens to all of those losing trades? Those losing trades fatten your broker’s
pocket. All losing trades are “business profits” for your broker. This is because your broker takes the other side of your forex trade. Although it is true that some retail forex brokers match up trade orders so that a trader with a buy trade order is paired up with a trader with a sell trade. However, the overwhelming majority of retail forex brokers do not do this. Unless you are a consistently winning trader, your broker will take the risk on your trades, and assume that your trades will lose money in the
long run. This is not something that is widely discussed, but it is true. Your forex broker wants you to lose, because your losses are your broker’s profits."

Nekritin, Alex, 1980-Naked Forex : high-probability techniques for trading without indicators / Alex Nekritin, Walter Peters.

Anyone care to expand their thoughts now!"

Hope someone here has an opinion.

2

I don’t use a market maker broker. I use a true ECN broker (IC Markets). The market place I trade in is thus the true interbank marketplace. Yes its still decentralized, but given that I trade directly with JPMorganChase, Commerzbank, BNP, RBS, Citi, BoA, HSBC, UBS, Nomura, Morgan Stanley, Goldman Sachs, Credit Suisse, etc…, its as close to centralized as can be. In this marketplace all the big boys, and little boys play together. An American billionaire hoping to buy 500million yen to invest in the Japanese stock market will trade with a $200 retail account (for a partial fill). A huge multinational telecom in Poland will repatriate profit back to the mother company in the UK by buying 200 million GBP from anyone that is selling.

With a true ECN broker, your broker doesn’t care if you win or lose. There is only one thing your broker cares about and that is volume, for which they take a commission. The more lots you trade, the more money they make. In this case, interests are actually aligned and your broker wants you to make more money to trade more. If you lose or bust your account they lose money. Because of that they also don’t manipulate spreads, to give you the best possible chance to make money. Its not unusual to see negative spreads during high liquidity times on the majors.

Market makers have truly given forex a bad name. They are probably most responsible for the fact that 95% of traders lose (well, that and extreme stupidity and naivety of newbies wanting to be millionaires in a few months).

3

Hey bob,

The first 6 posts by Darkstar (link below) will answer a good part of your questions (structure of the markets/ brokers)

The Structure of Forex Brokers @ Forex Factory

It is true that SPOT (retail) forex is only a small part ( approximately 25% ) of the total $5.3 trillion daily FX turnover

[ Source: Bank for International Settlements (BIS) Triennial Central Bank Survey: Triennial Central Bank Survey of foreign exchange and derivatives market activity in 2013 ]
( $4 trillion daily turnover figure is from the 2010 report; the latest report is for April 2013 )
–> The main purpose of forex exchange trading is to facilitate international business (that shouldn’t come as a surprise)

It is true that many (most?) brokers have A-books and B-books.

–> A-books: for the profitable traders whose orders are taken straight to market ( + affected by REAL slippage, partial fills, etc ) and whose trades the broker hedges
–> B-books: for the majority (who will lose in the long run). The broker is the counter-party for these trades

Cheers

Addendum:

My current broker Global Prime ( Global Prime - Welcome to Global Prime ) provides a trade receipt to see which liquidity provider took your trade. It is in their best interests that you succeed! ( they make money on the trade commission per round turn )

“95% fail” is a myth. There isn’t enough turnover ( of traders ) to even support that. Several studies ( e.g, http://leaprate.com/files/summaries/fxcm.pdf ) suggest this figure is closer to the 70-something% range.

[B]"[/B][I]FXCM customers have consistently fared in the bottom half of all firms reporting, with only 24% of client accounts being profitable over the past year, well behind both the [B]industry average of 28%[/B] and industry leader Oanda where more than 40% of accounts made money. [/I][B]"[/B]

.

4

Hello Dudest,

Not bad - one thing you missed about the A-Books and brokers, is that many times they are not hedging those positions. If they know a customer is consistently profitable, they will trade with the client in many cases.

Banks today often call this ‘flow trading’, whereby they are trading with the hedge funds, and accounts which consistently profit. Sometimes they will get in ahead of them, hence why JPM can post zero trading losses in 2014.

So its not entirely true that the A-book positions are only ‘hedged’ by the broker, as sometimes they will take advantage of highly profitable accounts, trading with them.

Best thing a trader can do is ask a broker directly if they are ‘ever’ your counter party. For example, any trades over 5MM and Deutsche Bank will be your counter-party. Anything less they will pass on to another liquidity provider.

Hope this helps.

Kind Regards,
Chris Capre
2ndSkiesForex

5

Great read. Thanks bro. Helped answer many questions but know have a heap more lol!