In this very helpful section of Pipsology, I gathered that “the quotes that your forex broker provides you may be informed by or even come directly from the institutional FX market (via price feeds), but it is your broker who you are still trading against. Nobody else.”
My question is: where each FX dealer’s market represents a “fishbowl” for the retail trader, how and why does it happen that the historical price action of a currency pair may be very closely aligned with the historical price action of the same pair in a different fishbowl? Without more info, it seems to me that the prices of the pairs in each fishbowl should be more different than they are?
For example, see the attached screenshots of the USDJPY, as offered by both FXCM and OANDA, superimposed over one another, on both the 1 hour time frame and the 15 second time frame. You can see very little difference between them on the higher time frames.
Is this because the price action we’re betting on is merely a feed the dealer is getting from a larger prime broker (i.e., the interbank rates/fluctuations)? And that those rates and fluctuations don’t vary much from one interbank “island” to another because they compete on that larger level and therefor must align with competing prices in those larger markets? And if so, does this mean that our trades don’t impact the price action that we’re looking at, because our trade capital never goes into that larger market? We’re never trading against one another? We’re simply placing bets on the movement of an object (i.e., USDJPY price action) that operates completely independent of our actions/investments? And if so, what are we looking at when we view the order book of those certain retail dealers that offer level 2 data, such as IBKR? As ostensibly those aren’t retail trades sitting in the book?
Assuming #1 above is correct, is the difference in price action between retail dealers merely attributable to the “mark up” that the retail brokers apply to the larger interbank feed? In that each retail dealer applies a different mark up?
Assuming all this is correct, why does the retail dealer apply a mark up at all? It would make sense if they’re all actually themselves trading in the interbank market through a prime broker arrangement, because they need to make money in the bid/ask spread. But couldn’t they merely be organizations with sufficient capital to back the trades they’re putting up against their retail subscribers? And if so, why would they mark up the spread/price feed in that case?
Any idea of the source of the feed from FXCM in particular? From this link, it seems the feeds are from FXCM’s liquidity providers; but is FXCM itself participating in the market? Or simply taking in dough from a mark up on the bid/ask spread without participating? And does one case or the other make a difference in conflict/risk to FXCM’s retail traders?
Grateful for your kind guidance in shedding light on this. It goes without saying I understand there may be other explanations from the above in lieu of my noob speculation; and I’ll be grateful if you can enlighten me. I’m merely paper trading at the moment, and don’t want to wade into live trading until I have a thorough understanding of the playing field, so to speak.