Do brokers borrow from any financial institutes to lend us as leverage?

[expertartist]

Hello friends,

I am not new to FX, trading Forex from a long time with success, and have no regrets till now.

However, I have few confusions in my mind and I am curious, and keen to know about this matter because this is the matter which is related directly with the religion, I am a Muslim and being a Muslim, I am restricted to not pay interest to anyone OR to not give benefit to the lender for his money as collateral.

I hope that any of you will not mind and would love to happily answer my question.

I searched a lot on google about how brokers manages so much money as leverage, after finding a lot of times, I came to the point that brokers do not lends us, it is the rule of financial market that we can pay 1 to have the rights for 100 which exactly means 1:100 leverage. It surely means that brokers lies to us that they give us leverage.

If even as a rule, who gives so much currencies on credit to us? I don’t think that brokers have so much money or rights to do this because if there are 100 people with 500k account trading with their full account and with 1:100 leverage, we will have the figure of 500 Millions Dollars. Wow, I don’t think any broker may have that much money to lend us.

Questions exactly are:

• Do brokers really lends us?
• Do brokers borrow from any financial institute, if yes then how even financial institutes can afford so much?
• Is it true that brokers borrow from liquidity providers?
• Is it possible to have leverage when trading without brokers? Directly with Bank and Trader?

I am clear about concepts of longs and shorts, we short one currency and long one currency. I know it. We borrow from banks/brokers.

Please, if something is not clear, ask for clarification so that you could answer fully.

Thank you very much in advance.

[Master_Tang]

• Do brokers really lends us?
  No.

• Do brokers borrow from any financial institute, if yes then how even financial institutes can afford so much?
  No.

• Is it true that brokers borrow from liquidity providers?
  No. They trade with them.

• Is it possible to have leverage when trading without brokers? Directly with Bank and Trader?
  No.

Think of leverage like a deposit. You are betting a dollar, but only using a penny, but the gains or losses would be calculated from the dollar. Nobody gives you the other 99 cents to use to make the bet, your penny margin holds 100 times it’s value.

[expertartist]

• Do brokers really lends us?
  No.

• Do brokers borrow from any financial institute, if yes then how even financial institutes can afford so much?
  No.

• Is it true that brokers borrow from liquidity providers?
  No. They trade with them.

• Is it possible to have leverage when trading without brokers? Directly with Bank and Trader?
  No.

Think of leverage like a deposit. You are betting a dollar, but only using a penny, but the gains or losses would be calculated from the dollar. Nobody gives you the other 99 cents to use to make the bet, your penny margin holds 100 times it’s value.

Thank you very much for your time.

Can you please make it clear that why? If it is betting then it should be named gambling, No?

[rindoan]

Questions exactly are:

[B]- Do brokers really lends us?[/B]
Yes a broker lends you the leverage you use its just done at 0 interest rate against the collateral in your account.

[B]- Do brokers borrow from any financial institute, if yes then how even financial institutes can afford so much?[/B]
Brokers also borrow money from financial institutions as they have a credit relationship. The reason they can afford it is all financial institutions on the interbank market trade with each other with credit based on their credit worthiness.

[B]- Is it true that brokers borrow from liquidity providers?[/B]
See above.

[B]- Is it possible to have leverage when trading without brokers? Directly with Bank and Trader?[/B]
Yes you can go directly to banks or prime brokers and get leverage you just need like 25m+ to do so

---

Main thing to consider for you though is that every day at 5 pm EST your forex trades will be rolled over to the next day and at that time you will either pay or receive interest depending on the currency you are trading.

So if you are not allowed to pay or receive interests because of your religion then you are not allowed to hold live trades at 5pm EST.

[expertartist]

[B]- Do brokers really lends us?[/B]
Yes a broker lends you the leverage you use its just done at 0 interest rate against the collateral in your account.

[B]- Do brokers borrow from any financial institute, if yes then how even financial institutes can afford so much?[/B]
Brokers also borrow money from financial institutions as they have a credit relationship. The reason they can afford it is all financial institutions on the interbank market trade with each other with credit based on their credit worthiness.

[B]- Is it true that brokers borrow from liquidity providers?[/B]
See above.

[B]- Is it possible to have leverage when trading without brokers? Directly with Bank and Trader?[/B]
Yes you can go directly to banks or prime brokers and get leverage you just need like 25m+ to do so

---

Main thing to consider for you though is that every day at 5 pm EST your forex trades will be rolled over to the next day and at that time you will either pay or receive interest depending on the currency you are trading.

So if you are not allowed to pay or receive interests because of your religion then you are not allowed to hold live trades at 5pm EST.

Thanks rindoan,

I feel that your definitions or explanation is very much different and now I am more confused that which view I should take. I don’t think leverage is betting otherwise Islamic jurists would had no problem to say that Forex is unlawful.

Master Tang explained in short and in his view, it is betting. I appreciate Master Tang that you spent your time but I am still in confusions, if you guys please wills to put more time here, I will greatly appreciate your efforts.

[expertartist]

Well, I feel that rindoan is right in this case because none of the view supports betting.

Can we say that financial institutes and brokers are partners?

[Clint]

Well, I feel that rindoan is right in this case because none of the view supports betting.

Sorry, rindoan is wrong.

[B]Master Tang is right.[/B]

Brokers do not lend money to clients.

Clients do not borrow money in order to trade with “leverage”.

Master Tang explained the similarity between (1) trading with leverage, and (2) placing a bet.

Forex trading is speculating, which may be considered essentially identical to gambling.

[B]If you have concerns about paying interest[/B], because of your religious beliefs, then you need to understand that [I]overnight positions[/I] in retail forex either cost you interest, or earn interest for you, depending on the pair you are trading. But, there are ways you can avoid this interest altogether. See below.

The interest debit (or credit) charged daily on overnight forex positions does [I]not[/I] arise because you are borrowing money overnight from your broker — [I]you’re not.[/I] This interest debit (or credit) arises because your broker has to borrow money from his liquidity provider in order to offset your position, and he has to borrow that money at full notional amount, for which he pays (or earns) interest. He passes that interest on to you (with a little extra profit tacked on for him). The term for this is the [I]daily roll[/I] or [I]daily roll-over.[/I]

To avoid paying or earning interest, you can do one of two things: (1) close all your trades before the close of the trading day, or (2) trade through an Islamic account.

Regarding the full notional amount of your broker’s borrowing from his liquidity provider: Unlike your position with your broker, which is leveraged, your broker’s offsetting position with his liquidity provider is [I]not leveraged.[/I]

So, if you trade one standard lot worth, say, $100,000, you put up only a small percentage (the required margin) of that $100,000 notional value. The required margin might be $1,000 or $2,000 (or thereabouts), depending on your broker and the regulations he must comply with.

But, in order to offset (hedge) the position you have placed him in, your broker must take a position identical to yours, but [I]at full $100,000 notional value, on credit,[/I] with his liquidity provider. That’s where the interest is incurred. And it’s that interest which is marked-up (or down), and passed on to you.

Regarding the extra profit tacked onto the interest which is actually paid or earned by your broker: You may have noticed that [I]the interest paid to you is always less[/I] than the calculated interest, and [I]the interest charged to you is always more[/I] than the calculated interest. The calculated interest in this scenario is based on the central bank interest rates prevailing in the two countries represented by the pair you are trading.

[B]Finally, if you have concerns about gambling,[/B] because of your religious beliefs, you will have to resolve those issues within your religious community.

[B]I assure you that all retail forex traders are speculators, including you.[/B]

We are not investors. We are not hedgers. We have no economic interest in the currencies we trade, except to place winning bets on the changes in relative currency values.

If speculating is too much like gambling, from your point of view, then you need to get out of the forex market, and find some other business.

[Profiforex_Rep]

The answer to your question is simple:

Open a Swap Free or Islamic account. Trading with this account is beneficial to your religious beliefs because interests or commissions is not attached to it. Like every other business, you can choose to gamble by just predicting and relying on luck. For serious traders, taking the time to study a currency pair is the real deal.

[Eva2014]

Considering what happens with Alpari. it’s possible that such things happen.

[expertartist]

Sorry, rindoan is wrong.

[B]Master Tang is right.[/B]

Brokers do not lend money to clients.

Clients do not borrow money in order to trade with “leverage”.

Master Tang explained the similarity between (1) trading with leverage, and (2) placing a bet.

Forex trading is speculating, which may be considered essentially identical to gambling.

[B]If you have concerns about paying interest[/B], because of your religious beliefs, then you need to understand that [I]overnight positions[/I] in retail forex either cost you interest, or earn interest for you, depending on the pair you are trading. But, there are ways you can avoid this interest altogether. See below.

The interest debit (or credit) charged daily on overnight forex positions does [I]not[/I] arise because you are borrowing money overnight from your broker — [I]you’re not.[/I] This interest debit (or credit) arises because your broker has to borrow money from his liquidity provider in order to offset your position, and he has to borrow that money at full notional amount, for which he pays (or earns) interest. He passes that interest on to you (with a little extra profit tacked on for him). The term for this is the [I]daily roll[/I] or [I]daily roll-over.[/I]

To avoid paying or earning interest, you can do one of two things: (1) close all your trades before the close of the trading day, or (2) trade through an Islamic account.

Regarding the full notional amount of your broker’s borrowing from his liquidity provider: Unlike your position with your broker, which is leveraged, your broker’s offsetting position with his liquidity provider is [I]not leveraged.[/I]

So, if you trade one standard lot worth, say, $100,000, you put up only a small percentage (the required margin) of that $100,000 notional value. The required margin might be $1,000 or $2,000 (or thereabouts), depending on your broker and the regulations he must comply with.

But, in order to offset (hedge) the position you have placed him in, your broker must take a position identical to yours, but [I]at full $100,000 notional value, on credit,[/I] with his liquidity provider. That’s where the interest is incurred. And it’s that interest which is marked-up (or down), and passed on to you.

Regarding the extra profit tacked onto the interest which is actually paid or earned by your broker: You may have noticed that [I]the interest paid to you is always less[/I] than the calculated interest, and [I]the interest charged to you is always more[/I] than the calculated interest. The calculated interest in this scenario is based on the central bank interest rates prevailing in the two countries represented by the pair you are trading.

[B]Finally, if you have concerns about gambling,[/B] because of your religious beliefs, you will have to resolve those issues within your religious community.

[B]I assure you that all retail forex traders are speculators, including you.[/B]

We are not investors. We are not hedgers. We have no economic interest in the currencies we trade, except to place winning bets on the changes in relative currency values.

If speculating is too much like gambling, from your point of view, then you need to get out of the forex market, and find some other business.

Thanks Clint for your detailed response. I appreciate it very much.

I think that closing the deal before 5pm EST is better than paying/receiving interest. I wouldn’t like the broker to pay or receive interest on my behalf also. So, etoro seems okay for this case.

Leverage is my main concern because I can trade Forex via my local bank here but I am getting problems when talking about leverage to them. I am working on few solutions and I would like to be in the business if it do not conflict with my religion.

[dwaynnyt]

I think these things are happening. Brokers just do not want to keep things transparent so I wouldn’t know for sure.