Hello to everybody. I’m sorry if the question is stupid, but I am new in this and there is one thing I do not understand. I see that if we use leverage, brokers lends us money (for example, with 500E and leverage 1:200 we control 100000E which broker lends us). If broker has a lot of clients who are using leverage, does he have all that money to lend?
My understanding is that they do not need it.
If you deposit 10k, but use leverage 10 then you would trade with 100k, in this case all you are allowed to loose is 10%, your trade will be automatically stopped if equity drops to 90k. Then it is game over till next deposit.
When you take a position in a particular currency pair, you are simply placing a [B]bet[/B] on a change in the price of that pair [B]multiplied by the size of your position.[/B]
You are not buying or selling anything. Your account currency is not being converted into any other currency. In fact, no currency exchanges are taking place, at all.
[B]You are not borrowing money from your broker, or from anyone else.[/B]
Let’s use an example to illustrate how this “bet” works. Let’s say that you have deposited U.S. dollars into your retail forex account, and you decide to bet on a price change in the EUR/JPY pair. You expect the EUR/JPY price to go up, so you take a LONG position in EUR/JPY. Most people, including your broker, refer to this as “buying” the EUR/JPY, but that terminology is misleading, because the concept of buying or selling currency pairs is totally incorrect. But, returning to your bet…
You expect to earn a profit from your bet. But, you aren’t interested in earning [B]just a few pennies[/B] on an increase in the value of [B]one euro.[/B] Instead, you want to earn much more than a few pennies, by betting on an increase in the value of €1,000 or €10,000 or €1,000,000. Those various position sizes simply represent various size bets.
Your broker will accept just about any size bet, so long as you have some money on deposit with him, to cover your loss in the event that your position goes against you. That money is referred to as MARGIN, and it’s the only portion of your bet which you must post with your broker prior to placing your bet.
Your broker is your “counterparty”, which means that he has the other side of your bet. If you take a LONG position, you automatically place your broker in a SHORT position. And vice versa. If you win, your broker loses. And vice versa.
Your broker [B]does not[/B] have the leveraged amount of your bet (the notional value of your position) on hand in cash to support your position.
He [B]does[/B] have more than enough cash on hand to pay you your profit, if your position results in a profit.
And, similarly, you have enough cash on hand (in the form of MARGIN) to pay your broker for your loss, if your position results in a loss.
[QUOTE=Clint;666941
You are not buying or selling anything. Your account currency is not being converted into any other currency. In fact, no currency exchanges are taking place, at all.
[/QUOTE]
This is new to me. So basicaly you are saying, that any retail forex activity does not influence the price?
Thank you, and I think this post must be one of the first lections in babypips school.
Cudos Clint, a perfect explanation. In most cases your broker is the counter party and I think traders should at least look for a STP/NDD broker rather than a market maker.
Hey, Bear — nice to hear from you.
Regarding the “counterparty” designation: According to the CFTC (U.S. regulator of retail forex, as well as commodity futures), there are no retail “brokers”; there are only retail “dealers”. And they make this distinction because, in every instance, a retail dealer acts as counterparty to his customers.
Furthermore, the CFTC contends that this counterparty relationship exists [I]in every case,[/I] regardless of whether the “dealer” operates as a market maker, as an STP/NDD “dealer”, or as an ECN “dealer”.
Note that I’m mocking the CFTC here, in their refusal to call forex brokers [I]“brokers”.[/I]
The CFTC requires every retail forex broker under their totalitarian rule to provide a risk disclosure statement (which the CFTC wrote) to every retail customer, and to obtain the customer’s signature on it.
Here are a couple of paragraphs from [B]FXCM’s Risk Disclosure Statement —[/B]
(1) TRADING IS NOT ON A REGULATED MARKET OR EXCHANGE – YOUR DEALER IS YOUR TRADING
PARTNER WHICH IS A DIRECT CONFLICT OF INTEREST. BEFORE YOU ENGAGE IN ANY RETAIL
FOREIGN EXCHANGE TRADING, YOU SHOULD CONFIRM THE REGISTRATION STATUS OF YOUR
COUNTERPARTY.
The off-exchange foreign currency trading you are entering into is not conducted on an interbank market,
nor is it conducted on a futures exchange subject to regulation as a designated contract market by the
Commodity Futures Trading Commission. The foreign currency trades you transact are trades with the
futures commission merchant or retail foreign exchange dealer as your counterparty. WHEN YOU SELL,
THE DEALER IS THE BUYER. WHEN YOU BUY, THE DEALER IS THE SELLER. As a result, when you lose
money trading, your dealer is making money on such trades, in addition to any fees, commissions,
or spreads the dealer may charge.
Your ability to close your transactions or offset positions is limited to what your dealer will offer to you, as
there is no other market for these transactions. Your dealer may offer any prices it wishes, and it may
offer prices derived from outside sources or not in its discretion. Your dealer may establish its prices by
offering spreads from third party prices, but it is under no obligation to do so or to continue to do so.
Your dealer may offer different prices to different customers at any point in time on its own terms. The
terms of your account agreement alone govern the obligations your dealer has to you to offer prices and
offer offset or liquidating transactions in your account and make any payments to you. The prices offered
by your dealer may or may not reflect prices available elsewhere at any exchange, interbank, or other
market for foreign currency.
Note that FXCM’s Risk Disclosure Statement is identical to every other broker’s Risk Disclosure Statement, because it is word-for-word what the CFTC requires.
Here’s a link to the complete Risk Disclosure Statement —
http://www.fxcm.com/uk/assets/media/pdf/risk-disclosure-statement.pdf
Thanks Clint. You have some good posts.
In the UK most STP brokers and ECN, etc all have dealer licences except for a few despite a lower tier licence being available for STP brokers. The question is are all those brokers mailing a market? Guess so… Why have a market maker licence if you don’t intend to make a market?
+1 Clint for sharing.
I think this is a very good discussion and very important points are made here as many are confused. I know the US is messed up like that, but are UK brokers equally messed up and only dealers or are they real brokers so if I have an ECN broker is it an actual broker or still taking the other side and a dealer?
So how come FXCM claims they don’t trade against the traders WHEN TEHY HAVE AGREEMENT LIKE THIS. After reading this, it is scary to deposit the hard earned money for trading with any brokers.
Basically it says, the [B]BROKERS [/B]which CFTC labels them as [B]DEALERS [/B]regardless of their execution status(ECN,STP) [B]can simply play any kind of game to steal the money from your account by manipulating prices whether you keep the money at broker’s account or in custodian bank.[/B]
Too ****ty for retail traders. CFTC wake up please.
I heard deposits with UK brokers are protected/insured by UK regulators for 50k or 80k pounds? Is that true?
Even in that case, the FXCM agreement contradicts in the section 3.
While Section 3 talks about funds, look at the [B]Section 4, it simply allows the dealers aka brokers to manipulate the prices. [/B]
[B]Can any FXCM person in forum explain this conflict in agreement and what FXCM claims?[/B]
RISK DISCLOSURE STATEMENT
OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVE THE LEVERAGED TRADING OF CONTRACTS DENOMINATED IN FOREIGN CURRENCY CONDUCTED WITH A FUTURES COMMISSION MERCHANT OR A RETAIL FOREIGN EXCHANGE DEALER AS YOUR COUNTERPARTY. BECAUSE OF THE LEVERAGE AND THE OTHER RISKS DISCLOSED HERE, YOU CAN RAPIDLY LOSE ALL OF THE FUNDS YOU DEPOSIT FOR SUCH TRADING AND YOU MAY LOSE MORE THAN YOU DEPOSIT. YOU SHOULD BE AWARE OF AND CAREFULLY CONSIDER THE FOLLOWING POINTS BEFORE DETERMINING WHETHER SUCH TRADING IS APPROPRIATE FOR YOU.
(1) TRADING IS NOT ON A REGULATED MARKET OR EXCHANGE – YOUR DEALER IS YOUR TRADING PARTNER WHICH IS A DIRECT CONFLICT OF INTEREST. BEFORE YOU ENGAGE IN ANY RETAIL FOREIGN EXCHANGE TRADING, YOU SHOULD CONFIRM THE REGISTRATION STATUS OF YOUR COUNTERPARTY. The off-exchange foreign currency trading you are entering into is not conducted on an interbank market, nor is it conducted on a futures exchange subject to regulation as a designated contract market by the Commodity Futures Trading Commission. The foreign currency trades you transact are trades with the futures commission merchant or retail foreign exchange dealer as your counterparty. WHEN YOU SELL, THE DEALER IS THE BUYER. WHEN YOU BUY, THE DEALER IS THE SELLER. As a result, when you lose money trading, your dealer is making money on such trades, in addition to any fees, commissions, or spreads the dealer may charge.
(2) AN ELECTRONIC TRADING PLATFORM FOR RETAIL FOREIGN CURRENCY TRANSACTIONS IS NOT AN EXCHANGE. IT IS AN ELECTRONIC CONNECTION FOR ACCESSING YOUR DEALER. THE TERMS OF AVAILABILITY OF SUCH A PLATFORM ARE GOVERNED ONLY BY YOUR CONTRACT WITH YOUR DEALER. Any trading platform that you may use to enter off-exchange foreign currency transactions is only connected to your futures commission merchant or retail foreign exchange dealer. You are accessing that trading platform only to transact with your dealer. You are not trading with any other entities or customers of the dealer by accessing such platform. The availability and operation of any such platform, including the consequences of the unavailability of the trading platform for any reason, is governed only by the terms of your account agreement with the dealer.
(3) YOUR DEPOSITS WITH THE DEALER HAVE NO REGULATORY PROTECTIONS. All of your rights associated with your retail forex trading, including the manner and denomination of any payments made to you, are governed by the contract terms established in your account agreement with the futures commission merchant or retail foreign exchange dealer. Funds deposited by you with a futures commission merchant or retail foreign exchange dealer for trading off-exchange foreign currency transactions are not subject to the customer funds protections provided to customers trading on a contract market that is designated by the Commodity Futures Trading Commission. Your dealer may commingle your funds with its own operating funds or use them for other purposes. In the event your dealer becomes bankrupt, any funds the dealer is holding for you in addition to any amounts owed to you resulting from trading, [B]whether or not any assets are maintained in separate deposit accounts by the dealer[/B], may be treated as an unsecured creditor’s claim.
(4) YOU ARE LIMITED TO YOUR DEALER TO OFFSET OR LIQUIDATE ANY TRADING POSITIONS SINCE THE TRANSACTIONS ARE NOT MADE ON AN EXCHANGE OR MARKET, AND YOUR DEALER MAY SET ITS OWN PRICES. Your ability to close your transactions or offset positions is limited to what your dealer will offer to you, as there is no other market for these transactions. Your dealer may offer any prices it wishes, and it may offer prices derived from outside sources or not in its discretion. Your dealer may establish its prices by offering spreads from third party prices, but it is under no obligation to do so or to continue to do so. Your dealer may offer different prices to different customers at any point in time on its own terms. The terms of your account agreement alone govern the obligations your dealer has to you to offer prices and offer offset or liquidating transactions in your account and make any payments to you. The prices offered by your dealer mayor may not reflect prices available elsewhere at any exchange, interbank, or other market for foreign currency.
(5) PAID SOLICITORS MAY HAVE UNDISCLOSED CONFLICTS The futures commission merchant or retail foreign exchange dealer may compensate introducing brokers for introducing your account in ways which are not disclosed to you. Such paid solicitors are not required to have, and may not have, any special expertise in trading, and may have conflicts of interest based on the method by which they are compensated. Solicitors working on behalf of futures commission merchants and retail foreign exchange dealers are required to register. You should confirm that they are, in fact registered. You should thoroughly investigate the manner in which all such solicitors are compensated and be very cautious in granting any person or entity authority to trade on your behalf. You should always consider obtaining dated written confirmation of any information you are relying on from your dealer or a solicitor in making any trading or account decisions.
FINALLY, YOU SHOULD THOROUGHLY INVESTIGATE ANY STATEMENTS BY ANY DEALERS OR SALES REPRESENTATIVES WHICH MINIMIZE THE IMPORTANCE OF, OR CONTRADICT, ANY OF THE TERMS OF THIS RISK DISCLOSURE. SUCH STATEMENTS MAY INDICATE POTENTIAL SALES FRAUD. THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER ASPECTS OF TRADING OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER.
I hereby acknowledge that I have received and understood this risk disclosure statement. ______________________________________ Date ______________________________________ Signature of Customer
PROFITABILITY ANALYSIS PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS Over 165,000 tradable accounts trade through trading platforms offered by FXCM Holdings LLC and its consolidated subsidiaries Forex Capital Markets LLC, Forex Capital Markets Limited, FXCM Asia Limited, FXCM Australia Limited, ODL Securities Limited, and ODL Securities K.K. Japan. Q4 2009 Q1 2010 Q2 2010 Q3 2010 % Profitable 26% 25% 23% 23% % Unprofitable 74% 75% 77% 77% Total Accounts 22,371 19,049 17,771 15,023
“Bucket shop” is a defined term under the criminal law of many states in the United States that make it a crime to operate a bucket shop.[2] Typically the criminal law definition refers to an operation in which the customer is sold what is supposed to be a derivative interest in a security or commodity future, but [B]there is no transaction made on any exchange. The transaction goes ‘in the bucket’ and is never executed. Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market[/B]. Alternatively, the bucket shop operator “literally ‘plays the bank,’ as in a gambling house, against the customer.” [3] Operating a bucket shop in the United States would also likely involve violations of several provisions of federal securities or commodity futures laws.
LOL illegal.
Yeah.
The section 4 of the agreement exactly says that… FXCM as/is bucket shop.
I want to hear from FXCM rep who is posting in this forum. Lets see.
- YOU ARE LIMITED TO YOUR DEALER TO OFFSET OR LIQUIDATE ANY TRADING POSITIONS SINCE THE TRANSACTIONS ARE NOT MADE ON AN EXCHANGE OR MARKET, AND YOUR DEALER MAY SET ITS OWN PRICES. Your ability to close your transactions or offset positions is limited to what your dealer will offer to you, as there is no other market for these transactions. Your dealer may offer any prices it wishes, and it may offer prices derived from outside sources or not in its discretion. Your dealer may establish its prices by offering spreads from third party prices, but it is under no obligation to do so or to continue to do so. Your dealer may offer different prices to different customers at any point in time on its own terms. The terms of your account agreement alone govern the obligations your dealer has to you to offer prices and offer offset or liquidating transactions in your account and make any payments to you. The prices offered by your dealer mayor may not reflect prices available elsewhere at any exchange, interbank, or other market for foreign currency.
this is leverage. they do not need enough money for it. because you can lose only your money. you can’t lose more money in your account
Hi Clint and thanks! Great that you explain to everyone that there are no retail forex brokers in the US, only dealers. The CFTC is a joke and have hindered the US in countless ways. I always feel sorry for anyone who needs to manage an account from inside their regulatory BS. I am not sure how ECN/STP/NDD brokers are in the UK when it comes to being a broker or dealer as regulation is different, but worth taking a look into.
I’m sure that we will hear from Jason Rogers, FXCM’s representative here on the forum, very soon.
In the meantime, there seems to be some confusion in this thread, and I feel responsible for creating that confusion. So, although I don’t speak for FXCM, let me try to clear up a few things.
[B]1.[/B] The CFTC has made a very picky distinction between brokers and dealers, and has used that distinction to paint all retail forex brokers (my choice of wording) as somehow untrustworthy. In a previous post, on another thread, I tried to describe the broker/dealer distinction that the CFTC seems to be hung up on. At the bottom of this post, I will place a copy-and-paste of that description.
[B]2.[/B] The Risk Disclosure Statement that is causing such an uproar on this thread is required by the CFTC, and reflects their bias against retail forex in general, and retail forex brokers in particular. Every retail forex broker subject to CFTC regulation must use the Statement quoted earlier in this thread, whether that Statement reflects the broker’s business model, or not. It’s not optional. It’s simply another example of the CFTC’s regulatory overreach. It’s incorrect to attribute that Statement solely to FXCM, or to any other CFTC-regulated broker.
[B]3.[/B] The CFTC hates retail forex, because they don’t have absolute control over every aspect of it. Specifically, they hate the fact that retail forex is an off-exchange-traded market. They have been battling forex brokers and forex traders for control of this market for as long as retail forex has existed. You might benefit from re-reading the brief history of the CFTC which I posted a while back.
[B]4.[/B] The CFTC’s designation of retail forex brokers as dealers, not brokers, would be applied to brokers in the U.K., and in every other country, if the CFTC had regulatory authority over those brokers. However, it is a worthless designation in many cases, because it does not describe the business model of many U.S. and foreign retail forex brokers. And FXCM is a case in point.
[B]5.[/B] FXCM is correct in stating that they do not trade against their customers, because FXCM has created a business model which precludes such conflict of interest. While FXCM remains the counterparty to every trade placed with them, for the duration of that trade, they offset their counterparty position by trading upstream with their liquidity providers. In every trade handled by FXCM, this offset is automatic and immediate. The conflict of interest which the CFTC presumes vanishes with the offsetting trade upstream. However, the CFTC gives no recognition to this procedure — and retail forex brokers, including FXCM, cannot point this out in their Risk Disclosure Statement, because the CFTC dictates the wording of that Statement. No additions, deletions, edits, revisions or additional facts are allowed in the Statement as dictated by the CFTC.
[B]6.[/B] Brokers, like FXCM, which have adopted an STP/NDD business model have done so because it’s good business. The fairness and transparency inherent in such a model attracts, and keeps, customers. It’s a perfect example of the free-market regulating itself. The CFTC is not capable of comprehending such a thing as free-market self-regulation. To the CFTC, only the heavy hand of the dictatorial state can ensure that naive and gullible citizens are not abused by greedy, unscrupulous “dealers”.
Here is a description of the difference between a broker and a dealer, which I posted back in 2010 —
Let’s distinguish between a “broker” and a “dealer”.
When you sell your house, you likely engage the services of a real estate agent or broker, to act on your behalf; and this person has a specific fiduciary responsibility to obtain the best deal and the best terms for you.
On the other hand, when you sell your gold coins, you likely visit your local coin dealer to hear his BID price; and if his price is acceptable to you, you will likely sell to him. He has a moral obligation to deal with you honestly, and that includes honestly giving you the current market price of gold. But, he has no fiduciary responsibility to help you obtain the highest price possible for your coins. He trades with you for his own benefit, not yours.
The CFTC says that the entities who solicit and transact your retail forex business are dealers, like the gold-coin dealer — not brokers, like the real estate broker.
Clint, when a trader makes a long bet the dealer places a long bet for itself? Thanks.
Correct. A true STP/NDD broker offsets every customer long position with an identical long position upstream (that is, with a bank or an ECN), and he offsets every customer short position with an identical short position upstream.
The result is that, even though the broker continues in the role of counterparty to the retail customer, his exposure to that customer’s position is non-existent, because it has been offset. No conflict of interest remains between the customer and the broker. The customer’s profits do not become the broker’s loss; and the customer’s losses do not become the broker’s profits.
Hi SenHill,
What Clint said is correct. The risk disclosure you quoted is language that the CFTC requires all US-regulated forex brokers to provide to traders regardless of the execution method actually used by the broker to offset their clients’ orders. (You can check the risk disclosures of other US forex brokers yourself to confirm this.)
That’s why in addition to the generic risk disclosures required by the CFTC, FXCM provides additional information in our trading agreement and on our website (which are also subject to CFTC review) to make it clear to our clients that they are trading on No Dealing Desk (NDD) forex execution.
On our NDD model, each client order is offset one-for-one with the best available prices from among 10+ competing liquidity providers. These liquidity providers are independent from FXCM. That means we do not profit from client losses. Instead, FXCM makes money from client trading volume through transparent commissions.
Thanks Jason, Much appreciated the time taken and response.