Hi @tommor and @CrisValenciana,
You are both correct in saying well-regulated brokers cannot hunt stops the way others in this discussion thread have suggested.
For example, in the US, forex brokers are regulated by the CFTC and NFA. The rules governing how we must execute client orders, and then report the time and price of each and every one of these transactions to the regulators are too many to list here, but below is an excerpt from just one rule to give you an idea of the protections in place for forex traders:
NFA Compliance Rule 2-36 imposes a number of obligations on a Forex Dealer Member (FDM) regarding the manner in which it handles customer forex transactions. Compliance Rule 2-36(b)(1) prohibits an FDM engaging in a forex transaction from cheating, defrauding, or deceiving or attempting to cheat, defraud or deceive any other person. NFA Compliance Rule 2-36(b)(4) prohibits an FDM from engaging in any manipulative acts or practices regarding the price of any foreign currency or forex transaction. Also, NFA Compliance Rule 2-36© requires an FDM to observe high standards of commercial honor and just and equitable principles of trade in the conduct of its forex business. NFA’s Board of Directors (Board) adopted these provisions to ensure that an FDM acts honestly, fairly and in the best interests of its customers.
Unfortunately, the term “counterparty” has been misunderstood by many retail traders. Investopedia correctly defines “counterparty” like this:
A counterparty is the other party that participates in a financial transaction, and every transaction must have a counterparty in order for the transaction to go through. More specifically, every buyer of an asset must be paired up with a seller who is willing to sell and vice versa.
All trades require some sort of counterparty, so for example, the counterparty to an option buyer would be an option writer. One of the risks involved in any transaction is counterparty risk, which is the risk that the counterparty will be unable to fulfill his duties.
The last point above highlights why a retail forex trader always has a retail forex broker as his counterparty. While retail forex brokers are willing to assume the counterparty risk of retail forex traders (the risk that these retail traders are unable to cover their losses), the largest banks in the world (those which trade forex with each other in the interbank market) are not willing to assume the counterparty risk of individual retail forex traders or even the counterparty risk of smaller retail forex brokers.
Since every transaction must have a counterparty in order for the transaction to go through, and the largest banks in the world are not willing to assume the counterparty risk of individual retail forex traders or even the counterparty risk of smaller retail forex brokers, major forex brokers like FOREX.com provide an important service to retail forex traders and smaller retail forex brokers by providing them with access to the market they would not otherwise have.
We question this 95%+ figure. We often see something like it mentioned on discussion boards by retail forex traders, but can you point to any reliable study that confirms it?
In the US, forex brokers are required to report client profitability stats to the CFTC every quarter. Below are the stats FOREX.com reported to the CFTC for the past year:
For the calendar quarter ending March 31, 2018, there were 35,139 active non-discretionary trading accounts of which 28% were profitable and 72% unprofitable.
For the calendar quarter ending December 31, 2017, there were 33,885 active non-discretionary trading accounts of which 33% were profitable and 67% unprofitable.
For the calendar quarter ending September 30, 2017, there were 34,138 active non-discretionary trading accounts of which 32% were profitable and 68% unprofitable.
For the calendar quarter ending June 30, 2017, there were 34,911 active non-discretionary trading accounts of which 31% were profitable and 69% unprofitable.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
You make a great point here, @CrisValenciana. FOREX.com offers volume-based rebates as a way to attract more successful traders.
A misconception some retail traders have is that a broker like FOREX.com must not be offsetting the risk on the other side of many of the orders we receive from clients, when actually the exact opposite is true. While we won’t speak for other brokers, in 2016, approximately 98% of FOREX.com’s average daily retail segment trading volume was either naturally hedged (offsetting buy orders from some clients with sell orders from other clients) or hedged by us with one of our liquidity providers.
We discuss forex trade execution in more detail in this post: Who is the counterparty in an exchange?