[quote=“bradley79, post:3, topic:169551”]
How do brokers pay their clients?
You know that you have two main types of brokers - Dealing Desk (DD) brokers and Non-Dealing Desk (NDD, for short) brokers, right?
The dealing desk brokers are your counterparty in a trade. So, when you lose they profit and vice versa.
In this case, the broker will pay you your winnings. However, considering that the majority of traders are losing it’s not a problem for the DD broker to pay you whatever you are entitled to. Unless they are a bucketshop/scam.
With a NDD broker your trades are sent out to a liquidity pool(LP) with which the broker is working. They get paid a commission on your opening and closing of orders. While you as a trader get your money from the LP. When you lose - the counterparty in your trade wins and so on. In this case, the broker does not pay anything to you. You just have an account with them and use them as the service provider to trade.
Think of it as a trade on a selling website (like gumtree, craigslist or ebay). The website is the broker/middleman. They do not trade against you, they just provide you with the service and get paid a commission for you using that service.
You open an account, and start selling - they buyer pays you and the money is transferred to your account. Meaning you don’t get paid by the middleman, but by the trader on the opposite side of the trade.
I hope this explains it.
Not quite B, but good try. Having worked in sell side and buy side spot currency I believe I can clear this up a bit.
First, all RETAIL brokers in Spot Currency or Forex, are Market Makers and an Exchange rolled into one. What does this mean, well they “Make a Market”, in that they have enough liquidity of the pairs they carry to allow “Trades/Transactions” to take place on their hub. Now about being an exchange if you remember your Series 3 study, the part about futures exchanges, you will remember that the futures exchange acts as a buyer to all sellers and a seller to all buyers, they can also act to facilitate access to certain other clearing firms for transactions. But lets focus on the first part. In the majority of cases the retail client will be executing against the Market Maker/Dealer, and not someone else, unless there happens to be another retail trader on the opposite side that has the same price and size. That is how it works in retail, so obviously if you get a dealer that is regulated you are much better off.
Now as far as Dealing desk vs Non Dealing desk, the reality is that dealing desks are basically antiquated by now, however they still can be found, and even hooked to ECNs. (Electronic Communications Network). So first a little background on dealing desks, it used to be you placed an order and the desk manually filled it, if they did not have the liquidity at the size and price you wanted, you got re-quoted. They worked like a “Specialist” on the NYSE floor.
Along came ECNs, where you didn’t use a phone or pager anymore, but you were on an electronic network. As we all know the NASDAQ led the way with this. But the ECN in Forex has little to do with execution speed, who you execute against etc. In fact, as I stated above there are Dealers/Market Makers that use a hybrid ECN/Dealing Desk model, not that common, but they are out there. Obviously you stand more of a chance at getting a re-quote in that system then in an STP (Straight Through Processing) model.
So at any rate an ECN does not guarantee you will not get re quotes, if the dealer does not have the liquidity at the price you want, you will get re-quoted. Now, I will tell you this, I have been on 5 or 6 retail platforms, traded during high and low volume and never been re-quoted, slipped on a market order, yes, in high Vol, but never re-quoted. But it all depends on the quality of the Dealer/Market Maker, do they have enough liquidity to fill your orders?
As far as how do they make money, if you are short, and you cover, don’t think that the D/MM Purchased those units at the price you purchased them at, they buy these units in bulk at a deep discount, also they charge you a spread, rollover, fee, and they get rebates from their prime broker for adding liquidity, or “Moving” units.
Oh, how do they offset the trade? in a regulated market D/MMs have to offset the trades on another hub that is not connected to the market they are making, usually done automatically through a prime broker. So no, in a regulated market they “should” not be trading against you.
The Ever Informed VIPER