Who is the counterparty in an exchange?

Thats not right at all bro, thats what they want you to believe. Read their PDS. Your risk lies with them and them alone. Well at least with the brokers most of us will trade with.


@philip338, it really depends on the broker’s business model.

For example, whether they’re an A-book, B-book, or hybrid type of broker.

If you want to know how Forex.com operates specifically, I’m sure @FOREX.com won’t mind providing an answer.

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I’m sure they wont mind proving an answer - however lets not forget that the representative of Forex.com is employed to specifically promote Forex.com with the business’s best interests at mind. Asking the question, which is about the underlying business model, is never going to be explained with 100% clarity, honesty, trust, integrity or open willingness to disclose all the details - and anyone who believes this is not the case needs to stay in this industry for a little while longer. (No disrespect to Forex.com - this is true for all retail MM brokers)

Without trying to beat a dead cat once again, you only have to look at FXCM when they explained there business model here on BP. Jason was a great rep, and friendly. However he was employed to work for FXCM. FXCM was one of the largest US brokers (if not the largest at the time?), before being shut down for misleading clients with false claims about their business model and the relationship it has concerning its clients interest. Since then and prior to this taking place numerous other brokers were also fined for similar activities.

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Unless your Not using Leverage
then The Broker Has to cover there ASS some how. If you Could afford to buy the 1Lot £100.000
out right
then the broker would not have any reason to be concerned about your trade.

But then you would Probably be looking at…>>>


Amongst others…:alien:


Stop trashing the thread with screenshots - this is topic which deserves quality input.


This isn’t so at all. It’s totally wrong.

Wherever you’re getting your information from, Nathaniel, try somewhere different!![quote=“RISKonFX, post:18, topic:131392, full:true”]
Stop trashing the thread with screenshots - this is topic which deserves quality input.

It “deserves” it, but that’s asking a lot.

Hello @philip338,

When a retail forex trader places an order to buy or sell a currency pair, his broker is the counterparty to his trade. This is true regardless of whether the broker is FOREX.com or any other retail forex broker. To confirm this, simply review customer agreement of any well-regulated broker.

For example, in the US, retail forex is regulated by the CFTC/NFA and all regulated brokers are required to include the following risk disclosure statement which can be found on page 12 of latest version of our customer agreement which was last updated on 1 January 2018:


What is a “Counterparty”?

Investopedia defines it 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.

However, big banks are willing to assume the counterparty risk of retail forex brokers like FOREX.com. These retail forex brokers will in turn act as counterparty to the trades of smaller retail forex brokers and individual retail forex traders.

Therefore, the fact that your retail forex broker is the counterparty to your retail forex trades is neither good nor bad. What matters is the quality of your broker.

It seems you are asking how your retail forex broker executes your orders. We established above that your broker is the counterparty for your retail forex trades regardless of the particular broker you choose. This means that, one way or another, your broker has to manage the risk on the other side of your trade. In fact, all retail forex brokers regulated in the US are referred to as Retail Foreign Exchange Dealers by the CFTC/NFA.

For our part, FOREX.com has always been open about our role as the market maker (AKA dealing desk) for the trades placed by our retail clients. We feel no reason to hide this fact, because at retail trade sizes, we believe market making is the best way to provide customers with reliable pricing while effectively managing our own risk. We are fully accountable for every execution and don’t outsource that responsibility to a third party.

Not always. Retail forex brokers rely on the big banks for liquidity, either directly as FOREX.com does, or indirectly as some smaller brokers do by clearing their own orders through larger firms like ours. Since all retail forex brokers, big and small, are dependent on the big banks for their liquidity, retail forex is generally open for trading 24 hours a day, 5 days a week, from 5pm Sunday to 5pm Friday New York Time.

When it’s 5pm in New York, it’s already the morning of the next day in Asia. Therefore, aside from the weekend (5pm Friday to 5pm Sunday), there are dealers manning forex desks of the big banks day and night to quote prices and provide liquidity to firms like FOREX.com. We in turn can provide liquidity to retail forex traders like you, while our institutional arm GTX provides liquidity to smaller retail forex brokers so their clients can also place trades.

Retail forex brokers can manage the risk on the other side of your trades in one of three ways, and each method has its pros and cons.

Option 1: Your broker can offset your buy orders with the sell orders of their other clients, and offset your sell orders with other buy orders). This is known as natural hedging and relies on a broker’s internal liquidity of buy and sell orders from clients.

Pro: This is a win-win scenario for trader and broker, because your order can be filled without having to depend on an external liquidity provider, and your broker gets to earn the full spread and be fully hedged (buyers offsetting sellers). Generally speaking, the larger a broker is, the more buy and sell orders its clients will place and the more internal liquidity in normal market conditions.

Con: For some smaller brokers, their internal liquidity might not be sufficient for natural hedging to occur as often. Even for larger brokers like FOREX.com, there are times the imbalance between buyers and sellers can be so great that natural hedging with internal liquidity is not possible. In either case, when internally liquidity is not sufficient for natural hedging, a broker must turn to option 2 or 3.

Option 2: Your broker can offset the risk with their external liquidity providers. For example, FOREX.com does this by looking at our net exposure to see if there are more buyers than sellers or vice versa. If there are more buy (sell) orders within our retail client base, then we can offset our net long (short) exposure placing a large buy (sell) order with a bank. Similarly, smaller retail brokers can offset their own exposure with a larger firm like our institutional arm GTX.

Pro: Your order is filled. Your broker is able to hedge its risk on the other side with a bank or a larger broker. Your broker’s external liquidity provider benefits from the order flow which they can use for their own internal liquidity to offset other institutional orders. This highlights how retail traders are connected to and contribute liquidity to the larger market even if it is indirectly through their retail broker.

Con: There is an another layer of dependency between your broker and their liquidity provider added to the process of offsetting the risk from your trade. Depending on how and how effectively your broker manages this risk, any price moves that occur in the interim can affect you (slippage), them (broker losses), or both. An extreme example of this was when the Swiss National Bank decided to scrap its currency ceiling 3 years ago.

  • Another con with Option 2 which may not seem as important to you as a trader at first glance is that your broker stands to make less money than with Option 1, since they have to pay their liquidity provider’s spread to offset the exposure. You want to know that your broker has a sustainable business model. Consider how some brokers have tried to use Option 2 for all orders and ended up having to raise their account minimums as a result. Others found they could not stay in business at all and were acquired by brokers that have the flexibility and internal liquidity to use Option 1.

Option 3: Your broker might decide not to offset the risk either internally (Option 1) or externally (Option 2).

Pro: Your order can be filled without having to depend on an external liquidity provider as with Option 1. Your broker avoids paying their liquidity provider’s spread.

Con: Since your broker acts as the buyer when you sell and the seller when you buy, their interests may be in conflict with yours meaning a profit for you might mean a loss for them, or vice versa.

  • This is the biggest concern traders tend to have with Option 3. While we won’t speak for other brokers, in 2016 which is the latest full-year data we have compiled, approximately 98% of FOREX.com’s average daily retail segment trading volume was either naturally hedged (Option 1) or hedged by us with one of our liquidity providers (Option 2). Therefore, Option 3 represented about 2% of FOREX.com’s average daily retail segment trading volume for the year.

Thanks for the shout out @ForexGump :slight_smile:

We tried to hit the main questions raised in this thread.

Thanks @Forex.com

You might want to review this thread and supply an answer if possible: How the Broker made money between buyer and seller

You’re mentioned in #29.

Thanks for the excellent post @FOREX.com! :slight_smile:

You have clarified many questions that regularly arise here and I would like to re-inforce two of them if I have understood them correctly… and ask you two more questions! :slight_smile:

[quote=“FOREX.com, post:20, topic:131392”]
Option 1: Your broker can offset your buy orders with the sell orders of their other clients, and offset your sell orders with other buy orders [/quote]

This does not mean that a trader’s position is actually connected directly with another trader’s position as their counterparty. Rather, the broker is still counterparty to both traders in a back-to-back fashion where the broker’s risk is offset and neutralised. In other words, if you have 1000 long traders with a combined leveraged exposure of usd 10mill and 1000 short traders with the same size exposure you are hedged by risk but you still have a total of 2000 open positions where you are the counterparty. And of course, the composition of the overall blancmange is constantly changing as traders enter and exit…

I doubt your dealing room looks like this as your employees are “matching” buyers with sellers?

The second issue I would like to expand on is the misconception of a broker counterparty as the “enemy” who is “trading against me”

It seems to be a common belief that when the counterparty is one’s broker then one is pitting one’s own limited experience and skills in a (usually) losing battle against the broker’s superior ability as the adversary.

But, in fact, the broker’s role as counterparty is entirely passive since the trader himself is the only one who decides when to enter, in which direction, and when to exit (excluding margin calls, etc). And, in any case, as @FOREX.com, explains, the broker will/may have already hedged his exposure risk away anyway and it is irrelevant, from the broker’s P/L perspective which individual traders profit and which lose on a trade.

The Newbie is not in a face-off duel with their broker regarding who is the better trader…

But I would like ask how do brokers decide their spread policy? How are spreads managed - is it an automated or manual process? and is it determined by client type, position size and/or market volatility?

My second question relates to your option 2. How do brokers actually “trade” with their liquidity providers? Do you have the same leverage/margin basis with each of them as we do with you? And if you take a position with Bank A and an opposite position with Bank B do you have to unwind the net exposure with each bank separately or is there some form of clearing house for this? This is not relevant to our positions with you, the broker, but I am just interested how this works on the broker/LP interface.

Many thanks!


[quote=“Manxx, post:23, topic:131392, full:true”].

Many thanks!

You as a former institutional should know of these things i believe?

it is intersting to read forex.com’s explanations.

however, not claiming some things he wrote are wrong, but claiming some things are missleading when it comes to counterparty brokers.

The matter is quite deep, but if you want to know exactly how brokers operate (real and counterparty brokers) you can start researching the series 7 license requirements.


The next step is the series 52 license.

it is the licenses which every broker must obtain to act as any kind of securities broker in the USA. There is a lot of study material for the licenses online for free and it will give you great insights how the brkerage industry works.

however, it will not benefit you in any way in the field of “trading”. it will not give you any knowledge that you can adapt and use in the field of making money by shorting/longing things in the financial world.

The main issue is to become profitable, the rest (like how brokers operate) is knowledge that will come with time by itself. knowing how a broker functions is not essential for successfully operating the financial markets.

No. My institutional experience is entirely interbank and customer transactions involving real funds with settlements -either direct with counterparties or via brokers. I have no experience of this kind of activity where market making is provided to retail forex brokers - that is why I am asking, and because I thought it may be of interest to others to hear a simple explanation of how the broker/LP interface works. We don’t need to know, but it is always helpful to have a broad understanding of how our business works.

Hey Manxx. The most relevant info for some of this stuff are the Series 3 and Series 34, just in case you were wondering.

As far as the Market Maker being the counter party.

Series 3 Exam prep

“Every major futures exchange operates a clearinghouse that acts as the counterparty to all buyers and all sellers.”

So, in reality, you do not connect directly with a seller when you are buying, even in Futures. Your trade is with the “clearinghouse”. What the clearing house does is it guarantees the “contract” and takes the risk of guaranteeing said contract. Also if you look into Market Maker or at the beginning of the NASDAQ, The “AXE” you will find out some more interesting stuff as far as who makes the market in a particular stock, and who your counterparty is.

This is why I am not in favor of these offshore FOREX Market Makers, there is wayy to much that can go wrong.

The Ever Just Making An Observation VIPER

Thanks RISKonFX. You’re comments are very kind and my goal is to be as helpful as possible for anyone with questions about FXCM. Forums are anonymous, so you have no idea who you may be dealing with and the validity of the information that person is posting. The exception is, as you mentioned, myself as FXCM’s representative to the community since 2009. Although you didn’t join much longer after me :grin:

Regarding our NDD execution model, every order is offset one for one with a liquidity provider. If FXCM had been acting as a market maker on NDD forex execution we would not have suffered more than $200 million dollars in losses during the SNB flash crash. On NDD forex execution, every order is offset one-for-one with a liquidity provider. The trader has a position with FXCM and FXCM has an offsetting position with the liquidity provider. When the trader went into a debit balance that meant FXCM also had a debit balance with the liquidity provider that had to be covered.

Providing the best execution and spreads possible has always been our top priority for traders, and we release the data to back it up. By the way, we continue to be one of the largest brokers. As of our latest metrics release in December, we had 116,000 active accounts and trading volume for the month was $171 billion.


Incidentally, Saxo bank is the institution that changed the prices at which client’s trades were executed during the Swiss franc flash spike in 2015. They unloaded all their client risk back on the client and are still battling lawsuits over it. They are a large established bank with lots of history; it’s no guarantee of integrity or fair-dealing.

I’m beginning to think that once a trader learns to trade well their biggest risk lies with their broker.

Option 3 was 2% of volume, what was it in percentage of total value?

Cheers for the info @clemmo

i wasn’t recommending any not well informed enough myself to do that…

But do you know any Reputable ones just in case i …:alien:

That’s if your broker really withdraws the deals onto the market, instead of keeping it all in his kitchen. In that case, it’s difficult to prove anything.