Is Your Broker a Bucketshop?The contrast between foreign exchange speculation and traditional types of trading such as stocks and bonds is that foreign currency isn't traded using a organized exchange. This initiates a unique and often misinterpreted set of conditions that every currency speculator needs to ascertain to deal with. For a lot of Forex clients, nothing causes greater consternation than their choice of a retail broker. The outward sentiment is that when you attempt to make money in forex you are trying your experience against 'the market' and that's the only adversary you have to be worried about. The truth is, there is so much more to it; the broker that is executing your trades will strongly impact your ability to make money.Most traders avoid what are referred to as Bucketshops; agencies who give inaccurate prices, seem to manipulate prices to help themselves, and actively work against their own clients. This practice (although many insist they never do such a thing) sets up a conflict of interest which definitely benefits them and against their clients. The appellation 'Market Makers' as well is regularly used to denote certain brokers that commonly take the other half of their clients' positions. They are creating the market that their clients are trading in, rather than simply passing those trades on to the open market. A truthful examination of the Forex environment, however, shows that such a policy is truly necessary to letting small retail trades to be made, and though it is occasionally used for unlawful purposes, it is not always a nefarious business model. The reason this is true is due to the fact that there's no actual 'Forex market', such as there is with other varieties of trading. As an example, company stocks are bought and sold primarily through typical stock exchanges -- the NYSE being among the most well known. All trades made by way of an exchange such as the AMEX is cleared under the auspices of that exchange, executed according to the rules of the exchange and facilitated by brokers that are regulated by the exchange. Stock exchanges establish the hours of trading and can determine whether any stock or trading agency ought to be removed or shut down because of practices that run the risk of compromising the market at large. These exchanges have known physical locations and are in turn overseen by governmental agencies. The Foreign Exchange market, by contrast, is made up largely of massive organizations that find it necessary to swap currency with other nations. Those involved are powerful institutions; banks and large conglomerates which need to change money from their currency to another so that they can buy and sell from one nation to a different one. Suppose a company from Australia markets its goods in Canada. The money will come as Canadian Dollars, but the business will need to pay for its bills in Australian Dollars. It will require a convenient means of converting its capital virtually every business day. This is the true Forex market; businesses and banks who transfer trillions of dollars worth of currency to and fro on a daily basis. You and I could never participate in that arena -- we clearly can't access that much cash, and you need to be in Forex in order to make money in Forex. That's the reason why retail Forex brokers buy and sell with their own clients. These brokers can take in smaller trades of the kind we can do, and they can bundle them together. They then execute bigger offsetting trades on the broader market via arrangements they have with 'Liquidity Providers'. The banking institutions are able to make trades with a broker who handles hundreds of individual traders even though they would never think of trading with every single one. It simply wouldn't be feasible for them. So, retail brokers provide price quotes to its clients, but there is no formal exchange which sets the prices traders are given. Each broker has to use quotes given to it by its liquidity provider(s) which may not be in sync with those published by other liquidity providers. That is the reason why two separate brokers seldom quote exactly the same prices. It is not a scheme to cheat the clients (although some unscrupulous brokers likely do) it's merely a necessity of opening the market for us to participate in. A broker may be reputable but still need to trade opposite its clients, even though they're not trying to falsify price quotes and make those clients lose. So, to sum it up, we can see that many retail brokerages are required to take the opposite side of all but perhaps the most sizable of their clients' trades, but they are not supposed to take advantage of this to unethically trade to their detriment. This creates a significant condition of 'caveat emptor' - or let the customer - and anyone planning to learn forex - be careful. All traders must consciously pick their broker and ought to diligently watch the trading and quoting activities to see that they are getting treated ethically. It would be wrongful, though, to conclude that any broker who takes the other side of a client's trades is doing so to screw them. It's a necessary, if uncomfortable part of the retail Forex business model. Brian Dalton has been studying and trading Forex for years, using his knowledge and experience in the realms of science, engineering, computer programming and statistical data analysis to help him understand the often confusing and chaotic world of Foreign Currency trading. He has made it a personal goal to help fellow traders by sharing his insights and understanding to de-mystify the Forex market experience. |
|
||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion