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What's Up with Forex Brokers? |
Article Submitted by: Brian Dalton
Saturday, 12 December 2009
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Forex (Foreign Currency Exchange) traders invest a lot of time wringing their hands and talking about their uncertainties about the retail brokers they use to handle their money. The prevailing sentiment is that when you try to trade successfully you are testing your talent against 'the market' and that's the only competition you need to be concerned about. The truth is, there is so much more to it; the company which is accepting your trade will definitely affect your level of success. Many people stay away from what are often known as Bucketshops; agencies which give questionable prices, appear to manipulate prices to help themselves, and actually work against their clients. Few brokers will admit to having such a policy, mainly because it provides them a powerful reason to cause their clients to lose. The appellation 'Market Makers' is also regularly used to denote certain brokers that commonly assume the opposite half of their own clients' positions. Such brokers are creating the market that their clients trade in, rather than simply sending these trades on to the actual market. A truthful look at the market of currency, though, allows us to see that this practice is in fact essential to letting small retail trading to happen, and even though it can be. The reason this is true lies in the fact that there's no physical 'Forex market', in the way that there is for other types of investment. As an example, industrial stocks are traded primarily on brick and mortar stock exchanges -- the New York Stock Exchange being among the largest. These kinds of exchanges are regulating bodies who check out each company to be listed, lay out the terms of the acceptable trading contracts, keep an eye on brokers, and finally clear all trades financially. These exchanges have a known address, do business for predetermined hours and are given the ability to close down the exchange of all stocks or the activities of any and all brokers they think may be acting unethically or in such a way that hinders fair and legal trade. The Forex market, by contrast, consists largely of massive organizations which need to swap capital with other countries. The real Forex market is made up of large global conglomerates and international banks that move currency from place to place in order to facilitate international trade. Imagine a company in Australia sells some products to Canada. Its payment will be received as CAD, but the business will need to pay for its bills in AUD. It will need a convenient means to exchange its currencies almost each business day. This is the true Forex market; businesses and financial institutions that shift trillions of dollars worth of currency to and fro daily. You and I could never get into that arena -- we obviously don't have that kind of money. That's the reason why Forex brokers buy and sell with their own clients. These brokers are able to handle small trades of the kind we can deal with, and they can bundle them all together. Then they make bigger offsetting trades out on the broader market via agreements they have with 'Liquidity Providers'. The banking institutions are willing to make trades with an agent who represents hundreds of smaller traders despite the fact that they would not ever conceive of trading with each and every individual. But when our broker packages our trades together, trading opportunities abound. So, most retail brokers must publish price quotes to its clients, but there is not any official exchange that guarantees the prices at any given time. Each broker needs to start with quotes given to it by its bank(s), and these might not be in sync with those given by the other banks. That's why two separate agencies seldom have the exact same prices. From this point arises the necessity for a broker to create the market for its customers, not necessarily from a desire to defraud them (although some few most likely do). A broker might be reputable but still need to trade against its customers, even if they're not planning to misquote prices and cause those clients to lose. Therefore, in summary, we can see that retail brokers find it necessary to take the opposite side of all but the most substantial of their clients' trades, but they should not use this to unethically work to their detriment. This creates a serious case of 'caveat emptor' - let the client beware. It's critical to always keep a careful eye on the price quotes and trade executions of their broker, and to choose that brokerage sensibly. To be reasonable, however, every trader needs to recognize that their broker has to take the opposing position in their trades and they should not infer a nefarious design. It's a fundamental, albeit somewhat troublesome part of the small capital Forex business model. Article Source: http://www.ArticleBlast.com |
About The Author:
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.
You can read his blog: Money Pipeline. He writes and sell Forex indicators and trading systems at Tantalus Online.
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.
You can read his blog: Money Pipeline. He writes and sell Forex indicators and trading systems at Tantalus Online.
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