Auto-Forex

#1737 (permalink) Today, 05:58 AM
ZTrader Senior Member Join Date: Mar 2006
Posts: 115


As we consider the issue of finding a suitable broker for this (or any) strategy, we should keep in mind a few facts about retail forex brokers.

First, it's perfectly legitimate for a broker to widen their spreads during periods of low liquidity. These periods can be caused by low market participation (not many people trading) or by high market demand - like one might see during major news events or when a popular EA has many clients requesting identical trades all at the same time. This doesn't mean that some less scrupulous brokers won't abuse the concept of spread manipulation, just that varying spreads are a necessary part of the retail broker business model, and shouldn't automatically be seen as some sort of scamming activity.

Second, many people are looking for a retail broker that doesn't use a 'dealing desk' or that doesn't 'trade against the clients'. These concepts are badly misunderstood. Every retail forex broker has a dealing desk, in the sense that they don't just pass your trade on to a major bank or liquidity provider (the real market). Major banks and liquidity providers would never waste their time with the tiny trades that retail clients make... the only way we can ever buy a mini or micro lot is for a retail broker to accept our trade themselves, which means they MUST take the other side of your trade. They do enough little trades that they can then turn around and make some large trades with the liquidity provider, thus offsetting the position.

Here's an example: Say you want to buy 0.3 lots of USDJPY. The liquidity provider would not accept a trade for less than 10 full lots, so the retail broker accepts your 0.3 lot buy themselves, which means that they are now short 0.3 lots. If they have enough clients buying USDJPY that they end up being short by 10 full lots, they can then buy 10 lots from their liquidity provider, thus offsetting (hedging) the positions they accepted from their clients. Now it doesn't matter to them in the least if you win or lose, or if the USDJPY goes up or down... they will make their money from the spread.

In reality, most of the positions the retail broker takes are offset by other clients' positions, for instance they may buy 3.2 lots of USDCHF from clients (short positions for the clients) and they may sell 3.2 lots of USDCHF to other clients (long positions for those clients). At this point, the combined effect of the clients' positions offset each other, and there's no need to use the liquidity provider at all.

Of course, things never work out as evenly as that.. at any given time the broker will be more short than long (or vice versa) in any given market, and that disparity represents their 'exposure', or risk. If they're heavy on the long side and the market goes up the could make some cash outright, but if it went down instead, they'd lose money. In the big picture, they don't want to be trading in the market at all... their goal is to service as many client trades as they possibly can while keeping all their positions hedged. That way they are isolated from the risk of the open market, and they can make a steady income from collecting spreads. This is the fee they charge for making it possible for you and I to trade. It's a fair fee, considering the opportunity they offer us.

Of course, there are cheaters and scammers.. some brokers will manipulate spreads without just cause, will take your trades then hunt your stops so they can take your money... If you have a real, solid reason for believing that your broker is one of these, close your account. But please don't accuse a broker of foul play just because the spreads widen during off hours, news or periods of high demand. If they can't offset the trades they receive during those times to maintain a neutral overall position (zero exposure) they will be in a position of greater risk, and they will charge more for the trades (via higher spreads) to adjust to this risk.