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Silver Wheaton Corp. Message Board

  • newscentral2002 newscentral2002 Nov 24, 2011 1:18 AM Flag

    FX markets

    I will post a series of articles that either I have written or friends over the next few days. This one is on the FX markets.
    Casinos do not like winners and neither do FX brokers. I can't play 21 in some casinos because I can count cards. Besides now - the loud noise of slot machines would not be good for my tinnitus.
    Your broker is forced to take the opposite side of the trade, at least temporarily. The broker may then wait until the client flow is sufficient to offset with their market maker or they may choose to hold the position and effectively trade against their clients. A no dealing desk policy simply means that dealers have been replaced with machines, but the fact that they trade against you remains.

    Real-time summary of client positions. Average cost of open positions Size and P/L of all open trades Outstanding orders Location and size of stops Flow information (who has been buying what/where) Real-time positioning of large clients. This information is actively traded upon and often shared with 'preferred' clients/partners.

    Ask your broker why all clients aren't given access to this information?

    Unfair practices. Although the odds were stacked against the client, smart traders can make money from them. Some have became so good at FX trading that they are banned. I have several accounts with the same firm and the same with other firms. Casinos do not like winners and neither do FX brokers. A casino may send a crooked dealer to stop the winner's streak and retail FX firms may resort to denying service or complicating execution to such a degree that it makes trading impossible. If anything, this should be a clear sign that your broker is trading against you, since it becomes evident that your broker is losing money if you are posting profits.

    Each layer represents an extra cost. The more layers between you and the market, the higher the costs. I often play many layers and compicated currency pairing.

    Since retail FX brokers do not have to offset client transactions in an exchange, pricing decisions become critical. Large retail FCMs have their own market makers, a JPM or Goldman for example, which offer them a 1 pip spread or less on the most liquid pairs, which they use as their indicative price. To this rate, they add their 2 or 3 pips (or more!), which is the rate clients see in their trading platforms, which enables them to capture a nice 3 or 4 pip risk-free profit on a round-trip trade -not bad for simply acting as the middle man between the FX wholesalers and the retail buyer.

    However, because these middlemen are free to manipulate their price feed, they can essentially show their clients any price they want, and the same person that is doing the buying and the selling also becomes the person that controls the prices. Price shading occurs when a broker either deliberately stalls their price or shows slightly higher/lower rates in anticipation of a move. If a broker is convinced that the euro is going higher, for example, he will shade his quotes slightly higher to benefit from the move. This is all fairly common practice in the FX world, yet even more appalling manipulation takes place when brokers deliberately spike their feed in order to take out customer orders. If a dealer notices that a bunch of good-sized stops have gathered nearby (remember, they know where your stops lie!), he may choose to mount an attack on them with his buddies or momentarily spike his price feed just enough to take them out.

    An example of price manipulation. With two feeds from two different FX brokers, you can see how at the same moment one price spikes while the other one does not.

    Conduct your own due diligence on your broker before opening an account. Do not assume that because they proclaim to be large and well respected in the industry that that makes them upstanding guys.

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