Is arbitrage activity prohibited by brokers?

[ElectricSavant]

I searched 15 pages of cutomer agreement...not really a good read!

Here is a piece of what they say in item 13G

g) You will not enter into any transaction to exploit any temporal and/or minor inaccuracy in any exchange rate.

I underlined a key word followed by and/or


will look for how they explained it...but I may not be able to find it...if I do I will post it..if their name is not all over it.

 

[Hamlet]

Quote from ElectricSavant:

Hamlet base your discovery in the real world, not on what I post. The fact is... it is happening in the partially regulated world of retail spot forex.....just read the posts here and in other Forums, if you do not believe it.

Some dealers need that buffer zone to collect up the executions to find their net position to hedge with, while others just do not find the income from their spread enough money to make, so they run stops and other shenanigans...therefore the spikes...

There is no central data feed for Retail Traders in Spot Forex...Each orex Dealer/MM make their own individual markets, therefore the regulation of this global secondary market is limited.

Most traders that discover this, leave Retail Spot Forex or never tradit it to begin with..... or figure out how to deal with it...

Don't you see the games in Equities....? AND ITS REGULATED!

Some traders have no other way to make markets and money, unless they hold the unfair advantage. Welcome to America....

Michael B.

That's all very interesting, I didn't realize retail forex was like the wild west (I thought the pink sheets was the last frontier). Thanks for taking the time to respond.

 

[Chood]

Quote from Hamlet:

You're right about it sounding like poppycock. From the viewpoint of someone who does not trade currency, this sounds hard to swallow. How or why could a firm who is offering you a quote to trade at, hold it against you for taking that trade regardless of what you are basing your decision on (except inside information I suppose)? Come on, if they dont want to sell it where they offer it or buy it where they are bidding then they should adjust their quotes accordingly!!! Hell, learning that this leading/lagging phenomenon exists makes me want to consider jumping into the currency arena. Perhaps I'm missing a piece of the puzzle here and you could further enlighten me.

You don't have to trade currencies to understand his point. The fx retailer controls every customer's exit from the trade -- that's the critical point. Of course, the dealer wants the customer to "take" the quote offered. The customer is "in" then, providing the dealer with what it needs to profit enormously. From that point forward, the dealer controls the trade's destiny 100%: it controls the prices that hit stops or avoid limits. Understanding that allows you to make sense of all the head-scratching questions you see on this board and elsewhere about why one dealer's prices differ from another's; why price spikes occur; and why tricks such as "misquotes" occur. Those are the incidents of the dealer's profitable 100% control over the customer's exit from the trade, and every incident represents a profit to the dealer over and above the profit the dealer would make simply from making a spread in the currency pair, i.e., what a market-based pricing model would deliver. It also of course represents a profit above and beyond what a true broker or ECN would earn in commission by executing the trade on an exchange or on an order matching service.

 

[Hamlet]

Quote from Chood:

You don't have to trade currencies to understand his point. The fx retailer controls every customer's exit from the trade -- that's the critical point.

Well, you either have to trade currencies or have a pretty decent understanding of the dynamics of trading with a retail dealer; perhaps that is a more accurate statement.

I still find it hard to imagine some dealer sitting there micro-managing every little order that comes in the way that you described, unless it is a small firm with limited number of traders and orderflow. I am sure it does happen all the time, but isn't it a lot less prevalent in bigger firms that have orders constantly coming in and out, with exposure on both sides?? With lots of traders watching the quote, if they try to lean too much or run stops there will surely be traders who will see that and take advantage of it, offsetting any gain they might have by running a stop. At least it would seem that would be the case... I guess I'd have to find out first-hand to really know, as was already politely pointed out.

Are there no arb opportunities at all by watching the bank's quotes vs the retail's?

 

[Chood]

I wasn't suggesting a dealer micro manages every customer trade, only that a dealer's quotes reflect its (the dealer's) best position versus its customers' net positions. Anything else would be irrational and counter to the incentives the dealer operates with.

From my first hand experience, you cannot rely on a dealer to give you a fill on a limit order when the limit price is breached. That implies (to me at least) enormous and unquantifiable risk in trying to arb a dealer's quote against a bank's. The trade necessarily would be of size: banks that deal FX, as I understand it, deal only in size. Assuming you aren't re-quoted by the dealer on the entry -- since the trade would be size, you might be re-quoted -- you still would be captive of a single supplier (the dealer) for halve the arb, relying on the dealer to give you the exit you'd need to capture the arb'd difference. Wouldn't a stock arb consider that scenario enormously risky?

 

[Chood]

Quote from Hamlet:

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Are there no arb opportunities at all by watching the bank's quotes vs the retail's?

Ultimately, the only way to answer your query is to try what you propose. Except for my first hand experience, which I mentioned earlier, my points about problems with the proposal are conjecture. You may be right that there's an unexploited opportunity awaiting anyone daring enough to risk it.