really need help to understand something...

[jm73]

"Effectively, most trades this client places are not able to be offset internally and must be offset with a bank, which takes a certain amount of time to do. By the time the trade has been offset, the trader may have already turned around and closed out the position, forcing FXCM to return to the level and attempt to offset again at what are hopefully still market prices.

Thus, when someone trades very short term with large size, the dealing desk must constantly offset those trades with a bank, even though by the time they do so, the trader has often closed out their position. the dealing desk must confirm the entry price for traders who are holding their trades for minutes at a time. To accomplish this, dealers periodically scan the market to identify scalping behavior, and then begin confirming market prices for scalping traders."


The above statement is the qoute from FXCM rep some time ago exlaining about dealer comfirmation on short-term traders.

My problem is I really don't understand why dealer has to comfirm the entry price for short-term traders when dealer have issue as following...

"By the time the trade has been offset, the trader may have already turned around and closed out the position, forcing FXCM to return to the level and attempt to offset again at what are hopefully still market prices"

I would think that the dealer should check the closing price to prevent the sitation above

Maybe I am dumb but please somebody help me to understand why dealer needs to confirm the entry price for short-term traders.

 

["Linus"]

Quote from jm73:


Maybe I am dumb but please somebody help me to understand why dealer needs to confirm the entry price for short-term traders.

Well, I believe I understand how FXCM operates from the explanation given by the FXCM rep here on this forum. A simplified picture of the process of trading with FXCM (as I see it).

1) trader puts in market order to buy 3 contracts of EUR/USD.

2) FXCM fills the order. The net result is now the trader is long 3 contracts and FXCM is short 3 contracts.

3) FXCM is not interested in taking a market postion and as such offsets the 3 short contracts by buying 3 contracts from the bank. The net result here is now the trader is long 3 contracts, FXCM is flat, and the bank (or some trader perhaps through that bank) is short 3 contracts.

4) When the trader closes out his 3 contracts, FXCM will again use the above process to ensure they remain neutral.

That would be the simplified view of what occurs at FXCM when a trader enters an order. In reality, I believe FXCM first matches orders and offsets within it's client base first and then the net amount of what they are either long or short is offset with the bank.

So when one understands how FXCM conducts their business, it is clear that they are not trading against the customer accounts on balance, but seeking to make their profit through the bid/ask spread.

OK, so this helps to understand the problem presented when scalpers enter the picture to trade through FXCM. The simplified process might look like this...

1) Scalper puts in market order to go long 10 contracts.

2) FXCM fills the order. The net result is that the Scalper is long 10 contracts and FXCM is short 10 contracts.

3) FXCM is not interested in taking a market postion and as such goes to offset the 10 contracts with the bank...but...before they get to do this, the scalper has sold the contracts for 3 pips profit each. The net result is that FXCM did not have an opportunity to maintain its neutral position and took the losing side of the trade, something their business is not built around, as they do not desire to take positions against their clients accounts.

So, in essense, scalpers put themselves in the position to trade directly against FXCM whereas traders other than scalpers are not trading directly against FXCM as their net positions are offset in the broader market.

To answer your question then, dealers would need to confirm the entry price for these short term traders to ensure they maintain their neutral overall position. I suspect the dealer would confirm the entry price to ensure they are able to offset immediatly. Without insider knowledge, I would suspect this is what is occuring when one is put on "manual".

In consideration of how FXCM does business, scalpers certainly need to look elsewhere to trade as they are trading either directly against FXCM or their trade is encumbered when FXCM puts them on manual to confirm their order.

Traders other than scalpers should be able to maintain that important "neutral" relationship with FXCM that should be at the heart of a trader/broker business relationship.

This is how I see things with FXCM, their clients, and the scalpers. Certainly if someone needs to clarify or correct my understanding, please feel free to do so.

L

 

[jm73]

Quote from "Linus":

3) FXCM is not interested in taking a market postion and as such goes to offset the 10 contracts with the bank...but...before they get to do this, the scalper has sold the contracts for 3 pips profit each. The net result is that FXCM did not have an opportunity to maintain its neutral position and took the losing side of the trade, something their business is not built around, as they do not desire to take positions against their clients accounts.

So, in essense, scalpers put themselves in the position to trade directly against FXCM whereas traders other than scalpers are not trading directly against FXCM as their net positions are offset in the broader market.

L

Thanks for your explanation.

I understand what you are saying and agree with you.

The part I still don't understand is the following...

like your qoute if scalper sold contracts for 3pips profit before FXCM could offset its position, that means the market already moved against FXCM. That means they have to offset its position with loss anyway wethier the postion was already closed or not.

I thought what FXCM rep. was saying was like this...

1) the scalper open the postion

2)FXCM offset the postion with their banks or whatever

3)when FXCM completed the offset, they realized that the postion had been already closed during 2).

4)now FXCM had to offset the closed postion and market price maybe already moved so that they coulcn't offset with the current market price for close.

"By the time the trade has been offset, the trader may have already turned around and closed out the position, forcing FXCM to return to the level and attempt to offset again at what are hopefully still market prices.
"
maybe I am wrong but if I am right, confirming the entry price for scalper is useless unless FXCM's intention is to make sure that the market price is still until they can offset without any loss due to maket movement.

any other thoughts?

 

["Linus"]

Quote from jm73:

maybe I am wrong but if I am right, confirming the entry price for scalper is useless unless FXCM's intention is to make sure that the market price is still until they can offset without any loss due to maket movement.

It would be interesting to see exactly how it all unfolds at FXCM...that would probably clarify an understanding of the details around why FXCM is not scalper friendly.

I would suspect you are right in your above observation. It makes sense that they would be confirming the makret price to ensure it is offset and they are not taking the other side of the trade.

L

 

[jm73]

Quote from "Linus":

It would be interesting to see exactly how it all unfolds at FXCM...that would probably clarify an understanding of the details around why FXCM is not scalper friendly.

I would suspect you are right in your above observation. It makes sense that they would be confirming the makret price to ensure it is offset and they are not taking the other side of the trade.

L

If I am right, you have to be NOT profitable at least first couple minutes after the postion is opened so that FXCM can have some time to offset with their banks without loss...

Therefore, the scalping which is not welcomed by FXCM or any other market maker is the trade which doesn't gve them a chance to offset with either some profits or no loss at least regardless of trading style.

Again, I am not an insider so I maybe dead wrong...

 

[icebergorder]

are you trading on a platform? or over the phone...? I would of thought that if over a platform the rates would have been coming from the banks so effectively matched and risk given to the bank right away not FXCM...what it sounds like is that you have managed to pick a few banks off on their price..thus the bank has called FXCM and said they are not happy...

Cant imagine that FXCM would actually take risk from clients on large trades unless they were getting a big spread on it..so sounds like a typical 'you picked me off' scenario...i.e the only people out there allowed to make money are the banks and the brokers....

 

[shpforex]

Quote from jm73:

If I am right, you have to be NOT profitable at least first couple minutes after the postion is opened so that FXCM can have some time to offset with their banks without loss...

Therefore, the scalping which is not welcomed by FXCM or any other market maker is the trade which doesn't gve them a chance to offset with either some profits or no loss at least regardless of trading style.

Again, I am not an insider so I maybe dead wrong...

Sounds like you are right but let them worry about their risk.

If they can't handle it, they would let you know.

If you don't like them, swich your FCM and switch again if you don't like the new one either. just keep switching until you find the right one for you.