Which FX broker? An illustrated answer.

S

sgsaxton

You open an account at Refco and you’re ready to trade.
You go to your trading room and sit down.
A huge Silverback guerrilla with a nametag reading Ref sits down across the table, greets you, opens up his laptop and smiles.

Puzzled but undaunted, you start your analysis. After a couple of hours you see an opportunity. The Macd has just crossed the Bi-polar Foozle Wigit and it was a full moon last night. Not only that but your wife’s chicken bones said today was going be a day to remember.

“I’d like to short 5 lots of Eur/$ at 1.2045 with a stop at 1.2065” you say.
Ref looks at his screen, leans over glances at yours then checks his Reuters and a few seconds later says
“That’ll be 5 lots at 1.2040 and a stop at 1.2065”
The Guerrilla starts pounding away at his keyboard.

Almost immediately the price shoots up to 1.2055
“Its Ok” you think, just noise.
Next few seconds the market spikes, hits your stop and reveres 1.2055, .2050, .2045 and keeps going. Had you not been stopped out, you’d have made a few bucks.

You shake the dust off, putting it behind you and wait. Emotional discipline and all that sort of thing. An hour or so later your indicators give another signal.

“I’d like to go long 5 eur/$ at 1.2025. (No stop this time; you’ve learned your lesson)
“No stop this time?” Asks Ref grinning.
He looks at his screen then leans over and has a look at yours. Checks his Reuters, takes a sip of coffee, takes a bite of his donut and finally says, “That’s 5 long at 1.2030?, no sorry the market has moved so I can’t fill your order”

“OK 5 long at 1.2031” you say
“Sorry the market has moved”
“1.2032”
“Sorry the market has moved”
“1.2033”
“Sorry the market has moved”
“1.2034”
“Done!!!”

Then Guerrilla starts pounding furiously away at his keyboard.

The market stalls, tics up a few pips and then promptly reverses and comes down hitting 1.2015
The Guerrilla looks at you and raises and eyebrow.

Your eyes are starting to burn because you haven’t blinked in a while. You’re starting to sweet and can feel it running down your bow . You should probably get out but instead you persuade yourself that there is strong support at 1.2010.
You hang in there like the trooper that you are.
Ref looks at you, then at his screen and pulls up your account checking the balance and smiling again.
“What the hells that idiot grinning at?” you wonder.
Markets at 1.2010
Much to your surprise the Guerrilla reaches over, unzips your trousers shoves his massive fist in and grabs your testicles.
Horrified, you struggle
He Squeezes.
The markets at 1.2005
“Say Uncle!” he says
You’re in agony, the room is spinning. He squeezes harder.
1.2004
“Say Uncle!!” he yells
“But there was support at .2010!!!” you scream with tears running down your cheeks.
1.2001
“SAAY UNNCLLE” squeezing ever harder.
The capillaries in your eyes are now bursting. Though you’re pretty sure you’ve just soiled your trousers, you know that there is support at 1.2000 , I mean there has to be doesn’t there?
1.1998
“SAAY UNNCLLE!!!!!!!!” squeezing, if it were possible, even harder.
1.1997
Your knuckles are bone white and you’ve clawed your way through the leather armrests off your chair.

“UNCLE, UNCLE, UNCLE, FOR HEAVENS SAKES UNCLE!!!!!” you shriek.
The pain subsides and the world comes back into focus. Sobbing, you desperately try and compose yourself.
“I, I, I….” You want to say something, ANYTHING that will restore to you even an ounce of dignity. Alas there are no words.

Ref knows and you know. Neither of you will speak of it again.
Ref peals his banana, gives you a grin and starts to eat it.
“You are a valued customer” he says.

A few days, a dozen shots of vodka and seven ice packs later, you have an earth shattering idea. I’ll go where the game is fair! ……..Oanda!!!!
You open an account, walk into your trading room and there sitting at the table is another Silverback Guerrilla.

He looks up smiling and says “Hi there, please do me a favour and hang your trousers up behind the door”
 
Actually, based on by (albeit limited) experience trading a demo with Refco, this riff strikes me as hilariously dead-on. Bravo! And thanks for the first laugh of the day.

Folks, I have never experienced kludgier price action than with Refco on the EUR/USD and USD/JPY pair. Yes, they say their spreads are fixed at 3 pips, but when that three pips is six pips away from the price you're getting from an independent data source (say, Comstock), one is forced to ask, in an almost existential way, "What is a spread?"

Maybe I'm spoiled by the big, liquid, regulated markets, but, trading the S&P, at least I can focus on price action, instead of existential metaphysics.

Please, someone, make the case that I'm just not getting it, that Forex really is a straight-up affair. Frankly, I can't believe it's as crooked as it's looking to me right now, as I've spent all of a week studying Forex, and there are lots of people who are a lot smarter than I am, who know a lot more than I do, and who trade Forex round the clock. So, smart people, please tell me, what am I missing here?
 
Funny, very apt, and a tremendous, enlightening favor to the uninitiated. Wishful thinking -- "Geez, I'm so good at Game Boy, I know I can do this trading" -- does not change the fact that these platform-based spot fx dealers are utterly crooked.
 
Quote from eagerbeaver:

Please, someone, make the case that I'm just not getting it, that Forex really is a straight-up affair. Frankly, I can't believe it's as crooked as it's looking to me right now, as I've spent all of a week studying Forex, and there are lots of people who are a lot smarter than I am, who know a lot more than I do, and who trade Forex round the clock. So, smart people, please tell me, what am I missing here?
More...

I think a distinction needs to be made. Forex in and of its self is just a market like any other. Ok its the biggest by far but never the less its still a market.

How one accesses the market is really the question here. I firmly believe that forex trading is gaining and increasingly bad reputation due to the low barrier of entry. Anyone with a few hundred bucks can jump in using a "bucket shop" and start losing. They haven't a clue what they are getting themselves into and as a result their demise is a forgone conclusion.

As a result of this the horror stories start; first to their friends and then it snowballs. Pretty soon Forex is a filthy word just like daytrading was a few short years ago when every Tom, Dick and Harry quit thier jobs and traded stocks. These so called Forex Market Makers who perpetuate the problem need to be exposed.

The only way to combat this is for firms such as IB and other ECNs to raise their profile so public is aware that there are better ways to trade the currency markets.

To answer your question, I would say don't shy away from Forex. The trading opportunities that present themselves here daily are just to good to pass up. However do your due diligence and select firm who's business model does not permit manipulation and that can facilitate your trading in an honest, honorable and most importantly auditable (don't know if that is a real word or not) way.
 
Quote from eagerbeaver:

Folks, I have never experienced kludgier price action than with Refco on the EUR/USD and USD/JPY pair. Yes, they say their spreads are fixed at 3 pips, but when that three pips is six pips away from the price you're getting from an independent data source (say, Comstock), one is forced to ask, in an almost existential way, "What is a spread?"
More...
Then what are you still doing with them? :confused: Demo or not.

Rather than keep asking existential questions (albeit interesting, over a beer or two), maybe taking decisive action would be a better thing to do, both for your confidence / comfort level and for your bottom line. You know, the NFL isn't the only place where often a good defense is the best offense, even when it comes to winning Super Bowls.

I watch, chart and trade 3 independent real-time price feeds for spot, plus 1 for futures. So do some other traders I know. 2 of the 3 are ECNs, 1 is not. 99.9%+ of the time, they are right on top of each other. Any difference of 0.5, 1 or 1.5 pips (depending on the currency pair) is systematic, meaning it is consistently there, so that I can often predict it without looking.
 
Quote from late apex:

Then what are you still doing with them? :confused: Demo or not.

Rather than keep asking existential questions (albeit interesting, over a beer or two), maybe taking decisive action would be a better thing to do, both for your confidence / comfort level and for your bottom line. You know, the NFL isn't the only place where often a good defense is the best offense, even when it comes to winning Super Bowls.

I watch, chart and trade 3 independent real-time price feeds for spot, plus 1 for futures. So do some other traders I know. 2 of the 3 are ECNs, 1 is not. 99.9%+ of the time, they are right on top of each other. Any difference of 0.5, 1 or 1.5 pips (depending on the currency pair) is systematic, meaning it is consistently there, so that I can often predict it without looking.
More...

Yes, well, you're right, of course, and, on the basis of this experience, I plan to broaden my horizons. Again, it's only been a week. But I was struck by this dynamic coming from an 800-lb Forex gorilla. I had assumed that the big boy would have the most to lose from a damaged reputation. Silly me.

You mentioned your price feeds, but what broker do you find has quotes that most closely reflect true price action?
 
If you walk into any trading pit in the world you will see that there are sometimes 100’s of guys (and a few brave women) trading there. The ones who trade for their own accounts are called locals. One of their functions is to provide liquidity to the market, enabling you to trade at any time, by buying and selling the incoming orders. In return for this the exchange makes sure their transaction costs are a heck of a lot lower than yours and mine.
Now because they have to be willing to buy and sell at any given moment there is a slight difference between what they will buy for and what they will sell for. The reason for this is so (ideally) they can make an immediate profit from another offsetting order. Despite what you read on this site and others, this is what true scalping is. Playing within the spread. What stops the spread being wide is that the locals are all doing this and are competing with each other for business. Why? Because if the price moves a tick or two in their favour, they can make a fast buck due to the low transaction costs.

Now the way the locals manage their risk is by how much their willing to trade and at what price. In times of high volatility or uncertainty the spread will widen reflecting the added risk that the locals perceive. What stops it from getting too wide is the competition the locals have with each other to attract business. At times of low volatility the spread will tighten reflecting the perception of low risk.
All in all its just risk management on the part of the locals.

You will see on other threads people moaning and groaning about spreads for the EUR/$ being at 5 pips on say IB’s IDEALPro platform (no offence Steve or Def just as an example). Well IB have 4 or 5 major banks acting as locals who obligate themselves to buying or selling at any given time. They will aggressively compete with each other for your business and as such its establishes a fair market price. In essence your trading in a real market place and the elasticity of the spread is evidence of that. This is how and ECN operates. All trades are anonymous and this is why it’s fair.

At least Oanda is open and honest about this.
At a spot forex “broker”, the firm you open your account with IS the local and the ONLY local. He chooses the spread. He knows where your stops are. He knows your account balance. The reason you see one price on your charts and your trading platform reflects another is that despite the “fixed spread” marketing rubbish, he also has to manage his risk by manipulating the spread.

And NO he does not offset your trade by buying or selling into the interbank market that’s just the hogwash they try and tell you. He may try and match closely your trade with another customer but any leftover he carries. Somewhere along the line he has to make up the difference. My guess is that (and it is a guess) this is why you will see mysterious price spikes etc. I mean hell, it’s not hard to even guess where stops are located; but when you can see them on your screen, its like shooting fish in a barrel.

It amazes me how few people know this stuff.
 
Quote from eagerbeaver:

Yes, well, you're right, of course, and, on the basis of this experience, I plan to broaden my horizons. Again, it's only been a week. But I was struck by this dynamic coming from an 800-lb Forex gorilla. I had assumed that the big boy would have the most to lose from a damaged reputation. Silly me.
More...

Yes, one would think that ("...the most to lose..." part), yet one would be wrong. As it turns out, the "name brand" online forex shops need not care about their reputation (yet), because:

1) they advertise heavily and seductively in print and online... it's all "commission-free", right?... and the minumim to open an account is, what, less than it takes to fly cross-country in coach. There's always fresh blood out there... for the time being.

2) the few times they might get "caught" committing a provable infraction, the worst outcome would be a slap on the wrist from the CFTC or NFA. That's just a routine cost of doing business, tiny / inconsequential compared to revenues and profits. How many folks actually look through the regulators' records when choosing a broker (even though they are effortlessly accessible online)?

3) Saving the best for last... In addition to advertising, the business model employed by the larger online forex shops depends heavily on countless, assorted third-party "affiliates" - CTAs, pseudo-CTAs, system sellers, signal services, chat rooms, etc. - tirelessly working on the fx shop's behalf to channel new clients to it. The fx shop's own reputation is now magically moot; the "unbiased" recommendation of someone that you're already inclined to trust (because you believe they'll help you get richer) is all that matters. Reputation by association... Marketing 101... it works. Powerful stuff, right up there with affiliate marketing that supercharged online selling in the late 1990s.

I put "unbiased" in quotes, because in many cases, the person / entity you trust gets a cut of every trade you execute through their recommended broker. A cut taken from the spread, of course, which explains the need for those 3-4-5 pip spreads you see on the majors. A perfectly legal kickback, if you will. In exchange, the party you trust will often reduce or even eliminate your management or subscription fees. What a splendid quid pro quo... Hell, and all I get are base and incentive fees.

Someone say "Wild West"? More like "Caligula"...

None of that should be earth-shattering news to those of us who take this business seriously.
 
You must log in or register to reply here.
Back
Top