Who pays you for winning trade?

[zbojnik]

Where does the money come from If you win a trade? I want to trade futures but I think it is the same principal for stocks. Ok for example. A simple example is of 2 people, which I sort of get. Price is at 5$. I want to go long at 5 and Bob wants to go short at 5. Price goes to 7, Bob wants to get out but cannot because I do not want to exit. Price gets to 10 and I want to cash in. Bob loses 5$. So we both give are brokers 5$ which then the broker gives to the exchange which makes sure who ever wins gets paid?

The whole question stems from the question: "If I start making money from trading, Is my broker or the excange gonna get mad that Im taking there money."? Also, can your broker or the exchange see your trading history and possibly steal you strategy? If only broker can possibly steal your strategy is there a way to get rid of broker and trade directly to exchange?

Thanks.

 

[zbojnik]

I would assume that the exchange takes money from the people that lost and then pays the person who wins because of working out a example with 4 traders and from different brokers. So I long at 1$ and Bob shorts at $1. At 5$ Bob closes short for -$4. Joe sold to him going short. Joe closes position at $6 for -$1. John sold to him going short. Market goes to $10 and John closes position at -$4 because I sell my contract to him. So I make $9 but this money has to come from 3 people? So Bob and Joes(and eventually Johns) losses got sent to the exchange and where held there until I close my position?

 

[lawrence-lugar]

Good questions. i've never really technically looked into these myself -- i have always just kind of...traded...

I don't think the 'winner' takes money Directly from the 'loser'...think of it instead as one big pool...where all the bets are thrown in, and taken out/paid out accordingly.

 

[TheNotSoGreatGatsby]

I would assume that the exchange takes money from the people that lost and then pays the person who wins because of working out a example with 4 traders and from different brokers. So I long at 1$ and Bob shorts at $1. At 5$ Bob closes short for -$4. Joe sold to him going short. Joe closes position at $6 for -$1. John sold to him going short. Market goes to $10 and John closes position at -$4 because I sell my contract to him. So I make $9 but this money has to come from 3 people? So Bob and Joes(and eventually Johns) losses got sent to the exchange and where held there until I close my position?

Most brokers take their trader's trades before even sending it to the exchange. They hedge against traders because so many lose.

Adam shorts ABC at $45. Their broker takes the other end.
etc
etc

Unless you're a profitable trader, then most brokers will be taking your trades hedging against you because you suck.

 

[onemoreshot]

Most brokers take their trader's trades before even sending it to the exchange.

Maybe in dealing desk forex but don't think so in equities and futures.

 

[Turveyd]

By other end, broker doesn't pass it to the market at all, therefore when you lose, which most do, it profits from all the loss.

Money isn't lost or made, it's merely moved around, the object of trading is to move it to yourself.

You in stock terms, buy at 5 and you sell at 6 and someone that'll pay 6 for it, the person who buys this could sell at 5 for a loss or 7 for a profit or 100 in 20years time.


That profit, comes from a big massive pool of money, just a bit more sits with you for a while thats all.

 

[lindq]

The whole question stems from the question: "If I start making money from trading, Is my broker or the excange gonna get mad that Im taking there money."?

Bob has an apple tree that has yielded 100 apples. He opens an LLC and decides to put them on the market. His costs for growing the apples was 30 cents an apple.

Mary comes along - she loves apples - and pays him 50 cents an apple. He takes the deal, and pockets the cash.

Now Mary has the 100 apples, for which she paid 50 cents each. But Dave comes along, thinks the apples are beautiful, and offers Mary 60 cents each. But Harry overhears the conversation and offers 70 cents each. So of course Mary -not being an idiot - takes the higher price and now pockets a nice profit.

She made a good trade. And thus far, both Bob the grower and Mary the trader have profited nicely from the apples.

And the apples still exist. They haven't gone anywhere.

Harry now owns 100 apples valued by the market at 70 cents each. But apples often have worms, and somebody spread the news that Harry had rotten apples. Along comes Ralph, who wanted some cheap feed for his horses, andtold Harry that he'd take the apples off his hands for 40 cents. Harry wasn't happy about that, but realized he now owned a declining asset, so he took the deal before the apples were worthless.

Mary made money, Bob made money, and Harry lost big because he got hit with bad news.

For every seller, there was a buyer. It all evened out.

But let's not forget the landowner, who charged a fee for each transaction, because he made
the market possible. Buyers and sellers paid his fee so that they could be a part of the marketplace. And he was happy to continue, forever and a day, sun up to sun down, because he was laughing all the way to the bank.

 

[Xela]

If I start making money from trading, Is my broker or the excange gonna get mad that Im taking there money?

If it's a genuine broker, then no: you're not trading against them.

A broker is someone who makes his living by executing trades on behalf of his clients in a market to which those clients don't themselves have direct access, in exchange for a fixed commission-fee. He has no incentive for his clients to lose.

There are also many counterparty market-makers pretending to be brokers (especially in the world of forex), and if you use one of those "brokers", then yes: winning their money regularly is likely to lead to problems, and sometimes fairly quickly and even over relatively small amounts of money, if it's happening consistently enough. (Forex "retail brokers" are notorious for these problems.)

When independent, audited reports are occasionally published, giving details of the proportions of winning and losing clients on various brokerages' books, it's invariably the genuine brokers who have the higher proportions of winning traders, and the counterparty market-makers who have the higher proportions of losers.

 

[newwurldmn]

If it's a genuine broker, then no: you're not trading against them.

A broker is someone who makes his living by executing trades on behalf of his clients in a market to which those clients don't themselves have direct access, in exchange for a fixed commission-fee. He has no incentive for his clients to lose.

There are also many counterparty market-makers pretending to be brokers (especially in the world of forex), and if you use one of those "brokers", then yes: winning their money regularly is likely to lead to problems, and sometimes fairly quickly and even over relatively small amounts of money, if it's happening consistently enough. (Forex "retail brokers" are notorious for these problems.)

When independent, audited reports are occasionally published, giving details of the proportions of winning and losing clients on various brokerages' books, it's invariably the genuine brokers who have the higher proportions of winning traders, and the counterparty market-makers who have the higher proportions of losers.

The Swiss Franc debacle showed that those "retail brokers" were better for their customers than traditional brokers. Those retail brokers were in a position to forgive customer debts than the traditional brokers as it was just an general ledger transaction. If I were trading FX on massive leverage, I would prefer to have a market making broker vs a pure agency one.

 

[Xela]

I would prefer to have a market making broker vs a pure agency one.

In discussions in forums, I find that I'm quite often among the "tiny group" with the "extreme, highly unusual opinions" on some issues, so I'm not criticising your perspective at all, but I won't pretend to understand it, and I just couldn't disgree more.

Under no circumstances would I be willing to trade with someone who holds the other side of my positions, also holds all my deposited funds, sets their own prices, and makes up and interprets all the rules governing the trades!