Keep Your Friends Close, Keep Your Forex Broker Closer

I could go on letting you believe that your retail foreign exchange (Forex) broker is on your side. While I’m at it, I might as well let you believe that every infomercial Forex broker scam  salesman is out for your best interests too. The truth is your friends are not always who they say they are and not everyone you trust is going to be there to look out for you, least of all the typical broker in today’s retail currency trading industry. If you trade Forex, you’re in the largest hunting grounds of the financial markets — and in this worldwide dog-eat-dog multi-trillion dollar jungle, you trade reality so get used to facing it. On the other hand, sometimes what others believe are the worst things in the world can be used to your advantage.

Read the service agreements and contracts. When a Forex broker says that they are a counter-party to your trades, and they’ve given themselves the choice whether or not to hedge your positions, what that means is that unless they choose to take action they generally win when you lose and vice versa. Under some situations, they net all their customer positions and take a trade with a tier 2 bank (their liquidity provider) to flatten their own net exposure. In most cases, however, they can actually maximize their profits by simply not doing this because the majority of their customers are consistently-losing gamblers who blow their entire accounts and might even re-deposit a few times to repeat the pattern and increase their profits further.

Does that mean you should stop trading retail Forex? Not at all. If we gave up every time we found out something wasn’t ideal in the world, most of us probably would’ve stopped playing the game of life after kindergarten. Just be aware of the real structure behind what you’re doing because there are usually ways to turn some of the market’s attributes into an edge of your own.

In fact, when I began my career as a proprietary trader, I routed many of my orders through to the human NYSE market makers to save on ECN (electronic communications networks) fees, which are charged for removing liquidity. I did this knowing full well that the market makers played the opposite hand most of the time. That was fine because my trades never depended on their good will. Plus, when the market was slow, I could take quick profits by using the market maker’s moves to my advantage — I would then route a closing order through an ECN like Archepelago (now NYSE Arca) who would in turn pay me a rebate for adding liquidity to the market. Aside from any market profits in the trade, this gave me a small profit in the commission structure alone, since the ECN rebate was larger than the market maker’s fee. With large lot sizes, these rebates amounted to large bonuses simply for placing trades. (In the order that we did this, it was perfectly legal — and still is — even in such a heavily regulated market as the NYSE.) If the logic of this technique is going over your head, don’t sweat it. It’s not important for you because the equivalent situation would never happen in the retail Forex market anyway. Just take from it that, sometimes, you can make a good thing out of an apparently unfavorable situation through a little creative maneuvering.