Is My Broker Stealing from Me?

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John Forman - The Essentials of Trading author

The following was actually left as a comment on the site, but since I’m sure it’s something which is a question many people have, I want to take the time to provide a public answer. Here it is:

I have a serious question about broker stealing. This relates to how brokers, specifically options brokers, mark to market. I’m with xxxxxx and these people are thieves. Every day I buy dozens of contracts and they always mark them to the bid. I’m losing hundreds of dollars every day simply by virtue of the way they mark to market. For instance, I have some calls on FWLT. The last trade was at 7.2. I bought at 7.0. Yet they marked my trade at 6.4, the bid. Which means that, at 10 contracts, they’re telling me I lost $800 versus actually MAKING $200 based on the actual contract price. Xxxxxx is stealing from me, aren’t they…………….Your response is greatly appreciated.

If you’re a forex trader I’m sure you already know what I’m going to say here.

In any market the last trade is just that - the last trade. It doesn’t necessarily represent the current market price. Sure, in actively traded markets the last trade and the current price (as per the bid/offer) are going to be essentially the same. In thinner markets, like options, however, there can often be some time between trades actually getting made - even days.

Even though no actual trades have taken place during a period of time, that doesn’t mean the market hasn’t moved. If you’re in a call position and the underlying stock falls in price, by definition the value of the options are going to decrease. If no one does a trade in those options, then you won’t see it in transacted price, but it will absolutely show up in the price you actually pay or receive if you go into the market to do a trade. Market makers are always adjusting their bids and offers to reflect changes in the market.

So, when your broker marks your position to market each day, they are doing so based on where you would be able to exit your open positions, not based on a last transacted price which might totally unreflective of the market reality. That means if you are long they will mark your positions based on the bid, since that’s the price you would sell at to close out.

As you can hopefully see now, your broker is not stealing from you. If you bought 10 calls at 7.0 and the current bid is 6.4, then were you to close your trade out by selling you would take a 0.60 loss per contract, or $600 total. That is what your broker is reflecting in their mark-to-market.

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