Someone Else Slamming Forex
November 9, 2009
I really wish people would get their facts right.
There was an article posted in the ft.com/alphaville section entitled The $100bln FX hustle, which I found referenced in a post on The Business Insider. The two articles basically pick up on the oft-stated “forex brokers trade against their customers” theme. Part of me wants to cut The Business Insider some slack because they were basically just going of the information in the original article, but I won’t. Both post authors are culpable for failing to realize that the marketing making function performed by retail forex brokers varies little from the same function performed by floor traders and bank dealing desks in stocks, bonds, futures, and options.
The FT Alphaville article starts off talking about the rapid growth in daily retail forex trading volume, which they put at $100bln. Informatoin from Gain Captial (they are forex.com) show annual volumes for that group having risen to $1.49tln in 2008 from $120.3bln back in 2004. Anyone who’s been around the forex market for a while won’t be surprised at these figures given how rapidly awareness of and interest in currency trading has beeng growing. This has happened to the whole of the forex market, with recent estimates over $3tln in daily volume noted.
For some reason, the author of The FT Alphaville article thinks that growth is a reason for concern. I’ve never heard anyone make that kind of complaint about stocks. The rapid growth in forex trading has caused the spreads to come WAY down from where they used to be. When I first got into the markets 10 pip spreads in USD/JPY were commonplace. The fact that it’s more like 1 pip now is a big benefit to price takers (that’s retail traders).
But that’s not the main gripe. The FT Alphaville article instead focuses on the counter-party element where by Gain (and other market making brokers) take the opposite side of their customers trades. Specifically, it brings up the subject of stops and how it supposes that the broker gains from stops being triggered:
In its role as counterparty, the firm is taking bets from tens of thousands of customers across dozens of currency pairs. It can maintain a neutral market position while banking the spread between wholesale FX rates and the quotes it offers the Speculators of this world. But it then sweeps up as soon as a client hits a stop loss — which the volatility in FX markets, together with excess leverage, makes a certainty.
First, let me speak to the last statement about the volatility of the FX markets. How exactly is forex volatile? And compared to what? Take a look at individual stocks or commodities. Forex rates are not more volatile than those markets. I’d venture to say they are probably fairly comparable to the major stock indices (maybe in my next post I’ll put up a comparisson). Certainly leverage introduces volatility in terms of one’s trading account, but that’s not what’s being discussed here.
Back to the market making. What does the author of the article exactly think is going on when stops are hit relative to their “neutral market position”? It means those customers positioned opposite the ones getting stopped out are making and equal amount of money! It also means the broker is now in an unbalanced position at risk if the market keeps going in the direction of the stop.
The article does bring up the issue of over-leverage, which definitely is a major problem with especially new traders. And of course the various brokers primarily hook people into trading who are thinking more about the potential gains than the potential losses. There are a lot of pitfalls in forex trading (and all other kinds as well). To suggest, however, that market making forex brokers are doing things substantially different from market makers in other markets, however, is naive.
Struggling with support & resistance and knowing what the key market levels are? Check out the Price Distribution Analysis methods I use.
Funny how even people with a lot of money at risk, who are presenting the image of being experienced fund managers or at least people who trade real size, are blaming the broker when their stops are hit.
Lots of complaining over at LinkedIn about a 3 pip variance in feeds — which isn’t much if you are looking at ECN, broker and interbank feeds. I tried to explain this in the thread, but everyone was so convinced that the broker moved the price three pips to get at this ONE guy’s stops.
Hilarious. And then the bomb was dropped — the dude didn’t know whether he should look at the bid or the ask on his short trade stop loss price.
LMFAO!
His clients need to RUN AWAY!
Anyway, I’m not surprised the authors got it so wrong. Journalists are generally sloppy these days. You know, content over quality and all that good stuff we are taught nowadays — from schools of journalism to schools of business. Sad, really.
Jay – Where’s that LinkedIn conversation? I wouldn’t mind a bit of a laugh.
As soon as service is restored, I’ll dig out the link…but it will just frustrate you.