|
Article Library
Law Schools
| |
Retail Forex Brokers
Retail forex brokers or market
makers handle a minute fraction of the total volume of the foreign
exchange market. According to CNN, one retail broker estimates retail
volume at $25-50 billion daily, which is about 2% of the whole market.
CNN also quotes an official of the National Futures Association
"Retail forex trading has increased dramatically over the past few
years. Unfortunately, the amount of forex fraud has also increased
dramatically."
All firms offering foreign exchange trading online are either market
makers or facilitate the placing of trades with market makers.
How To
Write a Resume |
 |
In the
retail forex industry market
makers often have two separate trading desks- one that actually trades
foreign exchange (which determines the firm's own net position in the
market, serving as both a proprietary trading desk and a means of
offsetting client trades on the interbank market) and one used for
off-exchange trading with retail customers (called the "dealing desk"
or "trading desk").
|
|
|
Many retail currency market makers
claim to "offset" clients' trades on the interbank market (that is, with
other larger market makers), e.g. after buying from the client, they sell
to a bank. Nevertheless, the large majority of retail currency speculators
are novices and who lose money, so that the market makers would be giving
up large profits by offsetting. Offsetting does occur, but only when the
market maker judges its clients' net position as being very risky.
The FOREX dealing desk operates much like the currency exchange
counter at a bank. Interbank exchange rates, which are displayed at the
dealing desk, are adjusted to incorporate spreads (so that the market
maker will make a profit) before they are displayed to retail customers.
Prices shown by the market maker do not necessarily reflect interbank
market rates. Arbitrage opportunities may exist, but retail market makers
are efficient at removing arbitrageurs from their systems or limiting
their trades.
A limited number of retail forex brokers offer consumers direct
access to the interbank forex market. But most do not because of
the limited number of clearing banks willing to process small orders. More
importantly, the dealing desk model can be far more profitable, as a large
portion of retail traders' losses are directly turned into market maker
profits. While the income of a marketmaker that offsets trades or a broker
that facilitates transactions is limited to transaction fees
(commissions), dealing desk brokers can generate income in a variety of
ways because they not only control the trading process, they also control
pricing which they can skew at any time to maximize profits.
The rules of the game in trading FX are highly
disadvantageous for retail speculators. Most retail speculators
in FX lack trading experience and capital (account minimums at some firms
are as low as 250-500 USD). Large minimum position sizes, which on most
retail platforms ranges from $10,000 to $100,000, force small traders to
take imprudently large positions using extremely high leverage.
Professional forex traders rarely use
more than 10:1 leverage, yet many retail Forex firms default client
accounts to 100:1 or even 200:1, without disclosing that this is highly
unusual for currency traders. This drastically increases the risk of a
margin call (which, if the speculator's trade is not offset, is pure
profit for the market maker). |
|
Sources: Wikipedia
Currency Trading Info |
TradeCurrencies | ForexTrading | ForeignExchange
|