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Is Your Broker OK?

Posted On : Dec-12-2009 | seen (3557) times | Article Word Count : 862 |

The difference between Forex speculation and other varieties of trading such as stocks and bonds derives from the fact that that foreign currency isn't traded by way of a official exchange. This initiates a unique and regularly misunderstood set of affairs that every currency trader has to ascertain to cope with.
Forex (Foreign Currency Exchange) traders spend a great deal of time worrying and discussing their various concerns regarding the retail brokers they use to execute their money. Of course it's normal to presume that being successful with Forex simply means to 'beat the market' by locating and entering top quality trading opportunities. Sad to say, the agency that any trader employs will have as much to do with whether or not he earns money as any other consideration.

Bucketshops are companies that take undue advantage of their own traders by taking positions against their clients and often by manipulating the prices they present. Very few brokers will admit to having this policy, mainly because it gives them a strong reason to cause their clients to lose. Yet another phrase commonly used for such agencies is 'Market Makers'. Due to the fact that these brokers give their own version of prices and fill the customers' trades directly from their own portfolio, they are undeniably making the market. A hard look at the environment of currency, however, shows us that this kind of policy is actually vital to making it possible for small retail trading to happen, and though it is sometimes abused, it is not always a nefarious business model.

To understand the logic behind this, one should first understand that the 'Forex market' is unlike typical trading opportunities due to the fact that it isn't actually there in a real-world sense. Company stocks, as an example, are available on a stock exchange such as the NYSE or the NASDAQ in the United States. All trades that are made via an exchange such as the American Stock Exchange is cleared by that exchange, traded according to the rules of that exchange and moved through brokers that are regulated by the exchange. They exist at a static address, trade set hours and have the ability to shut down the exchange of any stock or the activities of all brokers whom they feel are acting unlawfully or in a way that impedes fair and honest trade.

The Forex market, by contrast, is made up primarily of huge institutions which find it necessary to swap money with other countries. Those involved are major players; banks and large corporations which desire to change funds from one currency to a different one so that they will be able to do business from one country to another. Suppose a company from Australia markets some products to Canada. The money will come as CAD, but the business will have to pay for its expenses in AUD. It will need a convenient means of exchanging its capital almost every normal business day. This is the true Forex market; businesses and financial institutions that transfer trillions of dollars worth of currency back and forth every day. You and I could never participate in that market -- we just can't access that much cash.

That's why retail Forex brokers trade with their own customers. The brokers open up small trade opportunities for the under capitalized guys (such as us) who would otherwise never be able to get into the Foreign Exchange market. Then they turn around and perform much larger trades with their 'Liquidity Provider'; a bank that is able to transact with brokers in order to make some money from we retail traders. The banks are capable of buying and selling with an agent who represents many retail traders whereas they would never conceive of trading with every single one. When a broker lumps our trades into a larger transaction, trading opportunities abound.

And so, most retail brokers needs to publish price values to its clients, but there is not any official exchange that sets the prices traders are given. Each broker must start with quotes provided to it by its bank(s), and these may not be in tune with the prices published by other banks. These disparities are evident in the variation between broker quotes. From this truth arises the requirement for a broker to create the market for its clients, not necessarily from a penchant to cheat them (though there will be those who probably do). A broker might be honest but still have the need to trade opposite its clients, even if they're not attempting to shift quotes and make those clients lose.

So you see, on most trades a typical broker will be required to 'trade against' their customers, even though they are required by law and ethics not to do this in a way that harms those customers. In these circumstances every speculator must look out for his or her own interests. It is critical to always keep a diligent watch on the quoted prices and trade practices of their broker, and to select that broker sensibly. It would be uncalled-for, all the same, to assume that any broker who takes the other side of a client's trades is doing so to screw them. It's an indispensable, if troublesome aspect of the small capital Forex business model.

Article Source : Your Broker OK?_6905.aspx

Author Resource :
Brian Dalton has been studying and trading Forex for years, using his knowledge and experience in the realms of science, engineering, computer programming and statistical data analysis to help him understand the often confusing and chaotic world of Foreign Currency trading.

You can read his blog here: Money Pipeline. He writes and sell Forex indicators and trading systems here: Tantalus Online.

Keywords : forex, forex trading, currency, currency trading, foreign currency, make money,

Category : Finance : Currency Trading

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