Is Your Forex Broker Betting Against You?

As anyone with a Forex account knows the act of trading is hard enough as it is, do you trade against the news or do you trade technical (psychology or charts).

Then we get to the question of which currency pairs and the predictable nature of trading sessions.

But at least you don’t have to worry about your brokerage right, after all they make money no matter what happens?

Actually, yes you do need to check your broker because there’s a trick that most of them do that they don’t like talking about.

Imagine the sequence of events for a trade:

You pick a currency pair, lets say EURUSD and you choose whether to buy or sell and how much to buy/sell.

Just for reference the amount that you choose to buy or sell is referred to as volume and is measured in lots. For currency pairs, as opposed to CFDs or metals, one lot is 100,000 of the currency that you’re buying/selling.

The previous example was missing a couple of the finer points:

When you are looking at your trading platform it is updated with the current price (this can be several times a second for certain currency pairs). These prices arrive from the liquidity provider(s) – a liquidity provider is just a bank or other institution that provides price data for a given currency pair. When these prices arrive at your broker the broker will add a spread. So if you see a price of 1.3724 then the broker will be getting a price of 1.3720 (these numbers are an example and will vary from broker to broker).

So when you press the button to BUY you are buying at the higher price and the broker makes money on the difference between that price and the price from the liquidity provider.

So everyone’s happy, you’re trading, the broker’s making money, the world is good.

Maybe this is what’s happening but there’s a good chance that something else is happening, something that you really wouldn’t want to happen.

The brokerage could actually be betting against you – like a casino.

And in this case things work exactly the same as in the casino. When you play roulette, you put chips on the table and the casino needs you to lose because if you win the money comes from their pocket.

In the trading world there are two ways of trading, these are A-Book and B-Book.

An A-Book trade goes straight from you to the market, in this case the brokerage doesn’t care if you win or lose as they still get paid.

However, with a B-Book trade you place your order, based on the liquidity providers prices, and the trade goes straight to the broker and stops there.

If you win then the amount you win comes from the pocket of the brokerage however if you lose the brokerage doesn’t need to pay anyone else, it’s all profit.

There are tell tale signs that you’re being B-Booked. If you place a trade and the market moves (more than a few points) your trade will still be accepted but at a different rate – this is called slippage. With an A-Book trade if the price that you get is more than a point or two away from your request price you get refused (you don’t enter the market).

But my broker says that they are ECN (for those that don’t know ECN effectively means straight to market with no interference).

If you’re suffering slippage on your ECN account I would advise that you go to your broker and ask them if you are actually ECN or if they OFFER ECN (we’ve come across a few brokers that advertise ECN but you have to specifically request it).

Now you might well be wondering why anyone is telling you this, it is after all a little negative and may come as a surprise to some. Well it’s simple, we believe that when you’re dealing with peoples money you need to be transparent (there’s technically nothing wrong with this behaviour BUT the client should at least be aware of it).

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