In this episode of Truth About FX, Walter answers a common question: does my broker trade against me? Also, he digs into the different types of brokers, how knowing what type of trader you are can help you choose the right broker for you, and the advantages of having multiple brokers.
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In This Episode:
01:06 – profitable traders
02:24 – loan shark
03:06 – Market Maker
05:03 – next black swan
06:38 – multiple brokers
Tweetables:
Don’t place all your money on one broker alone. [Click To Tweet].
Essentially, the Marker Maker broker has more liquidity. [Click To Tweet].
The kind of broker that you will have will depend on your trading. [Click To Tweet].
Hugh: Hey, Walter. This is a common question that we get. I’ve heard that the brokers trade against me, is that true?
Walter: Yeah. The answer is, it depends. Some brokers essentially are the market makers so what that means is when you buy the EUR, your broker makes money if the EUR goes down and you can’t stop that. Okay?
However, there is a caveat. If you show that you either: one, have a very big account with your broker; or two, show that you make profit over the first month. Then, your broker will lump you into a group of traders who actually make money and they will make sure that those traders can’t hurt them.
In other words, if all of the traders in the A group is profitable traders going long in EUR, then they’ll go long the EUR, too, to innovate the market to offset those games that the winning traders are making.
They don’t want to be hurt by those traders. That’s how they’ll offer it. So the answer is, yes. They are trading against you in the case of having a Market Maker broker.
If your broker is a little bit different and you can see the depth of the market, you can see the orders on your trading platform, then what they’re doing is they’re matching up your order with other orders.
In other words, if I wanted to buy fifty million EUR against the USD, they would have to match me up with the fifty million EUR seller. That’s actually why they have their own little market with all of their customers in there and they’re matching those up. Those brokers are not trading against you, but in most cases your broker will be trading against you.
Now, here’s the thing. We’re just talking about this in webinar, so it’s a timely topic. Basically, it seems like traders want to go with the ECN sole broker where they’re actually matching your trades up with other traders. That makes more sense. It feels nicer because your broker is a good guy. They’re not trading against you.
Here’s what we found out with the Francogeddon incident where Fxean basically went bust and several others, until loan shark came in and save them. Also, there was another, at least one more in New Zealand that went bust and severaI others I believe that went bust because they we’re ECN’s.
Why did they go bust? Here’s why. Essentially, those brokers, they have to make sure that they push through their orders into the interbank market. Now, the problem with that is when the market moves really quickly, they’re not going to be able to do that. The Market Maker doesn’t have to do that because they’re taking on the risk.
Here’s where your account is at risk. If you aren’t a scalper, then you probably don’t need an ECN. You’d probably be okay with the Market Maker. I would, in fact, encourage you to go to Market Maker because you probably are going to be in a situation where if the market does move quickly like it did with the Swiss Franc and it has, in the tsunami in Japan and September 11 and the GFC.
All these things will be going to happen in the future, sometime. It happened in the past. You probably are going to be better off with the Market Maker. The only time that you might want to go with the ECN is when you’re actually scalping and you just like to see the depth and that’s sort of thing.
If you’re trading the four-hour chart and above, I wouldn’t even worry about it. That’s my opinion. I know it’s kind of controversial and people think, “Oh, she always go with the brokers not trading against you and all that.” But we do know that those brokers that don’t trade against you, they also have a weakness because they have to get into the innovate market quickly enough, otherwise they’re in trouble.
That’s what I would say to this. It really depends on your style of trading and which kind of broker you should go with. In most cases, yes, your broker is trading against you.
Hugh: I see. The Market Maker style has more liquidity essentially, is that what you’re saying?
Walter: Yes. They don’t necessarily have to hedge their trade. They’re not stuck when the market moves quickly. I mean, they’re stuck with their winning trades because they’re the only ones that they have to worry about.
It really depends. You look back and you say “well, Fxean basically went bust during Francogeddon.” Meanwhile, places like Oanda and Gain, they made a profit that day. You have to take into consideration: what are you more worried about? Are you more worried about your broker making money off of you or you’re more worried about your broker going bust?
To me, it makes more sense to be worried about the next black swan of it because we know it’s coming. There’s no doubt about it. There will be another one. How much money are you going to have with your broker when it happens and if your broker is going to survive that event? That’s how I look at it.
Hugh: I see. That’s awesome. Well that goes with a question also, should you have multiple brokers or should you have all your money in a broker or should you take something out? What do you think about that?
Walter: Yeah, great question. Here’s what I would say about that, I would never put all of my trading capital with the broker. Number one, you have a hundred grand that you’re going to trade. Your hundred grand that you’re going to trade, there’s no reason to give your broker a hundred grand.
Even if you’re in the US, where the leverage is low… what is it at in the US now? Fifty to one or something?
Hugh: Yeah. Fifty to one.
Walter: Okay. Even if you’re trading fifty to one, there’s no reason why you need to put all of that money in there. I would suggest — you’re not going to get much interest right? Like in a CD or something like that. You’re not going to make but, the reason you don’t have it in there is that your broker can go bust and say “oh sorry, your money is gone”. That’s really what you’re trying to guard against.
There’s a couple of things here. One, you want to split your money up and take, leave some of it to the bank or wherever — you leave it under your pillow or whatever — and then give some to your broker.
If I have a hundred grand, I’ll give my broker like forty or maybe fifty. But, I’m probably not going to give more than that unless I’m trading like crazy, like with twenty open positions at a time or something crazy like that. I’m probably not going to need to do that.
The other thing is, what about having your money at multiple brokers? That’s a good idea, too, if for example, what if you live in the United States, you can’t do hedging and things like that. If you have a weekly chart that says “buy the Swissie”, and you have the daily chart that says “sell the Swissie”. You want to take both trades but you don’t want to get messed up. Well, two brokers makes sense too.
Some guys, actually I know, they’ll have a different account for different strategy. They actually separated it out that way with different brokers. I think it makes complete sense to have multiple brokers and also to never give your broker all of your trading money. I think that makes a lot of sense.
Hopefully, that helps some people. Just because you have a hundred thousand dollars to trade doesn’t mean you’re going to give it all to Fxean or Oanda or who your broker is.
Hugh: Yeah. Totally true and if you have a hundred thousand dollars total and just because fifty thousand is in the trading account, you can still take a hundred thousand dollars worth of risk, right?
Walter: Exactly.
Hugh: I mean two percent on that, not the whole thing.
Walter: Yeah, exactly. That’s right.
Hugh: Cool. Thanks for that. It’s very insightful.
Walter: Thanks. See you later.
Hugh: Yup. Talk to you later.
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