In this episode of Truth About FX, Walter gives light as to how forex rebates work and whether you can actually benefit from this. He shares some insider information on the real story behind this, how will you know a legit broker and how the system works . How do brokers work? Is there really money in this kind of networking? And how can you minimize your risks.
Hugh also shares his thoughts on this. Walter also shares his first trading job why he would never go back at it.
Download (Duration: 06:26 / 7.4 MB)
In This Episode:
00:58 – set up a deal
02:50 – cater to that style of trading
03:23 – meat on the bone
05:18 – conflict of interest
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. How do forex rebates work and are they good for traders?
Walter: The story on this is — what the introducing brokers or the brokers will tell you — they don’t really add anything to the spread. Here’s the thing: you can tell your broker, “Hey, can you inflate?” For example, if you’re trading someone’s account… This will be really dodgy by the way and I know people that do this or have done this in the past where let’s say — they say — “Hey Hugh, you’re a great trader. I want to give you this money and I want you to trade my account.”
You could set a deal up with a broker and you say, “Okay, sure. Open up an account with this broker and then I’ll get trading rights and then sign over the trading rights to the account to me.”
And then, you could set up a deal with a broker when the broker inflates the spread so everytime you take a trade on your buddy’s account, you get a kick-back from the broker.
You could also do that with your own account. You can tell your broker, “Hey, can you inflate this spread and just send me a check every month for those?” And they’ll do it. It’s no problem.
But the thing is, I think what you are talking about is more like along the lines of the introducing brokers where they’ll say, “Look, we will introduce you. If you sign up through us, we get paid from the broker for signing you up this new accounts and then we’ll give you rebates.”
And they’ll tell you like, “The spread is the same. If you go to the broker and you opened up an account or you come to us and we open up an account, it’s going to be the same spread. There’s no difference.
The only difference is if you go to us, the introducing broker, we’re going to get paid for claiming you as a client and giving you to the broker and say ‘Hey, this is our guy and we’re going to give you an account’. And then, we pass on the money that they give to us. We pass on some of that to you.”
In theory, it is a great way to do it. In practice though, you have to be careful. You have to make sure that’s true. That you’re actually getting the same tight spreads and low commissions that you would have had have you just walked in to the door and just signed up. Click on the button and sign up with the broker. You just have to make sure that’s the case.
I’ll give you an example. Let’s say, you are a scalper and you are scalping. Like, you’re going for 8 pips or whatever and so you trade a lot. You trade a high frequency and you want as tight spread as possible.
You are looking for a 0.5 pip spread, like half a pip or whatever. It’s basically what you want. You can do that and you can find brokers that will allow you to do that — ECNs and brokers that cater to that style of trading — but they’ll usually charge you a round trip commission.
So, they’ll say, “Okay, it’s 0.3 to 0.6. Your spread is really going to be tight and then, we are going to charge you whatever it is. Twenty five bucks a round trip or whatever commission per lot.”
Now, my question for you is if you are that style of a trader and you go to through the introducing broker, are they going to build and get you the same deal? I don’t know. Maybe but I am not sure about that.
There’s not much meat on the bone. There’s not much left there so I’m not sure how is that going to work so I would just be careful. The best way to do it is you go to the introducing broker and you say, “Who are you going to hook me up with?”
They’ll say, “We are going to get you hooked up with this guy.” You say, “Okay, fine.” And then, you go and check and ask that broker: broker A, B, C. “Hey, what is the best spread you can get? What is the best deal?”
And then, compare that to what the IB says and if it’s true — and I think in most cases they probably is — but in certain cases like the scalping example that I just state, that might be tricky for the introducing broker to get you that deal.
I don’t know if they can do that. Maybe they can. I don’t know and these things change a lot too. Sometimes, some countries don’t like introducing brokers and they’re trying to stamp a mouth so they make it really hard for them to do business and all those sorts of thing. I don’t know.
Are you working with a broker that pays you back? That rebates you?
Hugh: No. I also thought that was kind of a conflict of interest so I’d never looked at that but I’ve heard from some people who are using it. They give their clients bonuses or whatever at the end of the month, stuff like that.
Walter: The first trading job I had which really I shouldn’t have it because I wasn’t very good. I was trading this guy’s account and that was the whole scam. What happened was the guy that hired me as a trader, he said, “Look, I don’t care if you grow these accounts. Just keep them like about the same. Just take a lot of trades because we will get paid per trade and he will get paid per trade.”
And then we will get a small incentive on profits but we would make most money for taking trades. That was about the time when I worked out that I didn’t want to take a lot of trades and I want to trade the higher time frames and all that.
He was getting mad at me even though I started slowly figuring it out and making money for the account. I didn’t trade often enough for him to get paid. That’s the conflict of interest, isn’t it?
When one side of it is churn and burn and the other one is like why I want to make money. It’s tricky stuff. I think just knowing in the back of your head that you’re going to get rebates for trades that also might — if you have a problem with over trading, that could also affect you.
That you might be taking too many trades because you know, “Hey, if I take some more trades my check in within the month is going to be better even if I’m not making money.” I think it’s a really tricky thing. There’s definitely some legitimacy there. I just don’t know if it is. You just have to do a little bit of homework there.
Hugh: Yeah. It has to be the right situation, I think too.
Walter: Exactly! That’s it.
Hugh: Okay, cool. Thanks, Walter.
Walter: Thanks a lot.