Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

brownsfan019

Retail Currency Brokers Earn 'Near-Certain' Returns Trading Against Their Own Clients

Recommended Posts

Retail Currency Brokers Earn 'Near-Certain' Returns Trading Against Their Own Clients

 

The latest IPO prospectus for Gain Capital, a retail currency trading brokerage, reminds us again just how awfully disadvantaged retail currency traders are.

 

The word surely needs to get out more, since as it stands Gain Capital has grown its customer trading volume by an absurd 88% per year on average from 2004 - 2008.

 

FTAlphaville nicely highlights the most shocking aspect of the whole business - these companies are essentially trading against you as a counterparty.

 

They don't even appear too concerned about hedging currency exposure given that their business model offers 'near-certain' returns trading against their customers.

 

FTAlphaville: Here’s how it works. Our Madcap Speculator (MS), having been lured by an advert or other promotion, puts up $500 to “play the dollar.” He thinks the dollar is going to 1.75 versus the Euro — and he may well be right, given that we’ve already moved from 1.25 to 1.50 in the past six months or so.

 

FXhustle.com offers the Madcap Speculator 200x leverage on his initial margin deposit of $500. That allows the client to go long the euro and short the dollar to the tune of $100,000.

 

Now, either because he’s cautious or because FXhustle have insisted he do so, our MS places a stop loss on his trade — limiting his total possible losses to $1,000.

 

Which is where FXhustle becomes the near-certain winner and Madcap Speculator becomes the likely loser.

 

MS might be right about dollar/euro going to $1.75, but even if it does, we can be absolutely certain that it will NOT do so in a straight line. And, because he’s levered 200 times, our little speculator cannot sustain much volatility without being stopped out.

 

FXhustle, on the other hand, acting as MS’s counterparty, can endure much greater price divergence — even without having a view on the future of the dollar.

 

In its role as counterparty, the firm is taking bets from tens of thousands of customers across dozens of currency pairs. It can maintain a neutral market position while banking the spread between wholesale FX rates and the quotes it offers the Speculators of this world. But it then sweeps up as soon as a client hits a stop loss — which the volatility in FX markets, together with excess leverage, makes a certainty.

 

With a simple algorithm covering market volatility and the leveraged state of clients, FXhustle can make near-certain returns — in just the same way that a casino takes a pre-defined cut at the roulette wheel.

Share this post


Link to post
Share on other sites

The $100bn FX hustle

 

The $100bn FX hustle

Posted by Paul Murphy on Nov 02 19:11.

 

$100bn — that’s the daily figure for trading volume in the retail foreign exchange market, where amateur plungers play the dollar and the like.

 

The IPO prospectus for Gain Capital, one of the scores of firms tapping into this area of explosive growth, sets out the juicy business on offer (emphasis FT Alphaville’s):

Foreign exchange, or forex, trading is one of the fastest growing areas of retail trading in the financial services industry. According to its most recent report, the Aite Group, a financial services industry market research firm, reported that by the end of 2008, average daily trading volume in the retail forex market reached approximately $100.0 billion, a 900% increase from 2001. Our total annual customer trading volume, which is based on the U.S. Dollar equivalent of notional amounts traded, grew from $120.3 billion in 2004 to $1.49 trillion in 2008, representing a compounded annual growth rate of 87.6%. Our annual customer trading volume from customers residing outside of China grew from $114.3 billion in 2004 to $1.32 trillion in 2008, representing a compounded annual growth rate of 84.3%.

 

Compound annual growth of almost 88 per cent? ALARM BELLS PLEASE!

 

We should state at the outset here that to our knowledge Gain Capital, better known as FOREX.com, are neither better nor worse than any other retail FX trading service provider.

 

But my, isn’t Gain profitable: net income has multiplied from $7.1m in 2004 to $231m in 2008, representing compound annual growth of 138 per cent.

 

But at whose cost? Step forward would-be FX speculators drawn from retail clients the world over.

 

The FOREX.com website, like the firm’s IPO prospectus, contains lots of warm words about enabling ordinary people to gain access to markets that were once the preserve of the professionals. There’s a stress on things like “education”,”managing risk in real time,” and other such intangibles.

 

The site also warns — in small print at the bottom of the page — that “forex trading involves significant risk of loss and is not suitable for all investors” and that “increasing leverage increases risk”. There’s also a separate page warning of the risks inherent to forex trading and the additional dangers of using an Internet-based platform.

 

Go to any of these sites — FXCM.com, Global Futures & Forex, Oanda.com, etc — and you will get the distinct impression that you are dealing with a warm-hearted, professional broker, where your interests are paramount.

 

But in many cases the exact opposite is the case. Note this line from the Gain prospectus:

 

The majority of our revenue is derived from our activities as a market-maker to our retail customers, where we act as the counterparty to our customers’ trades.

 

We would also highlight, in abstract, these two statements from the ‘risk factors’ section of the IPO doc:

 

Our customer base is primarily comprised of individual retail customers who generally trade in the forex market with us for short periods…

 

…If we are unable to maintain or increase our customer retention rates or generate a substantial number of new customers in a cost-effective manner, our business, financial condition and results of operations and cash flows would likely be adversely affected. For the year ended December 31, 2008, we incurred sales and marketing expenses of $29.3 million.

 

And then deeper into the prospectus:

 

As a market-maker, we take an equal and opposite position to our customers when executing a trade. We believe it is neither economically optimal nor necessary from a risk perspective to hedge all of our customers’ trades on a one-to-one basis…

 

…Trading revenue is our largest source of revenue and is derived from gains, offset by losses, from our trading positions and our revenue resulting from dealing spreads on customer transactions where we earn the difference between the retail price quoted to our customers and the wholesale price received from our wholesale forex trading partners…

 

…We offer both standard and mini accounts, which allow customers 100-to-1 and 200-to-1 margin…

 

We could go on. The 150 page FOREX.com prospectus provides dozens of talking points.

 

But let’s concentrate on the core issue here: how do those operating retail FX punting services make so much money?

 

——

 

Here’s how it works.

 

Our Madcap Speculator (MS), having been lured by an advert or other promotion, puts up $500 to “play the dollar.” He thinks the dollar is going to 1.75 versus the Euro — and he may well be right, given that we’ve already moved from 1.25 to 1.50 in the past six months or so.

 

FXhustle.com offers the Madcap Speculator 200x leverage on his initial margin deposit of $500. That allows the client to go long the euro and short the dollar to the tune of $100,000.

 

Now, either because he’s cautious or because FXhustle have insisted he do so, our MS places a stop loss on his trade — limiting his total possible losses to $1,000.

 

Which is where FXhustle becomes the near-certain winner and Madcap Speculator becomes the likely loser.

 

MS might be right about dollar/euro going to $1.75, but even if it does, we can be absolutely certain that it will NOT do so in a straight line. And, because he’s levered 200 times, our little speculator cannot sustain much volatility without being stopped out.

 

FXhustle, on the other hand, acting as MS’s counterparty, can endure much greater price divergence — even without having a view on the future of the dollar.

 

In its role as counterparty, the firm is taking bets from tens of thousands of customers across dozens of currency pairs. It can maintain a neutral market position while banking the spread between wholesale FX rates and the quotes it offers the Speculators of this world. But it then sweeps up as soon as a client hits a stop loss — which the volatility in FX markets, together with excess leverage, makes a certainty.

 

With a simple algorithm covering market volatility and the leveraged state of clients, FXhustle can make near-certain returns — in just the same way that a casino takes a pre-defined cut at the roulette wheel.

 

The only trouble for FXhustle is that it needs to keep finding new Madcap Speculators willing to lose their money in this way.

 

——

 

Returning to our real life example in the form of Gain Capital and FOREX.com, we can see that the firm currently has around 33,000 active customers collectively betting a nominal $1,200bn annually. For every $1m wagered by its clients, FOREX.com generated revenue of $122.

 

The firm does not appear to have divulged a figure for client churn, so it is difficult to know how many customers might be getting burnt on a monthly basis. What we do know is that advertising and promotion spending is running at $30m a year at Gain Capital, ranking second only to staff costs.

 

FOREX.com, like others in the same business, is regulated to the n-th degree — both from a capital adequacy perspective and from the advertising/promotion/consumer protection side.

 

But do the National Futures Association in the US and the FSA in the UK actually understand the hardwired hustle going on here?

 

If not, it’s about time they did.

Share this post


Link to post
Share on other sites

As far as the hedging goes, what would stop a futures broker from playing the same game?

 

If they execute trades for you, they can execute their own trades along side you.

 

I would assume that even though the sharks exist in the waters. There are certain maneuvers that they physically cannot do. Or even if they have dominion over most of the ocean, surely they can't devour it all. :2c:

Share this post


Link to post
Share on other sites
As far as the hedging goes, what would stop a futures broker from playing the same game?

 

If they execute trades for you, they can execute their own trades along side you.

 

I would assume that even though the sharks exist in the waters. There are certain maneuvers that they physically cannot do. Or even if they have dominion over most of the ocean, surely they can't devour it all. :2c:

 

B/c the quotes are centralized. When I trade futures, Open ECry doesn't get to dictate where prices go and what prices to report. They must report what the CME reports. They can trade against me, but the ultimate prices being reported are not dictated by them; whereas in FX it's like playing poker against an opponent that knows your hand.

 

If your opponent knows where you will give up on the trade, think they could use that to their advantage?

Share this post


Link to post
Share on other sites

If your opponent knows where you will give up on the trade, think they could use that to their advantage?

 

Sure if they have power enough to move the entire market past extremes.

 

It would seem that there would have to exist some walls in which a wrecking ball can't even penetrate. Until it at least takes a few swings at it.

 

I'm not into poker, but yet and still. Is it not valuable in some instances to make your opponent think that you have more power than you actually do?

 

If so then couldn't that lead your opponent on a mystical mental wild goose chase after a goose that never existed in the first place?

Share this post


Link to post
Share on other sites

How about when your opponent also controls price swings b/c they make the quotes? That's what you are missing here -- futures are centralized, fx is up to each broker to report their numbers.

 

Anyways, a couple good articles and it shows another story of the fx world which simply doesn't exist in futures.

Share this post


Link to post
Share on other sites

I have been a profitable FX trader for a few years, and also trade other markets. To be honest, I haven't felt any difference. I think it really comes down to who you are using, and trade size. If you are a large enough trader, you aren't messing with these little bucketshops anyways. I trade FX through an ECN now, so it's not even an issue.

 

But back in the old days, I traded at GFT, Interbank FX, and Gain. I never had an issue. The main reason in my opinion: I wasn't taking as nearly as much as the rest of the clinents were giving.

 

Sorry about the Browns. They are an embarrassment for the entire state. :haha:

 

Chris from Columbus

Share this post


Link to post
Share on other sites

fx houses do not “control price swings b/c they make the quotes”. Yes they do all the things reported in the article above plus a few other deviant little tricks the articles didn’t cover but ---

If they widen or slip the spread outside the ‘tolerance’, they lose transactions immediately and the accts may punish them for months and months or even never come back.

Same for overall transaction costs.

If they deviate from other quotes (especially from ECN’s), there are algo’s just waiting to tear them a big new one…

Stops that are ‘close by’ get run on all the exchanges – as much (and even more sometimes) in futures than in fx.

Basically, all trading profits are made in spite of the house. It is the individual trader’s responsibility to optimize trxs costs period.

 

Yes, ‘they’ do increment millions and millions in teenytiny amounts at a time off retail accounts. However, operating with far less revenue than fx, another ‘they’ probably makes close to the same "near certain" absolute millions and millions in ‘dealing’ listed stocks by ‘taking’ larger (but still tiny) amounts from their 'clients'...

 

I just can’t support the notion that fx is significantly ‘crookeder’ than banks or exchange traded instruments. They are ALL crooked as hell… For example, currently Comex makes fx houses look like angels … they do not actually have in the warehouse the metals they are reporting they have… fishy serial numbers on bars… huge delays on delivery… exorbitant fees for delivery… The same kinds of sullied conditions can easily develop ‘overnight’ in energy, agriculturals, softs, etc.

 

Not saying trust fx houses at all! Am saying they are no less trustworthy than any of the other types of houses in the current system.

Not saying you’re overreacting to fx. Am saying you are probably under reacting to your other trading ‘exchanges’.

In truly turbulent times, you would have just as much luck closing your positions at reasonable prices and ordering a check in the amount of your balance from an fx house as you would any of the other “more carefully regulated” houses…

Share this post


Link to post
Share on other sites

and another thing....

those stinking banks, who take our deposits at 0.0001% and lend us money at 5%.

what about those insurance companies that insure our houses and make money out of it!

I cant stand the corner store that charges me 70 c for a chocolate bar when i know i can get it from the supermarket for 50c.:)

 

I think the point that someone is using 500 times leverage means that unless they really know what they are doing, very good, or just out and out plain lucky they will loose their money.

A market makers job is to provide liquidity, for that they expect to make money.

customers are free to choose where to go.

(by the way I occasionally use them and have no problems with them, but am not associated with them)

Share this post


Link to post
Share on other sites

just in over the bloomberg website....Goldman Sachs report.

 

The firm lost $3.6 billion in currency trading, more than double the $1.4 billion lost from that division in the second quarter.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Topics

  • Posts

    • AMZN Amazon stock, nice buying at the 187.26 triple+ support area at https://stockconsultant.com/?AMZN
    • DELL Dell Technologies stock, good day moving higher off the 90.99 double support area, from Stocks to Watch at https://stockconsultant.com/?DELL
    • MCK Mckesson stock, nice trend and continuation breakout at https://stockconsultant.com/?MCK
    • lmfx just officially launched their own LMGX token, Im planning to grab a couple of hundred and maybe have the option to stake them. 
    • Date: 2nd April 2025.   Market on Edge: Tariff Announcement and Volatility Ahead!   The US economic and employment data continues to deteriorate with the job vacancies figures dropping to a 5-month low. In addition to this, the IMS Manufacturing PMI also fell below expectations. However, both the US Dollar and Gold declined simultaneously following the release of the two figures, an uncommon occurrence in the market. Traders expect a key factor to be today’s ‘liberation day’ where the US will impose tariffs on imports. USDJPY - Traders Await Tariff Confirmation! Traders looking to determine how the USDJPY will look today will find it difficult to determine until the US confirms its tariff plan. Today is the day when Trump previously stated he would finalize and announce his tariff plan. The administration has not yet released the policy, but investors expect it to be the most expansionary in a century. President Trump is due to speak at 20:00 GMT. On HFM's Calendar the speech is stated as "US Liberation Day Tariff Announcement". Currently, analysts are expecting Trump’s Tariff Plan to impose tariffs on the EU, chips and pharmaceuticals later today as well as reciprocal tariffs. Economists have a good idea of how these tariffs may take effect, but reciprocal tariffs are still unspecified. In addition to this, 25% tariffs on the car industry will start tomorrow. The tariffs on the foreign cars industry are a factor which will particularly impact Japan. Although, traders should note that this is what is expected and is not yet finalised. Last week, President Trump stated that he would implement retaliatory tariffs but allow exemptions for certain US trade partners. Treasury Secretary Mr Bessent and National Economic Council Director Mr Hassett suggested that the restrictions would primarily target 15 countries responsible for the bulk of the US trade deficit. However, yesterday, Trump contradicted these statements, asserting that additional duties would be imposed on any country that has implemented similar measures against US products. The day’s volatility will depend on which route the US administration takes. The harshness of the policy will influence both the Japanese Yen as well as the US Dollar.   USDJPY 5-Minute Chart   US Economic and Employment Data The JOLT Job Vacancies figure fell below expectations and is lower than the previous month’s figure. The JOLT Job Vacancies read 7.57 million whereas the average of the past 6 months is 7.78 million. The ISM Manufacturing Index also fell below the key level of 50.00 and was 5 points lower than what analysts were expecting. The data is negative for the US Dollar, particularly as the latest release applies more pressure on the Federal Reserve to cut interest rates. However, this is unlikely to happen if the trade policy ignites higher and stickier inflation. In the Bank of Japan’s Governor's latest speech, Mr Ueda said that the tariffs are likely to trigger higher inflation. USDJPY Technical Analysis Currently, the Japanese Yen Index is the worst performing of the day while the US Dollar Index is more or less unchanged. However, this is something traders will continue to monitor as the EU session starts. In the 2-hour timeframe, the USDJPY is trading at the neutral level below the 75-bar EMA and 100-bar SMA. The RSI and MACD is also at the neutral level meaning traders should be open to price movements in either direction. On the smaller timeframes, such as the 5-minute timeframe, there is a slight bias towards a bullish outcome. However, this is only likely if the latest bearish swing does not drop below the 200-Bar SMA.     The key resistant level can be seen at 150.262 and the support level at 149.115. Breakout levels are at 149.988 and 149.674. Key Takeaway Points: Job vacancies hit a five-month low, and the ISM Manufacturing PMI missed expectations, adding pressure on the Federal Reserve regarding interest rate decisions. Traders await confirmation on Trump’s tariff policy, which is expected to impact the EU, chips, pharmaceuticals, and foreign car industries. The severity of the tariffs will influence both the JPY and the USD, with traders waiting for final policy details. The Japanese Yen Index is the worst index of the day while the US Dollar Index is unchanged. Always trade with strict risk management. Your capital is the single most important aspect of your trading business.   Please note that times displayed based on local time zone and are from time of writing this report.   Click HERE to access the full HFM Economic calendar.   Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding of how markets work. Click HERE to register for FREE!   Click HERE to READ more Market news.   Michalis Efthymiou HFMarkets   Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.