FX Spread Shocking To Me
|August 20th, 2012, 06:39 PM||#11 (permalink)|
Futures Experience: Master
Favorite Futures: EURUSD
Posts: 5 since Jun 2012
Thanks: 1 given, 1 received
I've traded FX for almost 10 years now and the truth about the Retail Forex FCM/Market Maker Business Model(s) has never been fully told, nor fully understood by the general trading public. So, I appreciate your post.
The sad fact of the matter is that the vast majority of Retail FX, is ruled by Retail Bucket Shops who willfully engage in unethical behavior with respect to their customers and the do it in plain sight, regardless of the CFTC/NFA "watching" (not really) over their respective shoulders. Bucket Shop antics are nothing new in Retail Trading - we've seen it for decades in other markets.
The difference in Retail FX has everything to do with the amount of leverage offered and the unsuspecting "newbie" who really hasn't developed enough of an understanding about how to manage/use such leverage, or adjust for it within their own trading strategy/tactic/methodology. Therefore, the Retail Forex Business has earned a reputation for washing-out more than 90% of those who start out believing they will reach a consistent level of profitability. This reputation is very well earned and both Broker and Trader have done almost everything within their power to cast as negative a light on Retail FX as possible over the years, since its initial release to the public at large.
The spreads you see on your Retail platform, have little to nothing to do with actual Interbank Rates. The trades you make on your Retail platform never see the light of day on the real Interbank. A Retail Trading Platform is equal to a Private Liquidity Pool engineered (designed) by your Retail FX Intermediary (Broker) to be a virtual Money Machine for both them and their LPs. This is true in the vast majority of cases. They all use a Pricing Engine that contain algorithms they use to manipulate the Bid/Ask that ultimately makes it to your desktop.
Within that algorithm they have embedded their profit margin for every trade that you make, in the form of a delta within the spread. So, the vast majority of them are literally "fixing" the market price at which you get filled on a routine basis. This is part of what a Bucket Shop does. This is how their business model works and this is what makes them hugely profitable on a per customer/per trade basis. This is also the reason why you can see such a differential from one broker to the next, on any given day and at any given time of day.
Built-in latency, platform connectivity disruptions, trading platforms that hang just before a news release, slippage, re-quotes, partial fills, spread widening and monster spikes near an aggregate cluster of stop levels, etc., all part of the Retail Forex Bucket Shop Game. Some of the worst offenders are also some of the biggest and most well known FCMs in existence.
Yet, the fact of the matter is that unless the FX Newbie has enough capital to start their trading business on an Institutional platform through a Prime Broker arrangement (completely antithetical to how we understand a person getting involved with FX for the very first time in their trading career), then one must endure the inefficiencies of trading on Retail FX Platforms. But, those platforms do not have to be run by Bucket Shop Pimps.
In the United States of America, if you are a Retail Forex Trader, then you really have only two (2) options to avoid a *full-on* Bucket Shop experience:
2) Interactive Brokers
Everything else outside of those two Retail FX houses will land your funds in Retail FX Bucket Shop Hell. Pure and simple. If you happen to live in the United Kingdom, Australia, Japan, or somewhere else outside the United States, then your opportunities expand a little, but only a little. That is because the Bucket Shop Business Model is what primarily drives all Retail FX Transactions. It is also the reason why said business model has exploded in popularity over the past 10 years.
However, having said all of that - Bucket Shops in Retail FX do have their proper place.
- They offer free trading platforms and free "market" data
- They offer free demo/training accounts
- They offer tightly integrated trading account reports
- They offer little to no hassle set-up and installation requirements
- The allow one to open an account with relative peanuts
- They give the Trade an opportunity to learn how to manage highly leveraged trades
- They teach the Trader the importance of getting out of Retail Bucket Shop FX Hell as soon as humanly possible
For these reasons alone, Bucket Shops can be absolutely wonderful places to learn, develop and grow trading skills that ultimately allows one to finally graduate from Retail FX Bucket Shop Hell. Unfortunately, the vast majority of new to FX Traders don't approach Retail Bucket Shops with the right attitude towards furthering their own education and they get caught-up in the online world of Commercialized Forex Trading Forums where Brokers pay Trolls to help keep them in the dark about how to truly become a successful Forex Trader, by steering threads and conversations that should be about the Business of Trading, into a black pit of all too predictable personal ego, misinformation, disinformation and outright lies and distortion about what Retail FX is all about behind the scenes.
There are handful of highly successful FX Traders still lurking from time-to-time and who have always tried to extend a helping hand to those seriously interested in improving their skill as an FX Trader. But, those faces are now far, few and in-between these days, as the commercial interest who pay their trolls to confuse and beguile the newcomer to FX, far outnumber those who have truly developed an Edge in their trading.
Much thanks to Big Mike, for not allowing his forum to become of the black-holes of the Retail Forex online establishment.
So, there you have it. The spreads are sometimes ridiculous, no doubt. But, the reason you use a Bucket Shop is not to build a platform for future Production level trading. You use a Retail FX Bucket Shop to develop the skills necessary to get yourself onto a genuine Institutional Trading Platform with a serious Prime Broker arrangement.
Hope that provides at least some insight into the Retail FX Game.