Do brokers trade against you?
This is one of the common questions that new traders tend to ask all over the internet. While it might seem unlikely, the truth is that some brokers do trade against their own clients. So, let's see what is there to know about if brokers trade against you, and what impact it can have on your trading?.
Two broker categories
As mentioned, brokers do trade against their clients, which is not exactly a secret — nor is it actual cheating — but it is something that a lot of people may not even be aware of.
Another thing to note is that not all brokers do everything in the same way. In other words, details on how they operate differently from one broker to another, but most can be classified in one of two groups — A Book brokers and B book brokers.
When trading CFDs and Forex the contract is always between you and the broker. So technically the broker is always trading against you. It is how they manage this risk themselves that makes the difference.
1) A Book brokers
When it comes to A Book brokers, they are trading against their clients, but only in a technical sense. In other words, they do take the opposite side of the trade, but they tend to take a risk-neutral approach to the market. Their goal is to offset the trade as soon as possible,
Clients that are treated in this way are usually considered profitable, and no one wants to trade against profitable traders.
2) B Book brokers
When it comes to B Book brokers, they will be a bit pickier when it comes to choosing what position of their own clients they want to offset. In other words, they might take a directional position and may actively trade against their clients.
With the majority of the clients (75%) losing in their trading, it is quite clear that the stats favour the brokers.
Picking the right broker
If you are new and you don't want to lose all of your money in a few months, at best, you will need to keep in mind some things about your brokers, especially when it comes to how to choose the right one to work with.
Whether a broker trades against the client is not the key question as long as they provide you with fair and clean execution of orders. There are numerous things to look for, but we will now list some of the most important ones. Always remember to check them out, as the success of your trades may very well depend on this.
1) Is your broker licensed and regulated?
The first thing you want to check before even starting your cooperation with the broker is whether they are licensed and regulated. You have to understand that there are all kinds of dangers out there, especially when it comes to money.
Scammers will try to scam you, other traders will try to outsmart you, and everyone will try to use you for their own gain. This is why you need to look after yourself, which means securing your money.
The best way to ensure that you and your funds will remain safe and secure is to use a licensed service that is fully regulated. That way, you will have some confirmation that neither you nor your broker will get in trouble from the legal point of view, while everything that your broker offers will be in compliance with regulations, which are ultimately created to protect you, the client.
Once again, when you work with money, there is never enough trust. Unfortunately, you need to be able to trust others in order to be a trader, and that means trusting that they will keep your money secure and that they will keep their end of the bargain, which basically comes down to providing a good-quality service.
People have gotten rather bold online, and there is not a lot that they won't say if they are not satisfied with a service. That is what you need to use to your advantage, and read up on others' experiences and thoughts about the broker. These reviews will tell you what to expect, what are some positives and negatives about the broker. Most of all, reviews will help you decide whether a broker is trustworthy or not.
3) Ask questions
One thing that people rarely do anymore is to ask questions directly to the service. For whatever reason, people tend to avoid direct communication and potential confrontation, and instead, they go and gather information 'from around' instead of going to the source.
This is the wrong way to approach things, and you should simply ask the broker directly about anything you wish to know. Licensed brokers must provide you with accurate and full information when you ask a question. They must follow detailed regulations that cover disclosure and fair trading. The most important information that you need is about their dealing desk policy. Brokers that operate outside regulations such as those without a license or registered in offshore tax havens may not tell you the truth, so as we said earlier make sure you deal with a licensed broker.
They might feel uncomfortable about admitting that they act as counterparties to your own trade, but they will still have to admit it and inform you about it.
4) Educate yourself
This probably goes without saying, but you need to collect as much information as you can — not only about the broker but also about trading itself. One of the most important pieces of information that you need to know is when to trade.
Spreads often widen just before market open, which is valuable information for new traders who have yet to become experienced. Learn when spreads widen and when they narrow, what may affect the change, and what to do in these situations, how to recognize them early on, and alike.
5) What is Stop Hunting?
You may have heard about this expression or not, but it is something that you should definitely be aware of. Stop hunting is a well-known strategy that revolves around forcing some market participants to abandon their positions, simply by driving the prices of assets to a level where traders have set stop-loss orders.
In other words, traders who have set a certain threshold where they plan to leave their position if the asset's price reaches it, get 'encouraged' to do so. If a lot of stop losses get triggered within a short amount of time, significant volatility tends to follow, which opens an opportunity for those who understand and prefer such an environment, is a strategy that exploits extreme volatility, which can be profitable for those who know how to use it.
6) Understand requoting
Sooner or later, Forex traders tend to run into the term 'requoting,' which often confuses them at first, if they don't already know what it signifies.
A requote means that the broker you are dealing with is either unable or unwilling to give you a trade based on the price you entered. This is not a common occurrence, but it is known to happen from time to time. More often than not, it happens in fast-moving markets, mostly when there is some big announcement that might bring a big shift to the system.
Basically, what happens is that you prepare a currency pair at a certain price, and you place your order on the trading platform. However, by the time your broker gets the order, the market may have already made a move, and it might be too fast for the broker to execute the price that you have requested.
That's when the requote announcement pops out on your screen, notifying you that the opportunity is gone, and offering you to accept or decline the new price. Since the price is typically worse than the one you wanted, it is not surprising that most people do not accept it. More often than not, requotes are bad for you, the trader, and good for the broker, which might try to use it to charge you more, although that's not a general rule.
7) Why is there slippage
Price slippage is another term you will eventually come across and can impact your trading. It can also be an area where you need to monitor your broker.
When liquidity is low such as just before markets close, the price might jump by a large amount in one go. If you have a stop or limit order set for a price that it jumps past you will get executed at the next available price. For example, you have a position on the DAX/German 30 Index at 13,000 and you have stop 13,010, but suddenly the price jumps to 13,020, you will get executed at 13,020 even though your step was 10 points lower.
This is normal behaviour and you should see slippage both against you and in your favour at times. Some un-scruples brokers in the past have always taken the slippage again the client but given when it is favour of the client. Regulated firms can get into a lot of trouble for doing with their regulators. Keep an eye on slippage and question it if it always seems to go against your position.
In the end, the important thing to remember is that brokers do tend to trade against their clients and that you should be aware of it. More than that, you should be aware of an awful lot of things if you wish to become a successful trader, and you should never stop looking for new information.
Whether the information is about your broker, the asset you are interested in, the market, or the current events that might impact the market — you must always keep an open eye and look for any information that can give you a chance to make the best possible move at any given time.
Author: Ali Raza - A journalist, with experience in web journalism and marketing. Ali holds a masters degree in finance and writes extensively about the financial markets and fin-tech industries.