EXPOSED: What The Broker Doesnt Want You To Know - Part 1
Uncovering The Secrets Of A Retail Broker!
In order to trade the financial markets, you need a broker, but many don't understand the dark secrets brokers keep from their clients. This article is one of many, looking into what happens behind closed doors of their fancy offices and exposing the secrets the broker doesn't want you to know.
A retail broker is a company that executes trades. Most brokers have two charges, but some brokers may just have the one. These are called commissions and spreads. The commission is what the broker takes for giving you the ability to place the trade; whereas the spread is the difference between the bid and the ask price of the instrument.
Now, you are probably thinking, I will just trade with a broker that just charges the lowest spread or commission, wrong! If a broker is charging lower spreads you better believe their commission is going to be high! Same goes for lower commissions, their spreads will be wider than usual.
And it doesn't end there, there are other charges brokers' slap their clients with such as “swaps” or “rollover” costs, the broker will either charge you for holding a certain position or give you money for that position. This is dependant on a variety of factors, the main two are interest rate differentials and the direction you are trading in.
A positive carry is a credit and a negative carry is a debit. When comparing two currencies it is important to know the interest rates in each country at which you can borrow and lend.
Re-Quotes & Slippage
Re-quotes will happen when a broker is offering an “instant execution”, however not many brokers offer this, but some still do. Re-quotes are when the price you requested is no longer available at that particular price. This usually happens when opening or closing a trade, a box will appear on your chart stating that the current price you requested is no longer available, and they present you with a new price, hopefully this would be a couple of pips away ad you will only have a few seconds to click accept and be entered into the trade at the new price. If you do not accept the new price, the order is disregarded.
Slippage, this happens on market execution only, also known as volume-weighted average price (VWAP). Slippage is where you request to be entered or exited out of a trade, you don't receive this price, instead, you got a price a few pips away from what you initially entered. This happens automatically and you don't get a say in how far from the current price you get, and the only way to question this is to go directly to the broker. Slippage tends to happen around major news events or when trading in large lot sizes, an excess of 100 lots.
A & B Book
A Book, this is where your broker sends your trades directly to the market i.e. to a liquidity provider (the real market). There is no conflict of interest when a broker A Books as they send the trades straight to the market and just make the spread off their client -they do not care if you win or lose, only how frequently you place trades with them. However, when a broker decides to B Book, the broker internalises clients orders and “in houses” all trades placed by their clients. Hopefully, you can see the conflict of interest already here, the broker wants the client to lose. They are holding all of the risks that their client has put up. When the client wins, the broker loses; and vice versa when the broker wins, the client loses. As you can imagine, when a broker has clients that lose the majority of their trades, it means the broker is in a comfortable position and reaps the rewards from the client losing money but never actually sending their trades directly to the market, essentially a win:win situation for the broker.
Most brokers operate using a hybrid model as standard now -they carry both A Book and B Book lists of clients. This typically means your 60-70% business model would become 80-90%+ more profitable. There are algorithms which carry this task and are determined by a number of factors, how many margin calls the client has had, duration of open positions, risk-taking per account size and deposit size. Internalisation is the name of the game when operating a hybrid model, matching buyers and sellers internally.
Unfortunately, you can't trade without using a broker! This means they can work together and set the standards, which they have been getting away with for many years.
The bottom line is the broker wants YOU to lose.
Keep tuned for our next article which will uncover the losing percentages of the most popular brokers....