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Forex : Zero Sum Game

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  • Forex : Zero Sum Game

    Ive emailed both my forex account managers from different brokers for their anwers:

    I would like you to answer the following questions:

    Please explain this in simple terms, I am curious to know.

    1) If I BUY EURUSD 1.00 lot, who is the one that SELL EURUSD 1.00 lot?
    1.1) Will it be the broker or another retail trader?
    1.2) If it is another retail trader, will the broker match us together?
    1.3) If there is no retail trader that wants to SELL EURUSD at the same time with me that wants to BUY EURUSD? What will happen?

    2) If EURUSD price goes up and I close the trade in profit, who has suffered the loss?
    2.1) If the other retail trader or broker waits and EURUSD price falls and their order gets into profit and closes their trade with a profit, who has suffers the loss?

    3) We both can profit in the above situation but who is on the losing side?
    The forex market is already so complex, don't make it worse.

  • #2
    1) Broker, unless your a large profitable account
    1.1 No, if your good it'll go to inter banks

    2) Broker, but they control their own price feed, so it might not hit your price or they'll requote you, or you trade will just disappear , or the inter bank
    2.1) you, went long

    3) the customer 99% losers, because of their own ignorance or broker magic

    it's a Zero sum game, the players generally don't win, the casino does.
    If you don't know the answers to these basic questions.. why send your money on a holiday?.. you think you'll get it back???


    • #3
      It works a bit like the stock market, but it's uncentralized.

      If you buy EURUSD at the current market price you're accepting an offer price that's been sitting at the top of the order book waiting for someone to match it. So imagine someone out there is saying "Who wants EURUSD at 1.14132?!" When you click, the BUY button you're essentially saying "Yup, I'll pay that!"

      The person at the other end of the market that's offering to sell at 1.14132 could be anyone, a bank, retail trader or hedge fund. The price is fed to the broker by a range of liquidity providers who then combine all this into a single feed which displays the best price that you see on your chart or the "top of book price".

      So you're seeing the best offer price from a bunch of liquidity providers, who are feeding the offers from tens of thousands of normal market participants (like you).

      So who loses? Nobody specifically, because you're just taking the price of someone that wants to sell on the other end of the market, be it for a gain or a loss. But over the course of time you're competing against the broader market, because you're right in thinking that across the entire market of a given period of time that there'll be some winners and some losers.

      However it's not a true zero sum game because the spread acts like a "house advantage". You need to have a strategy that gives you an edge over the house AND the other market participants if you want to be profitable. That's why trading for yourself is so damn hard... not only do you have to beat the spread, you also need to beat the broader market which includes banks and hedge funds.

      For the sake of this example I've ignored the B-book model that simulates the example above, but instead of a normal market participant taking your order, the broker fills it in the expectation that you'll lose on the trade and they can pocket the loss.
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      • #4
        We are a full ECN/STP broker, this means all your positions go on the market throught our big pool of liquidity providers (Banks). In the event of wins or losses, most of the risks are carried by the Liquidity Providers. We only charge you a flat commission which is one of the lowest on the market.

        - Tickmill

        FXCM's liquidity providers particularly like the order flow they receive from our clients, because retail traders (generally speaking) tend to trade against the trend (buying lows and selling highs). By contrast, many of the hedge funds that offset trades with these same liquidity providers tend to trade with trend (selling lows and buying highs).

        This difference in the tendencies between retail and institutional traders means banks like to have variety in order flow to have more opportunities to offset their own risk.


        __________________________________________________ ____________


        Clint from babypips, very good answer in my opinion:


        1) If I BUY EURUSD 1.00 lot, who is the one that SELL EURUSD 1.00 lot?

        *Your retail forex broker sells to you.*

        Your retail forex broker takes the other side of your trade. Your retail broker becomes the counterparty to your trade, and remains the counterparty to your trade, for the duration of your trade.

        What your retail broker does to protect himself from exposure to your trade is another matter, and does not have anything to do with your trade.

        2) If EURUSD price goes up and I close the trade in profit, who has suffered the loss?
        ---End Quote---
        *Your retail forex broker has suffered the loss.*

        Your broker has likely offset (or hedged) his exposure to your trade, so that the loss he takes on your trade is exactly balanced by a profit he makes trading upstream with his liquidity provider.

        If you trade with FXCM (for example) and FXCM deals with CitiGroup as their liquidity provider (for example), then in the case of your winning trade, FXCM suffers a loss on their side of your trade, but earns a profit in the form of the spread.

        And FXCM earns a profit (equal to the loss you inflicted on them) on their upstream trade with CitiGroup, but they pay a spread on their transaction with CitiGroup, which is a cost to FXCM.

        However, the spread that FXCM collects from you is larger than the spread which they pay to CitiGroup, the difference being FXCM's net profit on your trade.

        It may appear that CitiGroup ultimately takes the loss in this scenario. But, banks are not in the business of losing money, so it's safe to assume that CitiGroup passes their loss on to someone else.

        You will never know who that ultimate loser is.

        --- end ---

        TURBOnero from babypips:


        For forex its like this:

        (here example)
        who earns money:______$_____$$_____$
        (Winner)retail trader <- fxcm <- city <- fxcm <- retail trader (loser)

        so through fxcm and city one retailtrader wins against another retail trader who was on the other side.
        that is on the big picture through pools created. in real no retail trader is given the chance to take the direct opposite position of another trader. the transaction risk is at citygroup but that is offsetted by balance of loosing and winning traders. as we know most retail traders are loosing and only few win it creates balance again as: for every sucessfull trader you need in average 10 loosing traders every year.


        1 winning trader making 100.000 a year
        equivalent: 10 loosing traders who deposit 10.000 each and get broke and stop trading forever

        next year you need 10 more loosers

        bucket broker are a different story again.

        everyone can argue about that banks and big companies take losses but in fact they dont as forthem it is another game. securing itself from currency fluctuations of a country they are doing business with.

        for example: city buys 2000 flats in europe on a KGV of 12 years (yearly profit of each flat= 8,33%), for them the rent is important and not the specualtion that a year later (due to euro getting worth more) they can sell those buildings for 5% more. so in the same amount they go long against $. if dollar looses value it will be offset by the euro rent (they now can convert into 5% more dollars) they are receiving from those 2000 flats. if dollar goes up 5% they will recieve a smaller dollar equivalent of their rents paid in euroe, but that will be offset by the profit of the long position on dollar.

        so in this game only retailtrader are going against retail trader and bucket broker.

        in the end both is a game of person versus person, winer against looser. just with the difference that in stocks you have a big bonus which is underlaying security that usually pays divident (creates value) of 3-4% every year, from this surplus most of the winning parts are beeing payed out and you dont necesarrily have to have a 1 looser for each winner.

        In forex you have no underlaying security that creates any value, so for every winner you must find a looser.
        So... the job of forex brokers is not the trading, their job is to constantly get new "loosers" into the game-field in order to keep the game running, the commissions and spreads paid (or in other words: bring 10 sheeps to 1 wolf every year)

        it simply is a zero sum game

        The forex market is already so complex, don't make it worse.