a great opinion about forex brokers

I am breaking one of my New Year’s resolutions to not spend time and post anything on a bulletin board. After a lousy day in the market I decided to see what’s going on at “the factory” and all I see is whining and crying over how brokers are screwing their clients. This will be considered a rant by many but I’ll feel better when it’s over. You may not have the same experience. For the record I have no financial affiliation with any broker. I have 2 accounts with very large brokers.

I feel slightly qualified to speak on the subject because I was a professional market maker in the spot physical electricity market (like Enron but less evil) and the electronic electricity futures market.

Electricity, like any other commodity can be volatile at times. As a market maker I had a right and an obligation to both show a bid/ask and to protect and grow my company’s assets. In times of volatility I absolutely raised the spread to reflect the market uncertainty and discourage potential traders from doing business with me. If they were desperate and needed the power then I would pass on the risk associated with increased volatility to them and not me. A wide spread that turns your stomach is your broker sending you a subtle message that he is currently not interested in your business. If you choose to trade anyway and then badmouth your broker on Forex Factory then you are mentally challenged and should seek another form of entertainment.

Tight, variable spreads are all the rage now. Somehow many have overlooked the “variable” part. I hear it all the time from the people I trade with. “You paid 4 pips for the Pound, are you nuts? I can get in for 2 pips.” Yes, I do pay 4 pips for the Pound and I pay it whenever I want to trade day or night news or no news. Tight spreads work well in quiet markets. But, here’s the rub, we all seek volatility and movement and that is exactly when your broker widens the spread.

News trading died about 2 years ago when brokers stopped guaranteeing their stoplosses. They were losing their shirts by upholding their promise. One by one they all folded and sent letters to their clients saying that they could no longer stay financially solvent by honoring prices that did not exist. I personally know several “big time” traders, one of whom many of you hold in high regards, that haven’t traded successfully since those days of guaranteed price fills and free money. While I don’t want to defend brokers, they are in this business for the same reason you are; to make money and feed their families. I think they have every right to do so.

If you are trading Forex for the thrill of a quick score on an unpredictable news event you would be better off going to casino where you can at least get a free drink. News trading looks amazing on paper but as you will soon find out, it rarely matches up with reality. My personal trading vastly improved when I stopped looking at the econ calendar altogether. That’s right, I never, ever look at the calendar. I trade my technical signals and if I’m in front of a release and it goes my way then I have a good day. If not, I’m stopped out and that happens all the time in real life trading.

You can call my broker(s) a “bucket shop” if you want. I don’t care who takes the other side of my trade as long as I am on the side my system told me to be on. Brokers manage their inventory by taking the other side of your trade and by various hedging techniques. They deal with larger entities as necessary to maintain their own VAR (Value At Risk). I can’t help but smile every time someone falsely believes that their broker passed on their mini-lot trade to the mysterious and undefined “Interbank” where they receive a fair price. If you think JP Morgan or Deutsche Bank has time to put aside their billion dollar trading operations to take the other side of your trade then again, you’re mentally challenged. Your variable spread broker passes your mini-lot to a “liquidity provider” and he takes the other side of your position long before it gets to the banks. And, guess what? He buckets all of your little trades together! All you have effectively done is add another middle man to the process. Trust me, everyone is getting a piece of your pie and the more fingers there are in the pie, the bigger the pie has to be to feed everyone.

Maybe brokers are evil but let’s face the cold hard facts. If you want to trade Forex, you need a broker. No one forces you to participate in this market. You and you alone make the decision to buy or sell. When you lose it is your fault, not that of your broker. They only make the game possible, you chose to play. I learned this lesson the hard way years ago in the stock options market: I thought the floor traders were out to get me. The sooner you focus internally on the matters of discipline, risk, position sizing and lastly, a decent system the sooner you’ll become a successful trader and the less time you’ll have to gripe about your broker and spending learning systems with names like “firebird” and “phoenix”.

Best regards and happy trading,

Phil McGrew