[willeh]

Never understood forex trading myself, and I'm by no means a trading professional but it has struck me that most Forex brokers seem extremely shady. Seems like an extremely risky asset class with no natural tendency to go up and to the right. So I'm curious if anyone on HN can explain the thinking behind stuff like this.

[lordnacho]

I used to run an FX hedge fund, and I know some people who got into the FX retail broking thing.

The FX retail brokers are essentially providing a casino. They aren't really offering investment services, though it may look like that from a legal perspective. FX is also an area where they can give you lots of leverage, which they love because they collect more fees that way. Naturally they market in a certain way to a certain clientele, and that's why it might feel shady, because they tend to use the get-rich-quick marketing toolbox.

If you look at FX volatility, the actual stdev of the price moves is much lower than most stocks. It's the leverage that allows you to make it risky. If you can find an edge, it's not much different from any other asset class. Bunch of prices that change, if you can find any predictability, you can make some money. No need to always go one way.

[PortlandMEnerd]

What others have said about leverage, standard deviation of prices, A+B book biz models, get rich scheme marketing, finding some sort of predictability is paramount, a tendency to find really bottom of the barrel people running the retail brokerages are all true.

The retail FX market is a dark, dark place. I spent roughly half a decade in the space setting up marketing analytic systems and presences for existing and new entrants into the space throughout the world. If you have a shred of humanity in you, I recommend staying the heck away from it minus having a small sum in it if you like testing your understanding of macro economics. Outcomes are very binary and most brokerages have code running to prevent their clients from developing a strategic advantage for that reason.

With all that said, amazed anyone put in any effort to make the Metatrader product look pretty. There's 0 money in it. The existing market does NOT like change. Means trying to find a new way to screw everyone else.

[hu3]

> most brokerages have code running to prevent their clients from developing a strategic advantage for that reason

I'm curious. How does that work? Perhaps front-running bots?

[AdrianAvtomat]

Not OP, but a broker wouldn't even need a front-running bot. If they're the intermediary (A book) then they can just apply markups to the quotes from their maker. If they're the maker (B book), they're the ones quoting the prices. Front-running is moot in either case.

I've heard lots of rumors and wild conspiracy theories about things like this but a lot of it is impractical if not impossible using industry standard platforms and software. I can't even imagine a broker manipulating the quote feed for thousands or tens of thousands of other traders just to hit one guy's stop but that doesn't stop people from being paranoid. Many traders worry about this so much that they won't use stops.

Things that are commonly done which could be described that way include delaying orders, changing spreads, and reducing account leverage. There are legitimate purposes for doing these things but the potential for abuse is certainly there. A quick Google for "virtual dealer plugin" will tell you more if you're interested.

I've also heard that some brokers will supposedly induce "artificial" slippage but to me that seems like a lot of effort and risk for very little reward unless it's done on a massive scale.

[AdrianAvtomat]

I'm familiar with the industry and I can corroborate most of this. I'm fairly certain I know where you worked based on that product description and if I'm correct then we've more than likely met once or twice.

Retail FX is a surprisingly small community and I often wonder how many people really know how the sausage is made. Aside from a handful of properly bankrolled professional traders and the odd compulsive gambler, people who have had a peek behind the curtain tend to stay away from trading. This isn't necessarily because brokers are shady— even the most honest broker will have no problem making money off its clients. People need to understand that FX trading is a set of skills which takes a lot of time, money, and effort to acquire and keep current. Even with the requisite skills, consistently grinding out the same hourly income you'd get working the Arby's drive thru requires a five figure bankroll to maintain sustainable levels of risk in the long-term. Trading is a real job which requires lots of real work.

The shady part is allowing traders to be lured in by MLM-esque instagram influencers in rented Ferraris and approving high leverage accounts for people who have $50 and no clue what they're doing and no chance of success. The smaller fish also tend to pay larger spreads and commissions, stacking the deck against them even further. Watching these guys trade is like seeing someone in a 2004 Hyundai Sonata pull into the Nürburgring during an F1 race.

Volatility and leverage get a bad rap. Yes, they give you plenty of rope to hang yourself with, but they're also some of the most powerful weapons at your disposal if you're quantifying and managing your risk properly. The majority of retail traders take on insane levels of risk at some point or another because it sucks spending hours on your setups for a $5 profit. It only takes a single moment of weakness to take on enough excess risk to blow an account in one go, and that's why B book models are so ubiquitous and profitable. Sure, there are countless ways an unscrupulous broker could abuse their position as the counterparty to your trades and the distrust they get is rational and mostly well-deserved, but having a thumb on the scale isn't even necessary when there's a seemingly endless supply of idiots who think they can take $1,000 and martingale it into millions.

That said, I think people worry disproportionately about B books. In general, "A book" (aka "straight through processing") just means your position is routed (hedged) elsewhere with some other counterparty. There's nothing inherently bad about this, but be aware that these makers have the same incentive to separate you from your money and they tend to be much more sophisticated and less transparent than retail brokers in doing so. A prominent and easily understood example of this is last look execution. In most cases I'd rather be on an honest broker's B book than tossed in with the sharks. The problem is, if I'm winning, I'm getting tossed in with the sharks anyway.

None of what I've described is necessarily illegal. If you wanted to get me going on the illegal stuff, I could go on all day about the mismanagement and outright fraud that I've witnessed personally. If you're hell bent on trading FX, choosing a broker operating under a reputable regulator drastically reduces your odds of falling victim to this and gives you some recourse in the rare event it does.

> amazed anyone put in any effort to make the Metatrader product look pretty. There's 0 money in it. The existing market does NOT like change.

The industry absolutely does hate change, but that includes their trading platform so there will probably be a market for MT4 trading tools and integrations for a while yet. Every effort is being made to kill it and get people using MT5 instead but there are still plenty of holdouts. MT5 will win eventually, but lots of people will have to be dragged kicking and screaming.

> most brokerages have code running to prevent their clients from developing a strategic advantage for that reason.

I know of a few things which might be described this way but I'm also curious what you're referring to specifically.

[chanar]

Hi willeh, thanks for the comment!

Definitely risky area considering how much leverage some brokers do provide. Higher leverage is beneficial if you prefer not to use all available funds for trading and deposit them to your trading account. For example, lets say you are trading with 100 000 account and your risk is based on that amount. You deposit only 10000 to your trading account and take advantage of the leverage while keeping the other 90k safely in your bank account instead of having all of it on your brokers account.

The brokers market has evolved in recent years as well and has become much more solid than what it used to be. Thankfully, a lot of solid brokerage firms have entered the market by now.

Forexbook will also try to provide some transparency around forex. To start, there's ability to share your trades. As there is no manual trade entry on the app, all trades are as is. For example, the trade example shown on the frontpage can be seen here with greater detail (what broker and if it was Live or Demo account) https://forexbook.com/s/trades/2da6ed44-d1fd-4028-a8a0-3203f... PS! Sharing feature is manual and only you decide which trades to make public.

Disclaimer: Maker @ forexbook.com

[danuker]

> Higher leverage is beneficial if you prefer not to use all available funds for trading

Can you not lose more than you have in your broker account in any case, with leverage?

[Galanwe]

Yes.

That is why you are often limited as individual trader to a relatively safe leverage level. Higher leverage is often possible if you post some collateral (often in the form of AAA/gov bonds).

The leverage level you are granted is often dependent on the asset class and your experience with it. FX being relatively low volatility, you can indeed get high leverage without too much scrutiny.

Overall it is a very lucrative business for brokers. The gathered funding fees are higher than the rare occasional losses. Pretty much like banks when doing loans.

[chanar]

In most cases no but after the Swiss franc crash event back in 2015, some brokers went bankrupt because the drop was so fierce and there was no liquidity available at some point to close the trades. Many traders suffered from negative account balances. Events like these happen rarely and they are called as "black swan".

https://www.reuters.com/article/us-swiss-snb-brokers-idUSKBN...

[landerwust]

Successful forex folk seem more inclined towards having a strong understanding of economic balance than trading price action directly, but there are those folk too, with the latter being far more common in the casino end of the market.

As for 'up and to the right', nobody trades forex with cash. Separately from a purely structural perspective, many kinds of spread trades are possible just like in equities, where either leg may not be another currency pair but some other related instrument (energy, bonds, ..).

[kwere]

- forex brokers are (mostly were) shady because forex (since mainstream deregulation in the 90's) is a "gold rush" and brokers are selling the shovels

- forex is a speculative asset for traders and a hedge/insurance for companies that manage investiments between differents countries.

[andysinclair]

Whilst stock trading enables you to bet on the price/performance of a company, forex trading enables you to bet on the price/performance of a country/currency.

You bet, however, not on a single currency but on a currency pair so you are really betting on how one currency will perform against another currency.

[markus_zhang]

Most of the retail brokrages (except maybe a few big ones) play a strategy of A/B book. Most customers are in book A which is essentially a casino (bet against the maker), and if someone is too good they just send him to book B to play against the market.

[nlitened]

The naming is vice versa for A- and B-book. B-book is playing against the maker. A-book is playing against the market (which is in fact "playing against a bigger maker down the line")

[markus_zhang]

Thanks! didn't know that

[sitzkrieg]

you're quite right, as other comments detail a/b desks but also foul play and such. take a look at fxcm for example, from biggest to banned in the US just like that. looking at the cftc site can be enlightening

https://www.marketwatch.com/story/fxcm-banned-by-cftc-after-...

[AdrianAvtomat]

The irony of that whole situation is that FXCM allegedly helped draft a bunch of the regulations as big companies are prone to do but the government took them, cranked them up to 11, and killed FXCM with them instead of just their would-be competitors.

[sitzkrieg]

i should say, retail fx trading is 100% garbage. there is absolutely no reason to do it. trading currency futures which are actually centralized, actually transparent and liquid, all while having drastically better market data and platform options make it a no brainer.

but sleezy advertising, low barrier to account creation, lower minimums, less stringent account verification and being able to fund on credit (lol) tends to make sure people who don't know yet what they're doing never get there

[keyle]

Regardless of how shady or legit it looks, make no mistake: the house always wins.

[arc0]

Who is the house, in this case?

[lbotos]

If the forex broker is acting as a dealing desk, then the broker: https://www.babypips.com/learn/forex/different-types-of-brok... (Most retail forex brokers are DD)