Forex : A Zero Sum Game

Messages
22
The last thread mentioning this was 2013, so I am opening this new one. You guys can also comment.

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?
 
Messages
22
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.

-FXCM

__________________________________________________ ____________

traders:


Clint from babypips, very good answer in my opinion:

---start---

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

Ans:
*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:

---start---

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.

example:

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

---end---
 

Pharaoh

Colonel
Messages
20,172
Some ECN brokers run 2 versions of liquidity - if your trade mirrors someone else's, they match you. If not, they pass you up to their LPs. Others pass everything to the LPs. If your trade really does go to a major LP (or pool of them), your opposite could be another trader, an LP itself, or some company changing money at a bank in order to pay an overseas debt.

Retail forex is only a modest part of the total daily exchange. As I understand it, the bulk of forex is banks swapping money back and forth and large corporations doing the same (usually via banks).

If course, if your broker is a bucketshop, the question is much simpler - your broker is the one and only counterparty - so has a vested interest in making you lose money.
 

Jason Rogers

FXCM Representative
Messages
517
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.

-FXCM

Hi ACG,

I'm glad you liked that comment I posted in the BabyPips discussion entitled "Forex is NOT a zero-sum game" :)

In case you didn't get a chance to read my later posts in that thread, here is what I wrote in response to the TURBONero post you quoted:

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

Hi TURBONero,

While I can't speak for other forex brokers, what you've described is not the case with FXCM's No Dealing Desk (NDD) forex execution. On our NDD model, we immediately offset each client order one-for-one with the best prices from competing liquidity providers.

It's these liquidity providers that take the market risk on the other side of our clients' trades, not FXCM, and not other clients.

TURBONero said:
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

In the same way you can earn dividends on stock, you can earn interest on the currencies you hold. This appears as rollover interest (AKA swap) on your trading platform.

Each currency has an interest rate. If you are long the currency, you earn that interest. If you are short the currency, you pay that interest. (Stock dividends work the same way, though fewer people short stock.)

As an example, if I'm long 100k USD/CHF, I can earn $2.40 in rollover interest every day for holding my trade open. That's because the interest I earn on the USD I'm long is more than the interest I pay on the CHF I'm short.

TURBONero said:
In forex you have no underlaying security that creates any value

Currencies have value. That's why any stock you trade is priced in currency. :D

Your forum profile says you live in Germany. I'm guessing you accept payment from your employer (or your customers, if you're self-employed) in Euros. You probably take some of those Euros to the store to buy goods and services from others, because everyone sees the value in currency.

Currency not only has value, but it can also create value by earning interest.
 

EuroTrader

Sergeant Major
Messages
1,052
Hi ACG,

I'm glad you liked that comment I posted in the BabyPips discussion entitled "Forex is NOT a zero-sum game" :)

In case you didn't get a chance to read my later posts in that thread, here is what I wrote in response to the TURBONero post you quoted:

Hello Jason,

Nice to see you here :D

What is the update regarding the FXCM loss on the EURCHF

Thanks
 

arigoldman

Recruit
Messages
171
Of course it's a zero sum game for those who look for excuses and ways to justify their losses in order to make them feel better about themselves. Sheesh.
 

EuroTrader

Sergeant Major
Messages
1,052
Of course it's a zero sum game for those who look for excuses and ways to justify their losses in order to make them feel better about themselves. Sheesh.

We have to contain our losses and the only way we would be able to do it is by reducing the amount of risks in our trades :)
 

Jason Rogers

FXCM Representative
Messages
517
Hello Jason,

Nice to see you here :D

It's a pleasure to be here, EuroTrader :)

What is the update regarding the FXCM loss on the EURCHF

Thanks

Our CEO Drew Niv recently did a Q&A with Profit & Loss magazine which discussed this in detail:
http://www.profit-loss.com/articles/p-l-talk-series/p-l-talk-series-with-drew-niv

It's worth noting the losses we sustained from the SNB flash crash prove FXCM's doesn't profit from client losses on our No Dealing Desk (NDD) forex execution.

The caveat of our NDD model is that traders are offset one for one with a liquidity provider. When a client entered a EUR/CHF trade with FXCM, FXCM Inc. had an identical trade with our liquidity providers. During the historic move, liquidity became extremely scarce and shallow, which affected execution prices. This liquidity issue resulted in some clients having a negative balance.

While clients could not cover their margin call with us we still had to cover the same margin call with our banks. When a client profits in the trade FXCM gives the profits to the customer, however, when the client is not profitable on that trade FXCM Inc. ends up having to pay the liquidity provider.

FXCM ended with a regulatory capital shortfall. Accordingly, FXCM needed to get a loan to cover this balance, which it did. For anyone that thinks FXCM is running an FX dealing desk instead of the true NDD execution we provide to all Standard accounts, we have now demonstrated that is not the case.
 
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EuroTrader

Sergeant Major
Messages
1,052
It's a pleasure to be here, EuroTrader :)



Our CEO Drew Niv recently did a Q&A with Profit & Loss magazine which discussed this in detail:
http://www.profit-loss.com/articles/p-l-talk-series/p-l-talk-series-with-drew-niv

It's worth noting the losses we sustained from the SNB flash crash prove FXCM's doesn't profit from client losses on our No Dealing Desk (NDD) forex execution.

The caveat of our NDD model is that traders are offset one for one with a liquidity provider. When a client entered a EUR/CHF trade with FXCM, FXCM Inc. had an identical trade with our liquidity providers. During the historic move, liquidity became extremely scarce and shallow, which affected execution prices. This liquidity issue resulted in some clients having a negative balance.

While clients could not cover their margin call with us we still had to cover the same margin call with our banks. When a client profits in the trade FXCM gives the profits to the customer, however, when the client is not profitable on that trade FXCM Inc. ends up having to pay the liquidity provider.

FXCM ended with a regulatory capital shortfall. Accordingly, FXCM needed to get a loan to cover this balance, which it did. For anyone that thinks FXCM is running an FX dealing desk instead of the true NDD execution we provide to all Standard accounts, we have now demonstrated that is not the case.

Thanks for the Clear and Nice explanation of everything :)
 

iMusingKiMi

Sergeant
Messages
896
I am curious why those question come out if you really want to be trader? Unless you want to be a broker maybe. I think our goal is to profit in trading, instead of whose money we have profit from or loss to? Just my own view or maybe I don't like to waste time on those question which does not improve my trading.
 
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