How Forex Accounts are Operated with Forex Brokers
How your forex account is created, operated and treated with forex brokers? How forex brokers work and make money from you? How you can save your precious money in trading conditions?
There are very less information available on internet regarding the mechanism of forex brokers. www.trade-council.com management decided to write how forex brokers work? How they make money from you? What are the trading conditions? And how trading conditions are set separately in each created account at broker? How many different forex brokerage modules work? What you should do to get ideal trading conditions? And what is the best way to deal forex brokerage needs? So you will find these kinds of information in this article. Forex brokerage and its mechanic are very important for all traders and investors to save lot of money in long term.
Most of the brokers do not charge commission on transactions but they earn by hidden charges in form of many technical ways to handle and deal your forex trades. Let’s talk step by step
What is back office terminal platform and client terminal platform?
Know that there are two types of trading platforms or terminals, one is back office and other is client terminal. Most of the traders and investors know very well about client terminal because they trade from there but they do not know enough about back office terminal where their accounts are created, treated and operated. This is very important to know for all traders and investors to deal with forex brokers to raise and settle their trading issues. Here we will describe how everything happens related to trading conditions and brokerage.
Creation of the Account
When you submit your trading application and signed agreement, the broker open your account in back office terminal system just like the banker open your account in their system. Considerable points are the trading conditions which broker set during the opening of your account in back office terminal. What kind of the options broker has to deal with your account? And how broker sets different possible trading conditions? We will discuss below
Which options broker use to make money?
For example there are 10 clients from different parts of the world with different knowledge and equity then broker adjusts and set trading conditions based on the profile of the trader and its own (broker) interests. Broker has many options to make money from clients but normally majority of the traders and investors feel that broker earns and make money due to spread only but the reality is else and here are the possible ways
Spread
Commission
Slippage or jump prices
Re quotes
Bad price at the time of click
Leverage
Dealing room
True STP ECN way of execution
Lot size restrictions
Book keeping
Lets talk one by one
Spread
Most common and known way to make money from clients for the broker is spread but always remember with 98% of the brokers spread is not fixed and it varies time to time and on the basis of financial data. In other words your expense and cost of spread is not fixed and broker can adjust its conditions in back office terminal to give different spread conditions to different clients worldwide. For example 2 clients out of 10 are experienced and have already discussed spread issues technically with the broker then broker may set ideal and perfect spread conditions to avoid any tough and disturbed discussion with experienced traders as compared to non experienced traders.
When there will be high value financial data then 2 clients out of 10 can get less widen spread as compared to other 8 clients because it was being set in back office terminal by the broker during the process of account opening. So broker has the full control to set any spread level condition to any client during the normal and high volatile trading hours. We recommend you to acknowledge this information to deal with the broker before the account opening.
Commission
Another control which broker has to charge your account is the commission. Broker sets different commission rates or commission free to different clients based on the agreed terms between trader and the broker. Those clients, who do not discuss these things with the broker, get normal and general conditions related to commission. Definitely deciding all these things with the broker before the account opening is the best way to proceed. Possibilities and control of the commission is just like the spread conditions which we already discussed under spread.
Slippage OR jump prices
Slippage or jump prices are one of the most sensitive and important point to be cleared with the broker otherwise broker will give you bad execution prices of your trades in form of slippage or jump prices. Broker has the control to set different slippage prices policy for different clients in back office terminal. For example two clients who placed stop loss of the gold trade at 1550 and when market hit that stop loss level then one may get price of 1549 and other may get 1547 or any different price based on volatility of market. By justice both should get same price but this different execution is due to setting up different slippage prices settings in back office terminal for different clients. So this is also very important to set & settle slippage or jump prices with the broker and always raise your concerns to your broker
You should negotiate to set ideal and affordable slippage prices which should be minor. For the confirmation purpose you can categorically ask your broker, have you set most minimum slippage prices in your back office terminal for my account? Most of the brokers reply with general information that we have same and equal policy for all trading accounts etc but raising these concerns helps you privately. The traders who remain silent against bad slippage prices, they do not get anything good from broker? So in case of any problematic slippage prices you should never forget to raise your issues with proof and references. www.trade-council.com can help you to collect useful resources to settle your slippage prices issues by the broker and by a trading itself.
Re-Quotes
Re quotes is also very tricky way for brokers to make money from clients. Like spread and commission the broker has control to set any condition related to re quote in back office terminal. Some traders face no re quotes, some faces a lot and some faces averagely because of the broker setting in back office for different clients. Again we www.trade-council.com recommend you to acknowledge and settle these issues with your broker during the process of account opening so they should set ideal trading conditions in your back office account.
Bad and against price at the time of click
Often broker gives you bad price during the time of click and it is done automatically because of the setting in back office terminal. This is another control which broker has and uses differently with different clients. Whatever broker sets during the account opening process, the same you will be treated. Once again we recommend you to consider this point.
Leverage
In back office terminal there is an option in broker hand to set different leverage levels for different clients. You can negotiate ideal leverage level which suits to your trading system. High leverage shows immature trading approach and low leverage protects your account deposit.
Dealing Desk
Most of the brokers have dealing desk but they show and declare that they are STP (straight to processing) brokers. During the process of your account opening or later after sometime broker decides either your trades should be treated via dealing desk or any else method. Most of the time broker decides on the basis of your previous history of trades. According to some certain analysis broker set dealing desk with your trades or does not set. There are advantages and disadvantages of being treated by dealing desk or without dealing desk but most of the traders do not like dealings desk and want their trades should be placed directly to liquidity providers.
True STP ECN brokerage execution
If any trader who is consistent in generating returns then he/she may be noticed by broker and his trades could be setup as STP (straight to processing) or ECN (electronic communication network) basis. You should ask your broker to inquire which kind of the setting your broker is going to setup in back office terminal related to execution of your trades because this is very important to know what kind of the treatment will be given to your trades. On the basis of different factors it depends on different suitability of getting STP or ECN or dealing desk execution. Each of them has some advantages and disadvantages.
Lot Size Restrictions
Most of the brokers restrict their clients to trade with different lot sizes. If your account size is big then it could be serious issue for you if broker restrict you to trade with bigger lot sizes. So always ask this question to your broker on the basis of your account size. Broker has control to set any level of lot size in back office terminal for your trading account. Forex managed accounts/managed forex accounts companies face this kind of issue commonly. When any fund manager gets bigger funds then it is needed to trade with bigger lot size but you should be well aware that what kind of the maximum lot size your broker can allow you in future as your fund exceeds in size.
Book Keeping
Book keeping means broker keeps your trading orders in its own pockets and do not send further to liquidity providers or to main prime broker. If you make money, then broker losses money and if you lose money then broker enjoys your losses. Most of the experienced brokers having many years in business know very well that 95% of the traders loss their money in this business, so they prefer to book keeping instead of sending their trades further to banks/liquidity provider or main prime brokers. Each broker has different policy but these are the real possibilities which normally exist in forex brokerage.
If your account is held with normal ABC, non reputed broker and that broker also does book keeping then at any time your whole investment could be blown out due to the broker losses if some traders make money with that particular broker because low volume broker cannot afford the profits of traders due to book keeping. You should always open your account with top 10 licensed financial brokers with large volumes of trades due to many technical and business management reasons.
Setting up your own brokerage firm
If you have the intention to setup your own brokerage company, even that you should discuss and negotiate above mentioned trading conditions with your prime broker or liquidity providers. It would be ideal if you can get written policy about different trading conditions from your liquidity providers. There involves many technical issues to handle the needs of the brokerage firm you should be well experienced and trained to handle these important issues. Your smart professional dealings with liquidity providers can save you thousands of dollars even more and your mistakes could lead you bigger losses due to technical handling of your forex brokerage company by your liquidity providers and third party agents who seeks their own interests.
You should be well aware of your own role, third party agents role and control and liquidity providers role as well. In this triangle of business engagement your knowledge & experience has a key role for your short and long term successes.