Question about which method is used when trading
Ok, so how does the broker keep the price on the broker exchange in line with the official rate? What's to stop thousands of people opening many long market orders (Which should push the price up) and cause the price on the broker to move away from the official rate?
There is no official rate or central exchange in Forex...
Most brokers use 1 or more price feeds and create their own spread around the price to offer their clients.
The volumes in forex make it extremely unlikely that individual traders could move the rate under normal market conditions.
Some retail brokers aggregate net position of clients and only trade the variance, some place every order to market.
Some brokers trade the actual spot forex others trade contracts for difference, futures or spread bets etc.
Given all the above, you or many of you, are not going to be moving the market price in the spot forex market
There is no official rate or central exchange in Forex...
Most brokers use 1 or more price feeds and create their own spread around the price to offer their clients.
The volumes in forex make it extremely unlikely that individual traders could move the rate under normal market conditions.
Some retail brokers aggregate net position of clients and only trade the variance, some place every order to market.
Some brokers trade the actual spot forex others trade contracts for difference, futures or spread bets etc.
Given all the above, you or many of you, are not going to be moving the market price in the spot forex market
So I guess I'm not quite getting what you are saying.
There is an order book. Placing a market order removes a certain amount of volume off the order book in the opposite direction(limit orders are put on the order book). etc when you do a buy market, you take someone elses sell limit.
Taking too much volume off the bid or ask price level on the order book causes the price to shift up and down per tick.
Given this, the price can deviate between brokers right?
So what causes the price between the brokers to stay in sync?
Banks with the many $billions can move the market. Us users can't, even if we all went in the same direction at the same time.
Banks with the many $billions can move the market. Us users can't, even if we all went in the same direction at the same time.
Ok, so i'll ask this in another way. When you buy an order on a broker, is it actually either:
a) Actually using your money at the banks exchange rate to buy and sell currency (and also using borrowed money from the broker for margin/leveraged positions) directly from the banks. (The broker sits in the middle facilitating this)
b) Just an agreement to transfer money back and forth between you and other people with metatrader positions opened at whatever rate the banks quote?
What I'm trying to understand, is it actually REALLY buying and selling currency for real directly with the banks and the broker works inbetween, or is it just an agreement to transfer money between each other positions sitting on the broker - the broker will distribute gains and losses between users on their platform as the position goes into profit or loss? Does that make sense?
point a performs the real thing directly, point b gets around it by just transferring money between different users positions on the broker as the price moves up and down.
point b has no interaction with any third party. point a has interaction with third parties to buy and sell currency.
Or c) the broker is a Dealing Desk and is taking the opposite side of the trade.
Or c) the broker is a Dealing Desk and is taking the opposite side of the trade.
I think I get this now. What i'm asking is the difference between STP (Straight through processing) and ECN and money maker brokers right?
More information is on this thread: How does a broker work?
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Hello,
I'm just interested in knowing which of these two methods happens while trading forex on brokers.
a) When you open a market order, it will take a limit order off the order book. The broker uses an index price (Which is based off some official pricing data to keep track of the real market price) and when the price moves away from the official rate, the broker rewards you with an overnight gain (I think you call it swap) according to whether you have a short or long position opened (It tries to reward people to open move longs for example if the price is under the market value). If many people open long orders while the price is under the official market value, this will cause the price on the broker to move up and correct the price closer to the market value (since people are being rewarded to open longs). Thus, the broker only makes money off the commission fee (and maybe some of the swap) and for the price movement itself, the money is exchanged back and forth between clients.
b) The broker just quotes off some official sources and hopes that most people will get the position direction incorrect. In this case the broker can profit off both the price movement as well as the commission. Having millions of people opening longs will not affect the price movement at all since the broker just always uses the official price from some external source.
I'm trying to get an idea if a trading system that has lots of people using it can actually affect a price movement in the market. Since the price always "follows" from an official source or corrects itself (point a), unless you are scalping over short movements, the trading system should not be affected by lots of users using it because the trading system has no impact on the official price. (It follows the official price, instead of leading it/directly impacting it).
Am I right to point this out?