How do foreign exchange dealers and brokers operate?

foreign exchange marketForeign exchange dealers, foreign exchangebrokerIt is a very important and special role. Forex dealers and traders are inextricably linked, so it is still beneficial for traders to fully understand foreign exchange dealers. Today, Daocheng Technology Finance (www.daoctech.comLet me reveal the secrets for everyone How foreign exchange dealers operate。
The international foreign exchange market between banks (the inter-bank foreign exchange market) has existed for decades. The market has a huge amount of transactions, and almost no one except banks can participate in it. However, since 1999, due to the development of the Internet, the retail foreign exchange business (the retail foreign exchange market) has begun to flourish, and traders who serve this market have also begun to emerge in large numbers. The retail foreign exchange market is mainly aimed at individual traders, and the transaction volume is relatively small. As of now, there are about five or six million individual traders worldwide.

According to statistics, there are more than 100 medium and large foreign exchange dealers in the world, each with an average of at least 1,000 customers, and the largest one has more than 125,000 accounts as of January 2009, with a monthly transaction volume of more than 500 billion US dollars. This shows that the retail foreign exchange market business volume cannot be ignored.

What do foreign exchange dealers need to start their business?

A foreign exchange dealer needs at least three things before opening for business: a trading platform, a back office management system, and an electronic connection to the interbank exchange market.

A trading platform is a tool that traders provide to traders for conducting foreign exchange transactions. There are quotes, analytical charts, real-time news, and other content on the platform, all of which come from the price engine, trading server, account server, web server, news server, chart server, etc. in the trader's back-end management system. Each trader wants to design their platform to be rich in content, easy to understand and use, and some even provide multiple platforms at the same time to suit different customer groups.

Where do foreign exchange quotes come from?

Before quotes appear on the trading platform, traders first obtain quotes from some banks through electronic connection with the interbank foreign exchange market. These banks are all major participants in the interbank foreign exchange market, and traders refer to them as liquidity providers. Some large banks, such as Deutsche Bank, JP Morgan Chase, Citibank, Hong Kong & Shanghai Banking Corporation, UBS, etc. are liquidity providers.

Traders typically connect with multiple banks, but some small traders have only one provider, which is less favorable for traders because they can only accept all quotes from that provider and have no choice.

After receiving quotes from multiple banks, traders are calculated by their own price engine, and then their comprehensive quotes are displayed on the trading platform, allowing traders to trade accordingly.

How do foreign exchange traders and traders make money?

Suppose a trader receives bids for euros from three banks simultaneously:

Bank 1: EUR/USD 2701/02

Bank 2: EUR/USD 2700/01

Bank 3: EUR/USD 2702/03

After the price engine calculation, he quoted EUR/USD 2700/03 on the trading platform. At this time, a trader buys euros at the price of 1.2703. The trader will immediately choose Bank 2 to buy euros at the price of 1.2701 (the lowest selling price among the three banks). The difference of 2 points in the price is part of the trader's profit.

Suppose also that when the trader wants to position squaring the price has changed to:

Bank 1: EUR/USD 2801/02

Bank 2: EUR/USD 2799/01

Bank 3: EUR/USD 2802/03

The trader quotes EUR/USD 2799/02, the trader squaring at the 1.2799 position, and the trader and the bank 3 squaring at the 1.2802 position (the highest bid price), the trader earns another 3 points.

Now let's calculate how much each trader and trader earned:

Trader: 1.2799 - 1.2703 = 0.0096 = 96 pips = $960

Dealer: 1.2802 - 1.2701 = 0.0101 = 101 pips = $1010

After paying the trader $960 and bank charges of $2, his profit was $48.

In this transaction, the trader did not take any risks. He made a profit from the spread between the bank and the trader, and every day the trader had a large number of transactions to make, so his profit was very considerable.

When trading in foreign exchange, there may be some situations that are not very favorable to traders, but it is not necessarily the broker's fault. These situations occur for a reason.

Why do foreign exchange dealers sometimes re-quote when placing an order?

Sometimes when placing a market order, you will be informed that the price has changed and re-quote, and the final deal price may be a certain distance from the price at the time of placing the order. Some traders will think that this is a broker deliberately letting them trade at an unfavorable price. Of course, this possibility is not completely absent, but there are other reasons why this possibility is not completely absent, but other reasons can also make this happen.

The network speed can be one of the reasons. If the network speed between the broker and the bank is not fast enough, it will take time from the time of placing the order to the broker transferring the order to the bank, and the bank will reply to confirm. If the network is blocked, the price may have changed, so only re-quotes are available. If this also happens when the network is not crowded, then it is also possible that the network speed between the trader and the broker is not fast enough.

The situation of re-quoting before and after the release of important data or news often occurs, because the volatility of the foreign exchange market will be relatively large at this time, and neither liquidity providers nor brokers are willing to maintain a price for too long to avoid unnecessary risks, so the price will change faster than usual, and the probability of re-quoting will increase.

What is the risk of procrastination?

Some brokers guarantee to trade at what you see is what you get (WYSIWYG) as long as the price appears on the trading platform at that time. They do this by accepting the trader's order and then forwarding it to the liquidity provider. By then, the price may have changed, so the broker will take a certain risk. Some of them will increase the spread to make up for the possible loss.

What happens when important data is released?

When an important economic indicator is released, especially if there is a large gap between the published data and the expected value, the foreign exchange market price will fluctuate sharply in a very short period of time, and the trading volume will also increase rapidly. This is because several things happen, and some brokers will widen the spread.

Usually in the foreign exchange market, the number of buy and sell orders is almost equal, and the remaining order volume after matching will not be very large, so even if the foreign exchange broker fully absorbs these remaining orders, it will not take too much risk. However, when important economic data is released, there may be a one-sided phenomenon, that is, the trading in one direction will greatly exceed the other, so the matching time will be longer, and the transaction price may also have a certain distance.

Due to the surge in trading volume in a short period of time, the server is overwhelmed and can only be queued for processing in sequence. Orders that can be traded in one second may have to wait for 10 or 20 seconds, and the price is constantly restated during this period, which is a great risk for "what you see is what you get" (WYSIWYG) brokers. Therefore, you can only increase the spread to protect yourself. At this time, the spread may be several times higher than usual.

This kind of news trading may generate huge profits, but it also involves high risks. Therefore, even some powerful large institutions avoid trading during this time. Individual traders with relatively small funds should focus on stability and wait for the market direction to be determined before taking advantage of the situation.

Why do foreign exchange traders sometimes fail to stop losses at a set price?

When the foreign exchange market fluctuates greatly, especially in the above situation, the quotation will gap, so the stop loss price set at the beginning may not appear, and almost all brokers' external principle is to use the next possible execution price to position squaring, so the stop loss price will be different, and even a certain distance.

The basic requirements that a foreign exchange broker should have

A professional and efficient foreign exchange broker should at least meet the following four requirements:

1. Provide a stable and feature-rich trading platform.

2. Sufficient funds, at least higher than the minimum amount stipulated by regulators

3. More senior commissioner staff

4. High-speed management team