The foreign exchange (forex) market is the largest and most liquid market in the world. With over $6 trillion traded daily, it presents attractive opportunities for traders seeking to profit from currency fluctuations. However, with such a complex market controlled by sophisticated institutions, forex brokers hold all the cards.
Most retail traders are unaware of the clever tactics brokers use to maximize their own profits often at the expense of traders. By understanding these broker secrets, you can level the playing field and give yourself the best chance of long-term trading success.
This comprehensive guide will reveal the inside scoop on forex broker practices to help you avoid common pitfalls. Read on to learn how shady brokers stack the odds against you and what you can do to take back control.
- Overview of Forex Brokers and Their Incentives
- Spread Manipulation and Bait & Switch Tactics
- Re-Quoting Orders to Capture More Spread
- Asymmetric Slippage to Favor the Broker
- Stop Hunting to Trigger Stop Losses
- Restricting Traders Close to Major News Events
- Widening Spreads Around News Announcements
- Pushing Traders to Overtrade with Bonuses
- False Advertising of Lightning Fast Execution
- Profiting from Client Losses with B-Book Trading
- Trading Against Clients with No Dealing Desk Models
- Conflicts of Interest in Market Making Models
- Hiding the True Costs in the Spread and Fees
- Obfuscating Price Data in Charts
- Restricting Profitable Trading Strategies
- Failing to Pass on Benefits from Liquidity Providers
- Questions and Answers
Overview of Forex Brokers and Their Incentives
The forex market has no central exchange like the stock market. Instead, trading is facilitated through forex brokers who provide traders access to the interbank market where large banks trade currencies.
These brokers are for-profit businesses seeking to maximize their own revenue. Unfortunately, many employ deceptive practices to skew conditions in their own favor. Their profit motives often conflict with traders’ goals of generating consistent returns.
To gain an advantage, it’s essential to understand exactly how forex brokers make money and what incentives drive their business models. There are three primary ways retail forex brokers generate revenue from traders:
- Spreads – The difference between the bid and ask price is kept as revenue on every trade. Wider spreads mean more profit per trade for the broker.
- Commissions – Some brokers charge a flat fee or percentage commission per trade on top of the spread. More trades = more commissions.
- Financing fees – For every day a trader holds an open position, a financing fee is charged for the leverage provided by the broker.
These revenue sources create financial incentives for brokers to maximize the costs to clients, encourage overtrading, and even bet against them. Many tactics used by brokers benefit the company’s bottom line while harming individual traders.
Being aware of these incentives and how they influence broker behavior is key to avoiding bad situations and costly mistakes.
Spread Manipulation and Bait & Switch Tactics
The spread on currency pairs is one of the main costs paid by forex traders on every trade. Wider spreads translate to higher earnings for brokers.
Many brokers advertise extremely tight spreads to attract new customers, such as 1-2 pips on the EUR/USD. However, once an account is funded, spreads often widen dramatically.
This bait and switch tactic takes advantage of the tendency for traders to place more weight on advertised spreads than on spreads actually experienced in live trading.
Some of the most common spread manipulation tactics include:
Quoting wider spreads than the market standard – Brokers widen the spread above levels justified by trading costs and risks. This generates extra profit on the imbalance without adding value.
Increasing spreads during volatile news events – Volatile trading driven by news events creates the perfect cover for brokers to discreetly widen spreads and increase revenue.
Widening spreads when orders are placed – Brokers detect placement of orders and artificially increase the spread for just that transaction, profiting from the large size.
Charging different spreads to different clients – Based on factors like account size and trading history, brokers charge some accounts higher spreads to generate more revenue.
Advertising fixed spreads but using variable spreads – Fixed spreads are advertised to appear low cost but variable spreads are used in live trading to capture more spread revenue.
Using a delayed feed to hide spread changes – By delaying price updates on the trading platform, brokers disguise temporary spread increases before reverting to standard spreads.
Increasing spreads when stop losses are triggered – Stop losses are designed to control losses, but wider spreads can turn those loss limiters into profit generators for brokers.
The impact of spread manipulation is clear – inflated trading costs that eat into profits over time. Be vigilant for signs of bait and switch tactics, and request spread data to perform analysis. Choosing an honest broker advertising true spreads will pay dividends.
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Re-Quoting Orders to Capture More Spread
Another tactic used by forex brokers to widen spreads artificially is called requoting. This involves showing one price when an order is placed but displaying a different, less favorable price when trying to fill that order.
For example, if the EUR/USD spread was quoted at 1.1055/1.1057 when you placed a buy order, but suddenly requoted at 1.1056/1.1058 just before the order fills, the broker captures an extra pip of spread from the requote.
Requoting may also occur right as stop losses are triggered to maximize spreads earned on those forced exit orders. The broker gets to sell to you at 1.1058 instead of the originally displayed 1.1057 price.
Here are some telltale signs brokers are using requoting to increase spreads:
- Prices updating normally until an order is placed, then requoting only for that order transaction
- Repeated requotes only occurring when trying to enter or exit a position
- Requotes always in the broker’s favor e.g. raising asks, lowering bids
- Orders filling consistently at the less favorable requoted levels
Excessive requoting results in extra costs on every order you place. It also leads to unwanted exposure when markets move rapidly during the requote delays. Brokers utilizing this tactic should be avoided.
Using a direct market access model rather than dealing through a broker’s internal systems can help reduce manipulated requoting. Traders should analyze order fill quality and requote frequency to identify any concerning trends.
Asymmetric Slippage to Favor the Broker
Slippage refers to the difference between the expected price of a trade and the price it actually executes at. During volatile periods, some slippage is expected as prices change rapidly.
However, brokers can program their systems to asymmetrically favor them in slippage, profiting when orders fill at worse levels than expected. This asymmetric slippage generates revenue in two key ways:
1. Always filling limit entry orders at the lower ask price
By filling buys at the ask rather than between the spread, every pip of slippage goes to the broker.
2. Always filling stop losses at the higher bid price
Forced stop loss exits extract maximum spreads for the broker when filled at the opposite bid.
Traders have no way to verify how their orders are filled since brokers have full control behind the scenes. The order could execute at a favorable mid-price but you only see the higher ask or lower bid.
Excessive positive slippage in the broker’s favor is a sign of asymmetric order filling practices. Comparing slippage on demo and live accounts can reveal these costs, as demo spread filling is usually more balanced.
Choosing a broker advertising STP (straight-through processing) execution can help reduce biased slippage. Checking independent monitoring services like spread and slippage analytics from execution providers can also detect imbalances.
Stop Hunting to Trigger Stop Losses
Stop hunting refers to the manipulative practice of brokers moving prices intentionally to trigger clients’ stop loss orders. By driving the price to knock out stops, the broker can secure spread revenue from the forced exit trade that follows.
Stop losses are often clustered around key support and resistance levels. Brokers have a view of these stop concentrations and can push prices just enough to trigger that cluster.
But how do brokers move the market in their favor when pricing is decentralized in forex? A few common stop hunting tactics include:
- Widening the spread temporarily to make a small true price move hit more stops
- Swapping liquidity providers to source manipulated cross rates that drag price to stop levels
- Using a single corrupt liquidity provider quoting falsely favorable rates which are passed to traders
Forex brokers typically hunt for stops around these key times:
- End-of-day, end-of-week, end-of-month – Increased volatility provides cover for stop triggering price spikes
- Before and after major news events – Fundamentals drive rapid price swings that can activate stops
- When markets are thinly traded – Low liquidity allows larger price manipulation with less volume
Beware spikes and sudden spread spikes widening just temporarily. Monitor your trades for patterns and request trading metrics if needed to identify potential stop harvesting.
Restricting Traders Close to Major News Events
Significant forex market moving news announcements like central bank interest rate decisions or employment data releases create volatility and heavy trading volume.
To avoid risks from potential price gaps and slippage around these events, many brokers temporarily restrict trading on currency pairs affected a few minutes before and after the announcements.
However, these trading freezes tend to last longer than necessary, maximizing the period where clients can’t place any entry or exit orders. The broker avoids volatility risk while also virtually guaranteeing large spreads around the news event, generating huge revenue.
Too often, trading is halted 1-3 minutes before and 5-10 minutes after the news – far exceeding the 30 seconds to 1 minute typically needed for prices to settle.
Repeatedly getting shut out around news while spreads expand significantly can impede your trading strategy. Review how your broker handles major announcements and news trading. Very long trade freezes to milk spreads are red flags.
Widening Spreads Around News Announcements
As discussed regarding trading restrictions, news events create spikes in volatility along with increased trading volume. This provides the ideal cover for brokers to dramatically widen spreads and maximize profit around announcements.
Spreads typically expand for a few seconds or minutes around events then normalize. However, many brokers inflate spreads beyond what can be justified by volatility and volume surges.
For example, EUR/USD spreads may average 1-2 pips during normal trading. But around a European Central Bank rate decision, spreads could blow out to 15 pips or more and remain inflated for many minutes after the event.
These tactically widened spreads generate tremendous revenue from regular traders stopped out or trying to enter volatile moves. Unfortunately, price shocks can already be costly around news events – inflated spreads only compound the pain.
Check your broker’s average spread data around major announcements. Honest brokers demonstrate spreads consistent with normalized volatility levels while opportunistic brokers show spreads extreme and extended without reason.
Pushing Traders to Overtrade with Bonuses
Brokers love trader activity and employing any tactics to encourage more trades reaps more spreads and commissions. One method brokers use to incentivize higher trading volumes is offering bonuses.
These bonuses come with strict terms dictating trading requirements in order to withdraw the bonus amount. For example, traders may need to complete 30x-40x the bonus value in trading volume before withdrawal is possible.
Meeting these demands often results in overtrading – placing more marginal trades than a trader normally would. Even excess losing trades still count toward bonus targets as long as spreads or commissions are generated.
By attaching conditional requirements to bonuses, brokers can essentially trick traders into overextending and overtrading to meet targets. Requiring high trading volumes in short periods also creates an unrealistic pressure encouraging excessive risk-taking.
If electing to accept a bonus, be aware of the impacts it can have on your discipline and performance. The trading volume targets should correspond to your tested strategy, not exceed it.
False Advertising of Lightning Fast Execution
The importance of fast execution in the forex market is undeniable. Prices can change rapidly, and slower execution can lead to missed opportunities and deep slippage.
Brokers are well aware that traders value fast execution and market it prominently. However, the advertised execution speeds often differ drastically from real trading.
Some typical tactics used in false execution speed advertising include:
- Quoting execution as low as 10-20 milliseconds – Near physically impossible speeds for forex price delivery
- Cherry-picking the fastest speed tests during ideal trading conditions
- Excluding overhead and latencies from platform and analytics code
- Comparing against brokers using deliberately delayed data feeds
- Optimizing connectivity speed testing with local servers
In reality, true institutional forex feeds operate on a 50-150 millisecond delay cycle for price updates. Beware of any broker touting execution faster than 50ms or the speed of light between data centers!
Prioritize certainty of execution over pure speed. Analyze order fill quality data to check for consistency in rapidly updating markets. Favor regulated brokers meeting advertising standards over those peddling impressive yet unrealistic metrics.
Profiting from Client Losses with B-Book Trading
Some forex brokers engage in what is known as B-book trading, referring to an off-exchange dealing desk holding client trades. The broker takes the other side of client orders and profits when traders lose.
Under this model, if you place a buy trade, the broker acts as the seller. As long as they can force the price lower, they profit directly from your losses. This creates an extreme conflict of interest.
Warning signs you may be trading through a B-book with your broker counterparty include:
- Frequent re-quotes, off-market pricing, and spread widening
- Poor fill rates and execution quality
- Prices moving against you right after entering trades
- Seeing your stops run but price reversing immediately after
- Inability to place orders during news events and volatile periods
- Difficulty withdrawing profits from the brokerage account
Brokers marketing “No Dealing Desk” or “Straight Through Processing” order flow are less likely to engage in B-booking. Seek regulated brokers and check contract details to avoid potentially manipulated execution.
Trading Against Clients with No Dealing Desk Models
“No Dealing Desk” (NDD) brokers provide traders direct access to forex liquidity providers through an electronic communications network (ECN). This is meant to avoid conflicts arising from the broker acting as the counterparty.
However, even some No Dealing Desk brokers still engage in deceptive practices:
- Partial fills – Only filling partial volumes from liquidity providers, then taking the other side of the leftover amount.
- Last look – After receiving your order, the broker holds it and has a final look to reject execution if now unfavorable.
- False liquidity – Providing simulated phantom liquidity through the ECN that doesn’t actually exist.
- Discouraging scalping – Placing restrictions on trading strategies like scalping that take profits rapidly.
- Excessive cancellations – Frequently canceling orders from the liquidity stream if outside broker risk limits.
- Delays and latency – Introducing delays that allow losses to accrue before orders hit the ECN.
The marketing of NDD/STP execution doesn’t always match reality. Review order fills for partial volumes and patterns indicating false liquidity. Ensure trading freedom without restrictive conditions on strategies.
Conflicts of Interest in Market Making Models
Market making brokers always hold a portion of your trades themselves, acting as the counterparty while hedging risk in the wholesale interbank market.
These brokers argue that access to their internal liquidity and risk management justifies wider spreads. However, the incentives remain misaligned. The broker still profits from trader losses, similar to B-booking.
Market makers face the following conflicts between their interests and clients:
- Taking the other side of all client trades generates more spread revenue
- Clients losing money means brokers win
- Traders winning repeatedly are considered threats
- Profitable scalping strategies contradict brokers’ ideal of longer-term trading with more spread capture per position
Market maker brokers point to advanced risk management and diversified order flow to justify pricing conflicts. But without true agency execution where the broker’s gains are aligned with their clients, inherent conflicts persist.
Understanding a broker’s role as market maker or the limits of promised NDD/STP models reveals potential diverging interests impacting pricing, execution quality, and trading freedom.
Hiding the True Costs in the Spread and Fees
Spreads and commissions or financing rates make up the main transactional costs for forex traders. Naturally, brokers seek to mask the true extent of these costs.
Common tactics used to obfuscate actual trading expenses include:
- Advertising fixed, low pip spreads that are wider in reality on small accounts or during volatility
- Using fractional pip pricing to make already-wide spreads appear more competitive
- Charging markup on spreads above wholesale interbank rates
- Raising financing rates without warning when holding positions long term
- Applying hidden markup on commission pricing tied to monthly volume
- Neglecting to factor exchange rate conversion fees on deposit/withdrawal in cost analysis
Forex brokers also make it difficult to obtain actual trading metrics required to analyze execution quality and true costs:
- Details like spread captured on every trade, requoting frequency, and slippage distribution are hidden and must be requested specifically.
- Metrics provided represent snapshots in time rather than account lifetime statistics.
Take time to review all contract and pricing documentation in detail before opening an account, and request comprehensive trading statistics regularly. Avoid doing business with brokers unwilling to provide transparency.
Obfuscating Price Data in Charts
The charting packages on broker trading platforms serve an important function – plotting real-time price data to recognize patterns and identify trading signals.
However, brokers use certain tricks in constructing charts that misrepresent pricing:
No history on price gaps – By not showing missing periods in a chart, large intraday price gaps caused by news events are hidden from traders.
**Charting only closing
Obfuscating Price Data in Charts
Charting only closing prices – Constructing candlestick charts solely from closing prices rather than each period’s range removes insight into highs and lows.
Bar compression – Compressing the timeline into longer periods like 1 hour hides short-term volatility.
Bid/ask misrepresentation – Plotting the bid or ask price rather than mid price overstates movements by widening the spread.
No trading volume – Lack of volume data prevents recognizing when price spikes are driven by low liquidity versus high conviction moves.
Indicator lag – Slowing indicator calculation and presentation generates lag, which delays trade signals produced by those indicators.
Pixelated small timeframes – Displaying coarse one pip movements on small timeframes underestimates potential slippage on trade entry and exit.
Scrutinize broker chart formatting, underlying data, and indicator calculations. Avoid missing critical intraday swings, volatility, volume, and precision required to make informed trading decisions.
Restricting Profitable Trading Strategies
Certain fully legitimate trading strategies like scalping and arbitrage aim to capture small, rapid price discrepancies in the forex market.
However, such strategies require placing many trades to accumulate small gains. This high volume goes against the broker’s preference for larger trades with sustained exposure generating more financing revenue.
To discourage these unfavorable strategies, many brokers impose restrictions like:
- Prohibiting scalping or defining it in vague terms allowing discretionary enforcement
- Applying additional commission fees to scalpers and high frequency traders
- Refusing to grant arbitrageurs access to exotic currency pairs with larger pricing inefficiencies
- Enforcing minimum trade holding periods to prevent rapid closing of positions
- Slippage programming intentionally designed to disadvantage scalping strategy entry and exit levels
Brokers may justify limits as risk controls, but often the motivation is hindering profitable trading. Review broker rules and FAQs for warnings about scalping or minimum holding periods. Seek brokers who allow all strategies with consistent execution quality.
Failing to Pass on Benefits from Liquidity Providers
Forex brokers source liquidity for pricing from large institutions trading in the interbank market. The spreads and volume they can access depend on their relationships and credit with providers.
As their liquidity improves, ECN brokers gain the ability to offer tighter spreads and deeper liquidity at better prices to their clients. However, some brokers retain these benefits rather than passing savings on to traders.
Subtly widening spreads from what liquidity allows or using phantom liquidity at less favorable rates boosts profits. Client price improvement trends should reflect provider incentive schemes and spreads narrowing over time.
Traders have no visibility into the exact spreads brokers receive from their upstream providers. Check whether your broker publishes regular LMAX Spreads or Price Improvement Percentage metrics to confirm price optimization.
Questions and Answers
Q: What is the most effective way to identify false advertising or manipulation by forex brokers?
A: The best method is analyzing your own trading records – order fills, spreads, pricing, slippage, requotes etc. This hard evidence reveals where brokers fail to match advertised conditions. Also request trading metrics directly for your account, not platform-wide statistics.
Q: Should forex traders avoid market making brokers completely?
A: Not necessarily, but understanding potential conflicts in market maker models is crucial. Weigh market making cons against benefits like potentially accessing unique in-house liquidity. Importantly, broker interests shouldn’t prevent implementing your chosen strategies.
Q: Is it possible for forex brokers to offer true no dealing desk (NDD) execution?
A: Yes, through a hybrid liquidity aggregation model providing access to multiple ECNs alongside selectively absorbing risk-managed client flow. True NDD brokers should allow unrestricted trading systems and provide transaction details for spread/slippage analysis.
Q: What steps can traders take to get fair spreads from their broker?
A: Check interbank comparison sites for wholesale spreads to benchmark broker pricing. Analyze spreads around major news events for excessive widening. Use a spread monitoring tool for real-time audits. Consider a broker using LMAX exchange that enforces standardizedspread costs.
Q: How can traders avoid excessive slippage from forex brokers?
A: Utilize direct market access brokers and platforms which allow setting maximum tolerable slippage on orders. Analyze slippage reporting regularly for asymmetry favoring the broker consistently. Maintain records of price levels at order entry versus order fill to quantify slippage costs over time.
Q: What recourse options exist for traders with disputes or issues with their broker’s practices?
A: First, document problematic execution clearly through account records, screenshots and trading logs. Bring concerns to the broker’s compliance team. If no resolution, file a complaint through industry dispute resolution services like those run by regulators. Change brokers immediately in severe cases like trade rejection manipulation, overcharging or B-booking.
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