How Your Trading Account is Created, Operated and Treated With Brokers? How 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.TopFundManagers.com management has decided to write how FOREX brokers work? How they make money from you? What are the trading conditions? And how trading conditions are separately set in each created account at broker? How many different FOREX brokerage modules work? What you must do to get ideal trading conditions? And what is the best way to deal FOREX brokerage needs?
Good new is that you will find answers to aforementioned questions in this article. FOREX brokerage and its mechanics are very imperative for all traders and investors who like to save lots of money in long term.
Most of the brokers do not charge commission on transactions. Nevertheless, many earn by hidden charges in form of many technical ways to handle and deal your FOREX trades. We will depict you this 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 imperative 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 opens your account in back office terminal system. This process is similar to the process of bankers when they open your bank account in their system.
Considerable points are the trading conditions that broker set during the opening of your account in back office terminal. When brokers open your account, you must be vigilant by asking following questions:
- What kind of the options broker has to deal with your account?
- How broker sets different possible trading conditions?
We will discuss these details below.
What are the options that a broker uses to make money?
For example: If there are 10 clients from different parts of the world with different knowledge and equity, 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. Nevertheless; normally, majority of the traders and investors feel that broker earns and make money due to spread only. The reality is something else. Below are the possible ways by which broker can earn money from the client:
- Slippage or jump prices
- Re quotes
- Bad price at the time of click
- Dealing room
- True STP ECN way of execution
- Lot size restrictions
- Book keeping
We will discuss these options one by one below:
Most common and known way to make money from clients for the broker is spread. Nevertheless, always remember that 98% of the brokers spread is not fixed; 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.
Also broker can give different spread conditions to different clients worldwide. For example: if 2 clients out of 10 are experienced and have already discussed spread issues technically with the broker, broker may set ideal and perfect spread conditions with these 2 smart clients. It is because; broker will like to avoid any tough and disturbed discussion with experienced traders as compared to non-experienced traders.
It simply means; when there will be high value financial data, 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 with any client during the normal and high volatile trading hours. We recommend you to acknowledge this information to deal with the broker before you open account.
Another control that broker has to charge your account is the commission. Broker sets different commission rates or can be commission free to different clients based on the agreed terms between trader and the broker. Those clients who do not discuss commission’s details 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 that we already have discussed under “spread” topic above.
Slippage OR Jump Prices
Slippage or jump prices are one of the most sensitive and imperative 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 price policies 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, one may get price of 1549 and other may get 1547 or any different price based on volatility of the market. By justice, both must get the same price. Nevertheless; this different execution is due to setting up different slippage prices settings in back office terminal for different clients.
So, this is also very imperative to set & settle slippage or jump prices with the broker. Also, always raise your concerns to your broker.
You must negotiate to set ideal and affordable slippage prices that must be minor. For the confirmation purpose, you can categorically ask your broker a following question:
- Have you set most minimum slippage prices in your back office terminal for my account?
Most of the brokers reply with general information that they have same and equal policy for all trading accounts.
Nevertheless, raising these concerns helps you privately.
Traders who remain silent against bad slippage prices do not get anything good from broker. So, in case of any problematic slippage prices, you must never forget to raise your issues and you must demand proofs and references. www.TopFundManagers.com can help you to collect useful resources to settle your slippage prices issues by the broker and by a trading itself.
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’s setting in back office for different clients. We as www.TopFundManagers.com you to acknowledge and settle these issues with your broker during the process of account opening, so they must 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. It is done automatically because it is done due to setting in back office terminal. This is another control that broker has. Broker uses this control differently with different clients. Whatever broker sets during the account opening process, you have to deal with it. We are reiterating this point again here because it is very imperative for you to know.
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 that suits to your trading system. High leverage shows immature trading approach, while low leverage protects your account deposit.
Most of the brokers have dealing desk. Nevertheless, they show and declare that they are STP (straight to processing) brokers. During the process of your account opening or later, broker decides either your trades must 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 analyses, 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. Nevertheless, most of the traders do not like dealings desk and want their trades to be placed directly to liquidity providers.
True STP ECN Brokerage Execution
If any trader who is consistent in generating returns, he/she may be noticed by broker. Consequently, broker does set successful trader’s trades on STP (straight to processing) or ECN (electronic communication network) basis. Therefore, you must ask your broker to inquire that which kind of the setting your broker is going to setup in back office terminal related to execution of your trades. It is because; this is very imperative 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, it can be serious issue for you; in case, your broker restricts you to trade with bigger lot sizes. So, always ask the following question to your broker on the basis of your account size:
- Have you placed any restrictions on lot size in my account?
Broker has control to set any level of lot size in back office terminal for your trading account, FOREX managed account/managed FOREX account companies face this kind of issues commonly. When any fund manager receives bigger funds, it is needed to trade with bigger lot size. Nevertheless, you must 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 means; broker keeps your trading orders in its own pockets and does not send further to liquidity providers or to main prime broker. When you make in case of assigning book keeping to broker, your broker loses money. Contrarily; if you lose money, broker enjoys your losses if broker is doing your book keeping.
Most of the experienced brokers who have many years in business know very well that 95% of the traders lose their money in this business. Therefore, they prefer to book keeping on sending their trades further to banks/liquidity provider or main prime brokers. Each broker has different policy; nevertheless, these are the real possibilities that normally exist in FOREX brokerage.
If your account is held with non reputed broker and that broker also does book keeping, it means that at any time your whole investment can be blown out. It is because; brokers are tended lose more in application of fundamental & technical analyses.
If few traders make money with that particular broker by having low volume, broker cannot afford the profits of traders due to book keeping.
Also, you must 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 (nevertheless, you must discuss and negotiate above mentioned trading conditions with your prime broker or liquidity providers), it can be ideal that you obtain written policy about different trading conditions from your liquidity providers.
It involves many technical issues to handle the needs of the brokerage firm. Therefore, you must be well experienced and trained to handle these imperative issues. Your smart professional dealings with liquidity providers can save you thousands of dollars, even more.
Contrarily, your mistakes can lead you to 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 must be well aware of your own role, third party agents’ role and control, and liquidity providers’ role. In this triangle of business engagement, your knowledge & experience has a key role for your short and long term successes.