Brokers forex currency trade against you


Assume a market maker has a number of clients. Client one sells to the market maker, thinking the market goes down. The market maker could at this point turn around and sell to the market, as a broker would. But then he cannot profitably show the market rate - buying from his client at the market rate and then selling at the same rate doesn't create a sustainable business, one that can continue to add value to its clients. If the market maker takes client one's trade into his book, there is now a window in which another client may show up and buy on the other side of the spread.

That is why market makers take risk into their books - it is to open a window in which buyers and sellers can match off across time, allowing the market maker to capture spread as compensation for providing their service, and show a better rate than brokers. It isn't to trade 'against' their clients. Let's look a little more closely at the period between clients one and two trading.

If there is anything that gives the 'trading against' nostrum its superficial appeal, it is this period where the market maker is long and the client is short. Surely this is zero sum? If the market goes up the market maker wins and the client loses, and vice versa. Surely the market maker is trading against client one?

The market maker temporarily has an opposing position from facilitating client ones ability to trade on the best rate.

But he is not married to it. He would like to see another client show up or a passive hedging order fill as soon as possible after client one trades to neutralise his risk.

And so we come to the issue of horizon. Differing horizons - or holding periods - is what makes the relationship between market makers and their clients work, and gives the lie to the idea of trading against clients. Different parties can win to a trade, so long as they have different holding periods. The market maker could at this point turn around and sell to the market, as a broker would. But then he cannot profitably show the market rate - buying from his client at the market rate and then selling at the same rate doesn't create a sustainable business, one that can continue to add value to its clients.

If the market maker takes client one's trade into his book, there is now a window in which another client may show up and buy on the other side of the spread. That is why market makers take risk into their books - it is to open a window in which buyers and sellers can match off across time, allowing the market maker to capture spread as compensation for providing their service, and show a better rate than brokers. It isn't to trade 'against' their clients.

Let's look a little more closely at the period between clients one and two trading. If there is anything that gives the 'trading against' nostrum its superficial appeal, it is this period where the market maker is long and the client is short.

Surely this is zero sum? If the market goes up the market maker wins and the client loses, and vice versa. Surely the market maker is trading against client one? The market maker temporarily has an opposing position from facilitating client ones ability to trade on the best rate. But he is not married to it. He would like to see another client show up or a passive hedging order fill as soon as possible after client one trades to neutralise his risk.

And so we come to the issue of horizon. Differing horizons - or holding periods - is what makes the relationship between market makers and their clients work, and gives the lie to the idea of trading against clients.

Different parties can win to a trade, so long as they have different holding periods. So the client is short and the market maker long at The market maker is then paid three minutes later at 21 on a passive order.