Can IBs Make the Money that their Customers Lose?

can ib make money that customers lose

Even though there are still plenty of unscrupulous FX brokers out there, the '90s were really the Wild Wild West of the rogue-broker era in Forex. "Yee-Haw! Bang! Bang! Bang!" (Horses galloping, guns blazing.)

Since all brokerage companies were acting as the counter-party to the transactions of their retail trading clients back then, the brokers would buy when clients sold and sell when clients purchased a given currency pair. Given the fact that 80% or more of active traders in any financial market (stocks, futures, bonds, Forex, etc.) lose money, brokers where in a very nice and lucrative position. Think about that. Because clients lost 80% of the time, brokers would make money in 8 out of 10 trades. While it sounds unjust to make money off others' misfortunes, if that was all the Forex brokers were doing, it wouldn't have been all that bad. It wouldn't have been much different than a convenience store selling a customer cigarettes or alcohol, knowing that it would be detrimental to the customer's health. If one convenience store refused to sell it, the customer would find another one that would.

dealing against the customer in foreign exchange

But dealing against the customer was not the only thing these firms did. When they saw all the money they were making, they got greedy (or should we say, “greedier?"). They wanted more. Making money on 8 out of 10 trades wasn't enough anymore, so they started playing "games." Because they would control the trade execution, they realized they could also take an extra pip here and there by waiting a few more seconds to fill a customer's order in the firm's favor. When they wanted more than that, they got even more creative. Here are some examples.

Let's say a lot of customers had stop losses in a certain price range. The brokers would sometimes spike the price in the direction of customer stops giving them all a fresh dose of bitter losses. Sometimes if a particular group of traders (the ones in the 20% "elite" group) was really hitting it out of the park on a consistent basis, the brokers would put their thinking caps on and do stuff like "flipping the light switch off" on the platform (causing the platform to "freeze-up"), rejecting an unnaturally high percentage of orders, causing extra long execution delays and huge slippage (unfavorable price movement) on transactions, etc. It was a very hostile environment for talented traders to operate in, and a gas chamber where the average trader was slaughtered.

Things have changed quite a bit since those days. Even though there are still some "sour apples" lying around, some Forex firms have improved their execution quality and stopped dealing against their customers, adopting STP (straight through processing) or ECN (electronic communications network) execution technology instead. Under this cleaner execution model, client orders are passed "straight through" to liquidity providers and other groups for direct execution. It is really the way of the future in FX and light-years of improvement over the good ol' Forex dealing desk days.

Despite the advent of these beneficial changes in execution technology for the customer, some introducing brokers still demand to be able to deal against their clients. They want to go back to the "slaughterhouse" days of Greed and Excess. Since we operate under an STP environment, we cannot allow IBs to deal against their customers or profit from any of their losses. Consequently, we reject all IBs that want to go "back in time" to rape their customers instead of embracing the future and providing them with the highest quality of execution possible.

making a market against forex customers is a bad idea

Even if we allowed referring brokers to "deal" or make a market against their customers (which we don't), it wouldn't make sense for them to do this. That is, it wouldn’t make sense if they cared at all about the future of their businesses. Here's why.

Forex customers nowadays are a lot more informed and knowledgeable than before, due to the rapid dissemination of information through the web and social media, so they will eventually catch on to any rogue brokerage tactics in the market. With the entire FX industry rapidly moving to a fairer method of dealing, why not embrace and adopt the future? Why not give clients what they naturally want? Wouldn't this lead to a more successful and rewarding long-term IB business? Of course it would.

Finally, all those new and existing IBs out there should seriously think about this. Is it better to make it in this industry by nickel-and-diming your Forex clients with deceptive tactics or by offering them all the value and quality that you can offer (see the earlier section, "Keys to Success in the IB Space")? Wouldn't you agree that the value-option would get them to stick around for much, much longer and at the end of the day, isn't this what your ultimate goal should be? Only a deranged lunatic would answer "no" to this question.

Forgive us for bringing up the cliché here, but what goes around comes around.

It is a universal truth also known as the law of attraction. If you deceive or take advantage of your client to get ahead in this business, you won't get ahead for very long. If you don't believe us, try it and see, but you're on your own if you choose this route.

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