If you haven’t read FT Alphaville‘s deconstruction of the Forex trading business yet, it simply cannot be missed. Eagle-eyed currency trader (and TRB pal) Kevin Hughes shot this over to me and I almost couldn’t believe some of the disclosures. Note, I said almost couldn’t believe- I didn’t exactly roll into town on the back of a turnip truck.
I’ll give you a taste and then send you over. Suffice it to say, your currency broker is not only NOT your friend, he is actually your adversary…
Go to any of these sites — FXCM.com, Global Futures & Forex, Oanda.com, etc — and you will get the distinct impression that you are dealing with a warm-hearted, professional broker, where your interests are paramount.
But in many cases the exact opposite is the case. Note this line from the Gain prospectus:
“The majority of our revenue is derived from our activities as a market-maker to our retail customers, where we act as the counterparty to our customers’ trades.”
And there’s much more.
There’s nothing inherently wrong with market-making but it seems as though the FX platforms make nothing until their customers lose. This is a Vegas relationship without the lodging or dining or Celine. There appears to be nothing “agency” happening here, only “principal” trading against the rook (which would be you). I don’t believe that many amateur players who are plunking down cash truly understand this.
The jaded among us and professional currency traders like Kevin have known about this business model for some time. I’m surprised that these companies would risk going public in light of having to make disclosures like these.
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I’m a New York City-based financial advisor at Ritholtz Wealth Management LLC. I help people invest and manage portfolios for them. For disclosure information please see here.
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