Do forex brokers trade against you?

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With a quick search on the internet, one would understand that all the new traders tend to ask a simple yet essential question: Do Forex brokers tradeLinks to an external site. against us? What impacts can that have on our trading? It seems unlikely for forex brokers to betray their clients' trust and trader against them, though it turns out to be the case for some brokers around the world. The surprising fact about this issue is that such behavior is not a secret in the market nor even against the law! 

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Trusting the forex brokers

 

How can we know that our forex broker is trading against us?

Given the current situation in the forex trading market, this question is relevant. To answer that, you need to know that not all the forex brokers trade in the same manner. The operating details can be different from one forex broker to the other. However, based on these details, you can classify forex brokers in two categories:

  1. A book Brokers: These types of forex brokers are in favor of risk-neutral approaches. This means that they can trade against their clients technically, by taking the opposite side. Their optimal goal is to look for immediate offsets in trading. Thus, the A book broker does not intend to go against their clients spiritually, but all that matters to them is the technicality. 
  2. B book brokers: Suppose that a B book broker in the forex trading market intends to take a short Euro position. Therefore, the B book broker does not offset the long Euro trades for their willing clients, by taking the other side of the trading market. In other words, B book brokers always choose the client positions of which they want to offset. The latter means that the B booker brokers take a directional place in the trading market, intentionally. This, in turn, can affect their clients more materially. 

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Trusting the forex brokers

 

Forex brokers and Liquidity risk

If larger brokerage firms and banks offset by A book and B book brokers do not take positions, both forex brokers and their clients will run into big problems. This is a well-known yet devastating risk known as "Liquidity risk." For example, when the Swiss Franc was unpegged from the Euro by the Swiss National Bank, both A book and B book brokers face a devastating impact from considerable moves in less than an hour. How to avoid Liquidity risk? There is no A to Z recipe to prevent such threats in the forex broking market, yet there are some steps one can take in order to minimize the chances. Brokers do not feel comfortable with admitting their counterparty status to your trading position. Therefore directly asking about the dealing desk policies may be a helpful hint in this regard. Moreover, brokers do not educate their staff on the nuances of their operating strategies. Therefore asking about their taken position in the trading market may shed light on the possible risks of trading with them. 

 

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