Does retail forex have that ugly face it is arrogated?

Retail spot forex has quite a notorious reputation among many market professionals. It is generally considered as a high risk market and is supposed to be widely manipulated. Let’s try to address the most common concerns about retail spot fx in order to understand whether they are indeed that serious. To give all proper credits: this article has been inspired by a recent discussion on intrinsic operational and systemic risks pertaining to retail spot forex (the discussion can be seen at

Concern #1. Retail spot fx is manipulated by dishonest brokers owned by Russian mafia.

In the first place we need to agree on terminology. Let’s assume that “market manipulation” is something that aims to significantly change the price of a given asset or a market in whole. Let’s further assume that “significant” means a change in price that is sufficient to generate a profit for a buy side trader after having paid all associated expenses. In this regard spot fx can be manipulated mostly only by bank desks (and this is exactly what regulators are being fighting now) and large (very large) volume clients. I would even suggest to say that large volume clients affect the price, but do not manipulate it, as in most cases this “manipulation” is against their interests. Therefore it is highly unlikely that a broker would manipulate the fx market in terms of the aforesaid —regardless of the country of incorporation and ownership.

We need to make an important remark here and note that “broker” in the retail fx world means a market maker. Therefore it is the broker that acts as the counterparty for its clients trades.

By “price manipulation” in retail forex it is most frequently assumed the ability to offer every client an individual price as this market is OTC and does not have a centralized exchange. Nowadays the difference in prices between retail fx brokers is seldom greater than one average spread as otherwise it would open an opportunity for arbitrage, at least among large brokers (and this is what normally done using aggregators). Minor brokers even today exhibit serious issues with their price feeds that could open an opportunity not only for direct price arbitrage, but even for latency arbitrage. Needless to say that in case a smart trader that has made a sum doing latency arbitrage will inevitably experience certain problems when he would try to withdraw funds from such a broker, but this is a risk of another sort.

Concern #2. All trades in retail fx suffer from poor execution. Orders are always executed at a price that is worse than the market price.

First of all it’s essential to understand that unlike exchange-based markets there are no equivalents to NBBO in spot fx in general and in retail spot fx in particular, and therefore the very notion of “market price” is vague in this market. All brokers (read: market makers) warn their clients that prices they see are only indicative and that actual execution price may differ from that posted in the data stream. This way there’s no wonder that most market orders are executed not at the bid/ask displayed at the moment of the market order submission. In most cases using limit orders instead of market orders helps.

Concern #3. Retail spot fx is a high risk market, and you can lose far more than you could have lost in other markets.

This concern generally ignores the fact that spot fx (be it retail or institutional) is highly leveraged. This very fact along with the ability to trade “mini” and “micro” contracts makes this market available to the widest retail audience in the world. It creates an illusion that you can “trade the world financial markets with only $100”. However I have always maintained that the choice of the leverage is the sole trader’s responsibility. No one would force you to open a position of $100K with only $1000 in your account. It is your choice, and you are responsible for it, not your broker or the market itself.

Concern #4. Retail spot fx market is non-transparent and even large and reputable brokers were fined for inability to supervise large volume traders.

Well, not much of a comment here. Do you really think any other market is more transparent? It doesn’t take long to google around to find that similar activity is regularly prosecuted by all regulators in all markets. The only difference is that you might settle a dispute with NFA and continue working, but if you’re prosecuted by SEC then most likely you’re done.

Concern #5, or General Concern. Anyway, there should be something behind all these fears as for example forex trading is not allowed in IRA accounts. Why?

The ultimate goal of all regulations, at least in the US, is to bring as much long-term money to the US stock market. So far it’s hard to find longer and larger funds than pension/retirement/superannuation anywhere in the world. This is why not only forex is prohibited for IRA accounts, but also derivatives, commodities and other markets. Another reason is that in a very long perspective stock market will make a new high and therefore a non-qualified investor that passively buys SP500 stocks every month/quarter/year will eventually have some profit. However it’s an open question whether such a behaviour of stock markets is intrinsic or is caused by these very regulations; if the latter is the case then we have an infinite loop — yet it’s a topic for an absolutely different discussion.

In conclusion I’d like to say that generally with the advent of ECNs to retail spot fx the situation has significantly improved. Generally speaking you can feel more or less safe with your trading until you start to be inconvenient for the market maker/broker/bank, that is your order flow is not considered toxic and your profit is only a negligible fraction of the broker’s (market maker’s) funds (see a note on latency arbitrage above).

All in all, the rule of thumb remains the same: know the market you trade, know your broker and know your counterparty. And this relates to any market, not only retail spot fx.

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