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A Little Perspective Please

Retail traders hunting the Holy Grail

‍The other day I was invited to speak to a retail trading seminar about the “Role of banks in the FX market in the 21st Century”.

For me, the title of the talk was presumptuous given that without banks there would be no FX market.

I talked about the way that banks provide liquidity but have, rightly, decided that the retail trading market is best left to fintech experts who can get closer to their clients and comply with very specific regulation.

Since LTCM and sub-prime, banks have more than enough new regulation to cope with just handling existing operations. A further consideration is that banks are faced with trying to gain market share in liquidity provision, realizing that economy of scale is all that matters, yet having to provide ultra-fine pricing to Payment and Remittance” businesses that are taking away their market share.

The talk went well but it was in the question and answer session that followed that things got interesting. Almost from the first question I felt I was in a very hostile environment. The attitude of retail traders to banks is to universally see them as the enemy.

“They hunt out our Stops”

It is human nature to blame someone else when something goes wrong. My audience was, presumably, made up of a fair cross section of experience and success.

Thankfully, I left “mainstream” trading before retail trading took hold so I could speak from a neutral standpoint. The FX market, at the last count, was $5trn per day across all products. That number is growing but suffered a small setback from 2013 when it was at $5.3trn.

The retail trading market makes up about 3.5% or $175bio of that trade. The $175bio is made up of spot and swaps. It is estimated that spot trading is about $85bio.

So, retail trading makes up about 1.7% of daily turnover.

Banks are seen as the enemy because they don’t “comply”. Yes, it may appear that they are hunting out stops and generally ruining the market for the “little guy” but that is definitely not their intention. There was an undercurrent of mumbled disagreement so I needed empirical evidence. I asked a question. “How many of you use a technical analysis tool like MACD to set your stop loss?”. Around 70% of the hands were raised. So, what is more likely, I asked, that your signal places your stop at a critical level where banks traders using other methods of trading see a possible development, or that same nasty trader is trying to screw you to possibly make a few dollars?

There is a real need to be more creative when placing stop losses. I know it is an admittance of defeat to place more emphasis on a stop loss but it is better to lose the battle and live to fight another day.

They change the spread.

This is my favorite topic when talking to retail traders either individually or as a group.

Spread is the magic word used by “some” brokers to entice business. Spread doesn’t matter. It’s price that matters. If I am looking to sell Eur/Usd and I get made prices of 31/33 and 29/30 I will sell at 31 since that is the best bid. That is obvious I know but illustrates perfectly the issue.

Slippage on stop loss orders is another thorny issue but there really is no need in a major pair or cross for stops to be filled at a level significantly worse than the order.

The universe of “certain brokers” is driven by a numbers game and retention simply means retain until drained.

Banks rarely change their spread. They have no need to but they frequently change the price. Again, blame the tech guy who created the algo not the trader whose role has been changed out of all recognition since the whole tech revolution reached into his world.

I managed to escape with both my dignity and my ideas intact and, hopefully, altered some preconceptions about “the enemy”.

Retail traders hunting the Holy Grail

‍The other day I was invited to speak to a retail trading seminar about the “Role of banks in the FX market in the 21st Century”.

For me, the title of the talk was presumptuous given that without banks there would be no FX market.

I talked about the way that banks provide liquidity but have, rightly, decided that the retail trading market is best left to fintech experts who can get closer to their clients and comply with very specific regulation.

Since LTCM and sub-prime, banks have more than enough new regulation to cope with just handling existing operations. A further consideration is that banks are faced with trying to gain market share in liquidity provision, realizing that economy of scale is all that matters, yet having to provide ultra-fine pricing to Payment and Remittance” businesses that are taking away their market share.

The talk went well but it was in the question and answer session that followed that things got interesting. Almost from the first question I felt I was in a very hostile environment. The attitude of retail traders to banks is to universally see them as the enemy.

“They hunt out our Stops”

It is human nature to blame someone else when something goes wrong. My audience was, presumably, made up of a fair cross section of experience and success.

Thankfully, I left “mainstream” trading before retail trading took hold so I could speak from a neutral standpoint. The FX market, at the last count, was $5trn per day across all products. That number is growing but suffered a small setback from 2013 when it was at $5.3trn.

The retail trading market makes up about 3.5% or $175bio of that trade. The $175bio is made up of spot and swaps. It is estimated that spot trading is about $85bio.

So, retail trading makes up about 1.7% of daily turnover.

Banks are seen as the enemy because they don’t “comply”. Yes, it may appear that they are hunting out stops and generally ruining the market for the “little guy” but that is definitely not their intention. There was an undercurrent of mumbled disagreement so I needed empirical evidence. I asked a question. “How many of you use a technical analysis tool like MACD to set your stop loss?”. Around 70% of the hands were raised. So, what is more likely, I asked, that your signal places your stop at a critical level where banks traders using other methods of trading see a possible development, or that same nasty trader is trying to screw you to possibly make a few dollars?

There is a real need to be more creative when placing stop losses. I know it is an admittance of defeat to place more emphasis on a stop loss but it is better to lose the battle and live to fight another day.

They change the spread.

This is my favorite topic when talking to retail traders either individually or as a group.

Spread is the magic word used by “some” brokers to entice business. Spread doesn’t matter. It’s price that matters. If I am looking to sell Eur/Usd and I get made prices of 31/33 and 29/30 I will sell at 31 since that is the best bid. That is obvious I know but illustrates perfectly the issue.

Slippage on stop loss orders is another thorny issue but there really is no need in a major pair or cross for stops to be filled at a level significantly worse than the order.

The universe of “certain brokers” is driven by a numbers game and retention simply means retain until drained.

Banks rarely change their spread. They have no need to but they frequently change the price. Again, blame the tech guy who created the algo not the trader whose role has been changed out of all recognition since the whole tech revolution reached into his world.

I managed to escape with both my dignity and my ideas intact and, hopefully, altered some preconceptions about “the enemy”.

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