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Trade Dynamics in Today's Markets

The Forex market has a $7.5 trillion daily turnover. The market players are many and varied, and the dynamics of the market operations are something that every trader has to understand. In this market, you have the Warren Buffetts, The Goldman Sachs and JP Morgan Chase-type companies, and the brokers/dealers/central banks that have the ability to tilt the balance of trade in an instant. Then of course you now have the individual traders whose numbers are swelling by the day.

Have you ever wondered why so many individual traders lose money (about 95%) and yet the institutional players who also trade this market are still declaring billions of dollars in insane profits year in year out? This is what this article will try to explain: how several market factors that are unknown to many individual traders affect the markets.

What are these potential market shifting factors?

Broker Types

We have two types of brokers: the ECN brokers and the market makers. The Electronic Communication Network (ECN) brokers are also called non-dealing desk (NDD) brokers. These brokers give traders direct market access to pricing as delivered by the liquidity providers. With ECN brokers, what you see is truly what you get. Traders get the same pricing that comes from the liquidity providers. Usually there are several price shown by several providers, so the trader is at liberty to choose the price that is best for him. There is no intervening dealing desk; orders go straight to the liquidity providers for execution. This straight through processing system ensures that there are no re-quotes, no slippages and no price manipulations.

It costs money to maintain the structures that oil this mechanism, so this service comes to traders at a premium. Spreads are variable and there is a commission to be paid on trades and on using the platform. The high cost of operating an ECN account restricts the participation of individual traders, which is why ECN platforms are used mostly by institutional traders.

Market makers are dealing desk brokers. Their presence in the Forex market is to serve as a liquidity bridge. In a situation where many traders cannot afford the high capital requirements that are the norm in the ECN environment, the role of the market makers is to match the volume of trades with the accompanying liquidity. As such, they operate dealing desks which purchase volume orders from liquidity providers and "resell" Forex trade contracts to traders. Market makers offer fixed spreads, do not charge commissions and offer the attraction of a reduced cost of operating a trading account for traders. However, by acting as a counterparty to a trader, a market maker are basically trading against the trader. If a trader loses the trade, the market maker makes money. If a trader wins, the market maker loses money. Trading with the wrong kind of broker can subject a trader to conditions under which he has no control over, so at the end of the day, the real winners here are those who have the money to trade with the ECN brokers.

Order Flows

Ever heard of the word "dark pools"? Dark pools or dark liquidity pools are a system in which big time players in the market can trade very large volumes anonymously without suffering the effects of price fluctuations produced by such large demands. Usually, price quotes and the different parties holding interests in the asset should be available for all traders to see in Level II price quotation models. Dark pools provide an avenue to mask this information. With dark pools, liquidity and market depth information is hidden. Without access to this information, ordinary traders will never know whether there is a demand shift or not, but members of dark pools will know and can plan their trades with such information. Dark pools may be independent or may be broker-mediated.

Ultra-Low Latency Software

Latency means delay. In the markets, latency is the time delay it takes for communication from the broker's server to get to the trader's computer and vice versa. In the Forex market, it is more important during news trades. By reducing the time delay between the release of the news numbers and when it hits the trader's computer, as well as the time of order placement and execution, a trader with very low latency can beat other traders to market entries and gain from the spikes that follow high impact news trades. Companies are spending huge amounts of money on setting up servers and data centres close to the broker's servers so as to reduce latency periods. Bloomberg is a major provider of ultra-low latency news services and they sell the service to anyone who can pay for it for thousands of dollars in monthly subscriptions. How many individual traders can afford such money which is basically chicken change for the institutional traders?

These points are just to open the eyes of individual traders to know what they are dealing with when they engage the Forex market. This is not to scare away people from trading, but they have to understand that this is what obtains in the market, and they need to take steps to position themselves where the institutional players are.

Get money. Open an account and trade with an ECN broker. Setup a virtual private server located close to the location of your broker's server. Form a trader's collective that can enable several of you pool funds together to join independent dark pools. Position yourself to profit from the market like the institutional players. Remember that in any market, the smart money always gets in early, reaps the profits and gets out just in time for the retail money to get slaughtered. Join the smart money players.

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