Insofar as being a broker, trader or equity raiser is concerned, I don’t think there is any other way on this planet to make as much money as being on the business side of this business. The problem is, that it’s way more cool to be a trader than a salesman.
It’s more prestigious to be a mover and shaker than to spend your days asking for money. I’m brought back to the line in the movie where Charlie Sheen tells his father, played by Martin Sheen (his actual father), what he’s doing for a living and his father disapprovingly says “so you’re a salesman, you ask strangers for money.”
Trading for a living is a great life, you make your hours, you are your boss, and aside from the stress of it all, it’s all up to you. The next couple paragraphs are going to make your life not only easier but also more enriched, both financially and professionally.
Beneath the Surface
Brokers and even prime brokers and banks charge many fees that are either hidden, disclosed but only partially, or somewhere in the fine print so thick that no one would ever have the stamina to find them. Here are just a few – I’m sure if you’re reading this article, you know that you can negotiate your commissions and spreads.
If you don’t, I’ll touch on it very briefly. There is no such thing as a commission free brokerage. The commission is in there somewhere and probably in a lot of places we’ll cover in just a minute. If you are trading on a commission-less platform, then the spreads are simply marked up.
How much depends on the greed of the broker or bank, but in the words of one of my favorite salespeople, when asked how much he marks up the spread, he stated “whatever I can get.”
Once you understand this, then you can understand there is only one way to know if your spread is marked up, even if you are also paying a commission. The new sales pitch is that “we are only agents to the market, we charge a fee to put you directly into the market via an ECN.”
The only way to know is to have multiple feeds from multiple liquidity providers. They won’t all be identical, but if one is consistently 2/10ths of a pip wider, it’s pretty safe to say they are marking it up at least a bit.
Legally any markup must be disclosed, however if the broker is taking the other side of your business, which is entirely legal and done 90 percent of the time, then it is less likely to be disclosed. This process is referred to as ‘B booking’ business. Their algorithms identify you as a bad or losing trader, so they simply take the other side of your trades, until you lose whatever amount you’re going to lose.
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Now comes the tricky stuff, the things that even after 35 years still surprise me. If you were to trade USD/CHF, and you profit 300 CHF, this is converted back into your currency of choice or account at some point. The same thing happens if you lose that or any other amount.
What the broker typically does, and covers in the fine print, is mark up this conversion so if 300 CHF is 290 USD, then the broker can and does add 15% to this charge and credits your account anywhere from 285 to 260 depending on their interpretation of 15%. Conversely, if you lose that same 300 CHF, your account is debited somewhere between 305 and 325 USD.
Room for Negotiation?
Most brokers are lazy and convert at the high or low of the day or week, whichever is in their favor. For a quick example, if you profited 100,000 JPY last week, your yen was converted at the worst possible rate back to your currency (meaning you make less of your currency). Here they are consistent because if you lose that same 100,000 JPY, they convert the yen back to your currency at the worst possible rate meaning you lose more.
Can this be negotiated and recouped? Absolutely. You just have to identify it and call your broker. I’ve personally caught almost every broker or prime broker doing this very same practice.
The last of the big three is the roll. A roll happens when you have a position that exists from 4:59:59 to 5:00:01 E.S.T. What is supposed to happen, if you don’t already know, is that the broker must charge or pay you the difference between the interest rate for the country of the currency owned against the currency you are using to purchase.
Some can get into semantics about not owning the currency position, and obtain a loan in the underlying currency, but the net effect is the same, they must charge you or pay you the difference. Many probably remember the ‘carry trade’ a few years ago when the interest rates in places like Australia, Great Britain and the entire eurozone were above 5% and Japan which was experiencing deflation had zero or negative interest rates.
The carry trade, simply put, was purchasing any of the high interest bearing currencies against or ‘in’ yen, thereby not only yielding the overnight interest neatly deposited in your account but since everyone was doing this, the higher interest currencies were increasing against the lower ones.
Even if you had a losing day, the interest payment usually covered the loss. UNTIL IT DIDN’T! Many remember the unwinding of these carry trades it happened fast and ugly, but that’s fodder for my next article. The point here is that brokers mark up almost exactly the same way they do conversions and transactions.
This article was written by Jack Wolf, a Trading and IT specialist at BJW Financial.