Question

Identify and describe ways a broker/trader can exploit his client to make profit.

Answer 1

A stock broker will not cheat you directly. But there are ways in which he can swindle you out your money.

The most common way is to give tips. The brokers motive is to make you trade (for the commission) and for that they have appointed analysts and dealers. Analyst job is to generate the calls and dealer's job is to push those calls to you. Their motive is to make sure you trade and that you don't make major loss so that you don't withdraw the account.

There is a major difference between playing to win and playing to not lose. So do your own research and don't depend on the broker.

Following are the ways through which a broker can cheat you :

1. By winning the trader’s trust using very official web pages

Many times, a dishonest broker gains a customer’s trust by being smart and targeting unaware people. Taking advantage of this trust, the broker can encourage their client to trade on margin and set stop loss orders which allows the market makers to close out trades almost at will during strong markets, at prices they have set. If the market maker does not offset the trader’s position, the loss generated when a stop loss is triggered becomes the market maker’s gain. You can see how this is not in the best interest of the trader, but rather only in the interest of the broker.

2. By charging extra overnight interest rates

Brokers charge and pay disproportionate swaps based on the gap between short-term interest rates associated with currencies pairs set by central banks. This gap is not fixed; if the broker spends the swap from the customer, it will charge more than needed and if the broker pays the swap, it will pay less than needed. When the gap is small, the customer pays the swap both ways; it will not matter if one is long or short on the pair.

3. Slippage

A high spread because of adding markups can be easily seen on the platform, by checking the difference of the bid and ask prices. However, slippage is hidden to the traders. You don’t find out that the broker slips the price as long as you have not opened and closed any positions.

What Is Slippage?

Slippage is a trick made by the market maker brokers. As your profit is their loss, then they have to do their best not to let you win. One of the ways is that they slip the price when you want to take or close a position. When you want to buy and click on the buy button, they suddenly take the price higher, so that you will enter with a higher price than what you see on the chart. For example you want to buy EUR/USD while the buy price is 1.31216 on the platform. You click on the buy button and you enter, but when you check your entry price you will see that it is much higher than what you saw on the platform. For examples it is 1.31320.

4. Re-quoting

Re-quoting is another trick made by market maker brokers. When the price is going up strongly, and you choose the right direction to enter (you click on the buy button), the broker delays for few seconds, and then instead of taking the position for you, gives a new price which is higher than the price you want to enter (because the price is going up strongly).

5. Swap

Swap is the interest you have to pay when you hold your position overnight.

Swap has to be calculated through a special formula, and as each currency interest rate is clearly stated by the related central bank, the swap has to be a constant amount with all of the brokers, banks and liquidity providers. However, the swap you actually pay is different from broker to broker. It is OK if it is not too much, but if you see your broker charges a lot as the swap, then you have to ask them about the reason, and you have to close your account if they don’t fix it. Swap can cause you to lose a lot specially if you hold your positions for a long time.