It is essential for you as a trader to know the financial risk model of a company before
deciding to trade with them; because your short and long-term happiness will definitely and largely
depend on it.
Believe it or not, trading is actually and always a financial battle between two parties opposing each
other. One party must win while the other party must lose. There is NEVER a WIN-WIN
situation in the trading world.
It doesn’t matter whether you are trading directly with a Bank or at an Exchange or with a traditional
Broker. It also doesn’t matter whether you are trading in OTC style or Exchange style.
If the financial risk model you are under is not the type whose design is such that doesn’t put the Broker in advantage
over you; then you should not be surprised if someday you are screwed, especially if you are
consistently profitable against them. It is always a matter of time before this happens.
Unfortunately, the design of the traditional market is tailored to overprotect the Brokers and Banks.
This is the reason why they make it compulsory to trade with spreads, commissions, slippage and all sort of traditional market bottlenecks.
Another aspect of the design which is of prime concern is the structure that says before you can trade with the Broker, you must first send your deposits to them to hold. This rule will keep you always at their mercy should you become consistently profitable.
Although, it is fair to mention that some of the traditional Brokers have deep pockets to absorb losses.
Some also usually have more losers than winners over an extended period of financial assessment. However,
that is not to excuse any of them of being able to screw up their clients in the event where the tables
turn suddenly, and more winners emerge than losers. Unfortunately, this market scenario happens a lot
The fact that a Broker is regulated doesn’t necessarily mean they will do honest business with you at all
times. It is a common saying that the ‘House’ always wins because the traditional market is designed to
work that way. It is also a standard expectation of Brokers that clients will still lose all their funds
within the first six months of trading, so they plan their risk based on this expectation and should their
hope be cut short, do not be surprised to experience unhappiness going forward.
TYPES OF FINANCIAL RISK MODELS
1. STP – Straight through Processing model
2. ECN – Electronic communications network model
3. DMA – Direct market access model
4. MM – Market maker model
5. P2P – Peer to Peer model
The STP/ECN and DMA models are the TRADITIONAL agency models that send all your trade flows to the
owners of the traditional market. The owners of the conventional market are called the Market Makers.
These Market Makers are the ones who you are trading against at the end of the business chain.
So if you win, they lose. In the same vein, if you always win, it means the provider will continuously lose and vice versa.
The market makers have the right to reject your trade flows. Now, this is a critical aspect of
trading. You can be trading with a Broker that is operating an STP/ECN/DMA model and yet have your
trading profits canceled or a worse scenario whereby your deposit is held back for a while. This
unethical behavior of the STP broker may be because their Market Maker rejected your flows
at some point and consequently, whatever profit you made becomes invalid. The market maker may as
well choose to punish the Broker for allowing such streams by holding back the client’s deposit. These are
some of the real facts of the traditional market models.
Even though some of the agency Brokers who deal in extra large volumes usually send flows out to their
Market Makers in bulk, it is still possible for the Market Maker to asses how profitable the trade flows are, to take necessary measures to counter the flows or hedge themselves.
That is why some STP Brokers endeavor to work with as many Market Makers as possible to spread the risk of profitable trades among different MMs, but this also comes with its unique challenges both for the Broker and the clients.
In contrast, the Peer to Peer model though new to financial market systems, it is different from
every other business model practiced by the financial market’s operators. As oppose to the
ECN/STP/DMA/MM models where you are trading against the Brokers and Market Makers, the Peer to Peer model means you are dealing directly with other market participators with the Broker serving as the licensed and regulated independent settlement party known as the exchange administrator.
In this scenario, the loss of one client is used to fully offset the win of the other client at all times. In this case, there is no of default of profit payments.
An exchange/neutral trading climate created without the bottlenecks found in the other financial market models.
It is important to note that either of them cannot close genuine Peer to Peer trading contracts Peers at any time before the stop loss or take profit rates are hit or anytime before the contract expires in the case of an options contract. This factor ensures the trading conditions equal, unbiased and independent of conflict of interest.
Source: New feed
How A Forex/CFD Brokers Risk Model Affects Your Trading Success