Making Sense of Forex Broker Stop Loss Policy

Why do on-line Forex brokers guarantee stops at all? The answer is simple; they make a lot of money from it. Only the on-line Forex brokers handle stop loss orders such that a customer?s stop loss order is executed when the level is reached and not breached. In fact, in Forex banking the etiquette is to not fill a stop until 3 points or so breaches the level.

For example, if you leave a stop loss at 1.2150 with a bank, your stop loss order is unlikely to be filled unless the market trades 1.2147 (meaning deals are actually done at that rate); and then the Bank will likely fill your order at 1.2148 or 1.2149. In the on-line brokers if the market trades at 1.2155 and the broker makes the rate 1.2150-53 you?re stopped out at 1.2150.

What?s particularly disturbing is the low trade may actually be 1.2155, even; it is not at all unusual for the on-line broker to "jack in" a low ball rate and "run" the stops; meaning execute the stop loss orders at 1.2150 (buying from customers at 1.2150) and selling to Banks at current market price 1.2155.

This ability to arbitrarily "jack in" off market rates is the cornerstone of broker profitability and clearly explains why brokers that guarantee stops choose to do so. The fact is if the broker didn?t guarantee stops then nobody would leave stops and the lucrative stop running strategy would not exist.

Another benefit of having an order book of stops is the potential to use the stops to offset a wrong market position or to get a right one. Case in point; on August 6th, 2004, as seconds ticked on toward 8:30am and the release of non-farm payroll EURUSD was marching into the mid 1.2060s; one broker jacked in a 1.2032-1.2035 rate.

This clearly off-market rate caused hundreds of customer long EURUSD positions to be stopped out; in effect all the customer long positions became broker long positions. It is unclear whether the broker knew the non-farm payroll number when the off market rate was jacked in but it was a no lose situation for the broker.

As it turned out the EURUSD price was 200 points higher right after the number; so instead of the customers making 200 points the broker made between 210 and 230 points, depending where they bought the customers EURUSD position (where they stopped out the customer).

The bottom line here is that FOREX brokers that routinely do not simultaneously offset their customer transactions with Banks are in effect strictly market makers and as such have a fiduciary responsibility to treat their customers orders fairly and honestly. Just because a customer signed a client agreement that says the broker rate can be different than the market rate does not mean a broker can make a "flash" price for a nano-second and clean house ? take all the customers positions for themselves, regardless of where the market really is.

When a broker that acts primarily as a market maker jacks in an obviously off market price by 30 points and makes millions of dollars by doing so the regulators ? CFTC ? should at least acknowledge that a situation exists. In this case despite hundreds of complaints I have not heard a single word from the CFTC concerning this matter.

I have called many times and have yet to get a response myself. If the public is indeed protected by these brokers being registered CFMs; well where is the protection when we need it. Where is the CFTC on this matter? The question to be raised if this situation is "swept under the rug" is this; Can anyone with adequate capital become a CFM and do what they want ? provided they have the capital? If so, what kind of "business people" is FOREX inviting?

I personally would like a call from the CFTC so I know that the matter is at least being looked into. There is not a single knowledgeable trader, broker, or informed individual that does not realize that a grave injustice has been done here. If the buck does not stop here, I am afraid on-line FOREX trading is doomed.

Jimmy Young