Chapter 1 - Wagging the dog
The right to immediate, uncensored access to the marketplace
Who's minding the store?
Given the volume, tempo and apparent liquidity of the forex market, you'd expect it to be an open and efficient place to trade.
Until you stop to ask:
- Why was my trade delayed?
- Why did my price move so far away from what I expected?
- What is my market maker not telling me?
And there's really one answer to all three of these questions.
Access to the forex market is overwhelmingly controlled by a handful of market makers whose intervention does not act in the best interest of traders.
Could we trade without them? Of course not. But the real problem is how they exercise control: with little or no regard for efficiency, fairness or transparency.
First, there are no uniform standards. Pricing, execution and accountability are subjective: how your trade is handled depends on the size of your order, your current position, the size of your account, your trading habits and history, and your personal relationship with the market maker.
Outcome: execution and price are a function of who you are. [privileged access: lack of fairness]
Second is a more anonymous form of censorship: price and execution may have nothing to do with you, but on how your order fits--or doesn't fit--the market maker's trading agenda at any given moment.
Outcome: execution and price are a function of the market maker's greed. [biased access: lack of transparency]
How do they do it? The largest market makers execute with dealer intervention, using subjective information or net positions to manage their own book of business.
Outcome: execution and price may be bad or good, but manual intervention ensures that the process won't be efficient. [delayed/inefficient access: lack of efficiency]
If these practices are so obviously bad, why are they still so common?
Because predominant market makers continue to rely on systems introduced more than 50 years ago, before modern technology enabled spot execution and immediate settlement. And before the Internet had created a global community of traders. Before demand and competition insisted on a better way.
In an unregulated, international, over-the-counter market, no one's minding the store. And any abuses are likely to get lost in the dust cloud of volume. And even without overt abuse, round-about execution and settlement increase cost and create unnecessary risk. Because they slow the trading process and throw up a barrier between the trader and the trade. For no good reason.
What is your market maker not telling you?
Anything that would allow you to compare what you're getting now to what you should be getting. Anything that might jeopardize the market maker's ability to exploit his lop-sided advantage.A call for transparency
The business of market making should promote the existence of one market with no price discrimination, not a labyrinth of sub-markets controlled by a few big players.
A call for fairness
The one market should produce one price for every trade-regardless of the trader's identity-and that trade should be executed immediately.
A call for efficiency
Market makers should step up and embrace technology that enables them to counter-party trades at the market, not at their own convenience and advantage.
One market for all
Every market exists to create prices for traded assets. For the pricing mechanism to be effective, traders must not be segregated into special groups with special prices. The stability of the process depends on including the greatest possible number of buyers and sellers, whose actions spontaneously and immediately determine supply and demand-and, therefore, pricing equilibrium.
As long as one group of traders exercises disproportionate influence in the pricing process, there can be no equilibrium; and trading will be riskier and costlier for the majority.
Until market makers are held accountable for the price of each trade, there will be multiple markets, multiple prices for the same trade, and greater overall instability.
Next: The right to trade real spot
Back: Why the Bill of Rights is important
Return to: Table of Contents
Please refer to our more detailed Risk Warning, and NFA's FOREX INVESTOR ALERT.