Where Do Forex Money Go?

Where Do Forex Money Go

At the end of each trade, the Forex trader sees an update to his or her account balance, both up and down. Although this seems normal, the novice trader may wonder where the money came from (in case of profit) or where it went (in case of loss). This article explains the flow of funds to and from the trader account.

Inward and outbound financial flows

In the FOREX market, the broker either passes the trading orders directly (STP) to a liquidity provider (Credit Suisse, Goldman Sachs, Nomura Bank, Citigroup, UBS, Bank of America, etc.) or takes the role The counterparty in the transaction (market maker).

Where Do Forex Money Go

STP

Where does the money go when an individual Forex trader works with an STP broker? Let's assume that the customer has placed an order to buy a standard lot (100,000 units) on EUR / USD at 1.1120. The order is directed directly to a liquidity group. If the limit order is executed, the capital required to open the transaction is held as margin in the customer's account. If the client uses a 1: 100 leverage, the margin value held at $ 1,120 will appear in his / her account. The value of the remaining arrow in the client's account is updated in real time in parallel with price action. STP brokers usually get a leverage of up to 1: 100 of their liquidity providers. Thus the liquidity provider will also hold $ 1,120 from the forex broker account.

If we assume that the client has closed his deal to buy the euro at $ 1.1130. In this case, the sale order is directed to the liquidity provider to match it with a buy order. The liquidity provider will release $ 1.120 + $ 100 profit for the forex broker, which will release the held margin, ie $ 1,120, with a $ 100 gain to the trader's account. The Liquidity Provider may play the role of counterparty in this transaction, and may not play this role. In other words, it may open a new deal in the hope of later selling at a higher price to someone else, and may instead cover the open sale at a higher price. Consequently, the transaction can not be classified as a loss suffered by the liquidity provider.

If we assume that the trader closed the deal at 1.1110, in this case the liquidity provider will release only $ 1,020 ($ 1,120 - loss of $ 100) from the forex broker account, which will in turn release only $ 1,020 from the margin held in the trader's account when opening Deal. In the end, the forex broker regained what he lost and will continue his business as usual.

Market Maker

Let's now assume a similar situation with a forex broker working as a market maker. When the customer places a trading order, the broker will hold the required capital (depending on the lever used) and confirm the transaction. Depending on the nature of the risk management strategy used by the forex broker, customer orders may be grouped together and sent to the liquidity provider. An internal match is made between the open and buy orders at one level on the same currency pair. When the customer closes the order, a book change is made based on the net margin value. Again, depending on the mechanism used by the forex broker, his or her counterparty deal may be closed at the same time with the liquidity provider.

Buying and selling currency pairs is similar to buying other physical assets as the actual cost of the product goes through multiple stages before reaching the final consumer. Retail brokers and distributors take their share of profits. Equally, forex brokers charge their profits in the form of spread that is added to the actual price and then passed to the opposite end.