If you’ve been around the forex forums on the web you would have come across people claiming that their forex broker manipulates the market. Of course manipulation has been done to the detriment of the person writing the forum money who ended up losing money.

So, let’s explore this “manipulation” concept a bit further.

How Does A Broker Quote Prices?

A broker quotes prices according to three main groups:

  1. Banks
  2. Customers
  3. Themselves

We will explore each in a little more detail.

Banking Quotes

There are two large institutional groups that make up the currency market: the banks, and the market makers (brokers). The banks are the institutions that make up the interbank market (hence the term “interbank”), and the market makers (brokers) offset their positions by trading with the banks.

Depending upon the number of banks a market maker has been listed with, a market maker can choose any price from the range of quotes they receive from their banks. Obviously the market maker will quote you the price that will ensure they receive the most from the transaction. This only makes common business sense - if someone offered you $10 or $5 which would you take? There’s no question, anyone would take the $10.

To help the market maker make the most out of the transaction they employ sophisticated computer programs to generate the price that their retail clients see. This program will take all quotes received from their banks and will provide you with a price according to how they can best make money offsetting your position into the interbank market.

Now we understand how brokers receive their quotes from the banks, let us move to the next point… quoting a market due to clientele.

The Customer

Many people complain that the prices seen on one particular brokers’ platform is different to the prices seen on another platform - sometimes by as much as 50-60 pips! One question that I generally ask in return is: could a large client of the market maker be off-loading a position? Just because a quote is different does not automatically mean that the broker is manipulating price - there can be two sides to this story - and don’t be too quick to jump to negative conclusions, just remember:

No market maker no play

However, market makers do have the provision of seeing what their clients are doing and where their stops have been set. Regardless of whether a market maker offsets their clients’ positions into the interbank market, there will come times when they will offset a clients positions with another of their clients’ - once again it only makes sense. It saves the market maker transaction costs and time.

Now the problem that most people claim with market makers is that by seeing the clients orders they could potentially locate where to make money by “manipulating” the price of the quote determined by their sophisticated computer programs. But that in itself is a large call.

Not only would the broker need to also take into consideration the likelihood of clients who are sitting watching the market from their computer that DON’T have positions on (but could very well do), they would also need to predict that price will do nothing during their “manipulative” spike. While I agree that spikes can take just seconds, it could just as easily back-fire on them. However, if a cunning market maker were to spike during off-peak times then this would certainly add to the legitimacy of the claim that they are manipulating price.

Themselves

I know this may sound strange, considering the nature of this article, but market makers can quote their own price. Sometimes this doesn’t come across as being apparent. See, market makers can also speculate. They may decide to open some positions and place an order from their own book that complements their view. Is this wrong? Hardly!

Why would a market maker do this? Well, I don’t know about you, but I know when I initially started trading the forex market I was pretty shocking. I was able to burn my account in about 3 months’ time. Now if someone had been smart and speculated (not traded) against me then they would have made the amount I lost! Now what if the market maker lines up all the new accounts and analyses them then takes a position against the majority of forex newbies? Interesting thought.

Conclusion

I hope this article was able to arouse some interesting thoughts as we all get mad when we see the spike in price on our machine only to see what would have been a very profitable trade had we been in.

This should get you thinking one step further: can spikes be a trade? Is there a method that can pick out a broker spike and trade against (or with) the direction of the spike? Keep thinking, you might stumble on something.

Lastly, just be mindful if a broker does trade against you, they will need to manipulate the price to exit you out of your trade and/or they will need to know where price is going, PLUS they need to assume that you will NOT change your stop loss order.

If you feel that regardless of what “I think” about forex broker manipulation then you may wish to take the following actions:

  • Change your broker.
  • Trade during liquid market times. If you are trading during 1700 EST and midnight EST then you are trading at the weakest time of the day.
  • Be wary of major announcements. During major announcements the market can dry up very quickly, therefore, spiking is easily done - watch out.