Who wins when you lose? (Or how brokers make money)

This week my middle son took his 11plus test. Around 30% of kids will meet the grade – it’s a tough lesson in winners and losers for 10 year olds, although most of them take it with more grace than their parents do!

Most of us, when we’ve lost, look around to see who’s gained at our expense.

Who pushed in the queue in front of us?

Who got the promotion?

When we lose money in the markets or with a sports bet … someone else must be on the other side of that.

But who is it? And how can we ensure that next time around, we’re on the winning side?

So who wins when you lose?

There’s been some shocking details in the press recently about tipsters who are pushing bad bets so they can get a cut of the client’s losses from the bookmakers.

These are seriously dodgy affiliate deals between the big firms and people masquerading as knowledgeable tipsters, often posting false claims and manipulated track records on social media.

This bad practice has been going on in the betting industry – while I’m disgusted by it, I can’t say that I’m all that shocked. Bookmakers are betting against their customers, running on very tight margins. And they always need new clients.

The glimmer of hope is that bookmakers as now coming under pressure to stop making these affiliate deals. This doesn’t happen with spread-bet brokers because they are regulated, but binary betting companies also do this, which is why I tend to give binary-betting systems a wide berth, unless I’m really confident about their sources.

It’s always good to take a hard look at who’s on your side, and who could be against you.

The obvious pantomime villain in the trading game is your broker.

Brokers are the guys in suits who get rich while we traders scrabble around hunting for returns.

Look on internet forums and you’ll find brokers taking the blame for everything from stop-loss hunting and bad tips, to Brexit and the common cold.

And as someone who spent a good part of Wednesday this week shouting down the phone at my broker … I’m not quick to jump to their defence.

However, if you’re actually going to beat the ‘other side’ of your trade – you really need to know who this ‘enemy’ really is.

So, how do brokers make money?

Spread-bet firms (as their names suggest) make money on the ‘spread’ – the difference between the buy and sell prices on your trades. This gives them a cut, every time you place a trade, whether it wins or loses.

While I don’t enjoy paying a spread – it’s a transparent cost that’s agreed up-front on the trade.

Some brokers will hedge every position that their clients place – which means that if you bet that the GBP will go down, they’ll go into the real market and sell GBP to balance their position with you. That way, if you win, they’ll win too … and if you lose, they’ll lose too. The result is that they are in a market-neutral position – they are taking no risk in the market, and are just earning money from the spread you pay to them.

However, not all brokers do this. And most will only hedge part of their book in this way.

With the unhedged positions, they’ll be taking a risk, and are essentially betting against you.

In these situations, it’s not hard to see how they could benefit from stop-loss hunting.

On an individual basis, it is unlikely that a broker is going to spend time hunting down your stop (I’m sure he or she has better things to do with their day). However, if many stops are being placed at key levels and the overall exposure is high, then some traders believe the market makers use this information to their advantage.

The prices offered by your broker are not necessarily the true market price, but can vary by a few points. This does give them the opportunity to manipulate the prices you see on their platform, and leads people to believe their stops are being hunted.

Bear in mind though, that if your broker manipulated a price, they’d be leaving themselves exposed to others getting into a market at a false and advantageous price – so it’s a dangerous game to play.

I’d be lying if I told you that I’d never had suspicions about any brokers manipulating prices … but, it’s easy to get cross with our brokers, and to fail to consider that it might be our own fault that we’re getting our stops hunted …

There are other players out there …

Big market investors, with a lot of money to pile into a market, like nothing more than a cluster of stop orders (suggestions for collective noun of stop orders, please? A groan of stop orders?) to quietly slip into the market. These offer pools of liquidity, where they can enter the market without causing too much of a stir.

It’s much more likely that we traders have positioned our stop levels in glaringly obvious places, alongside a lot of like-minded individuals, and that these levels are easily picked off by big players.

So, while we’re getting our knickers in a twist about a ‘fake’ spike on our brokers charts – chances are that the big players are rubbing their hands in glee.

So, how do we beat the market?

While it’s always wise to be wary of anyone who might benefit if you lose (especially if you’re using sports betting tips), I’d caution against conspiracy theories.

There will always be bigger players than you who have the buying power to push prices, and to hold out longer than you can. Which is why our trading methods need to be a bit canny, and they need to match the modest funds we have.

Think hard about where you position your stops, and also question your reliance on stop levels. While I wouldn’t recommend placing trades with no stops – there are other ways to exit trades, based on time and technical analysis.

If you already use Martin Carter’s Diff trading products, you’ll be familiar with the use of hedging to manage risk, and the use of his quantitative analysis to exit trades before stops or targets are hit.

We may be the little guys in the markets, but that’s no reason for us to be their punching bags.

One of the benefits of working for myself at Thames Publishing is that I don’t have to bow to pressure to use any of these kinds of tactics – I’m able to set my own agenda. I’d like to stress that I would never look to profit from a member’s losses. I do have affiliate deals with spread-bet firms, but only to receive an ongoing commission for bringing new customers to them, not based on winnings or losses. I don’t have any affiliations with bookmakers (they have no interest in taking on clients who are going to win!)

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