The average retail trader doesn’t have the credit or capital required to participate directly with interbank trading partners. Retail currency dealers act as market makers for small-volume currency traders. Currency dealers manage their risk by balancing their portfolios of retail orders among the customers for which they are making a market. When they are overexposed to market risk due to an imbalance of short or long orders, they offset their risk by taking positions with their trading partners on the interbank. It is important to understand that currency dealers do not operate the same way stockbrokers do. The spot currency market does not have an exchange; therefore, the currency dealer often fills a customer’s order by itself assuming the risk. This is commonly known as taking the other side of the trade. In other words, the currency dealer is betting against your ability to make money. If you lose, the dealer wins and collects the spread for doing the transaction. This is significantly different from a stockbroker, who is paid a commission for brokering your order to the exchange, where it is matched with an anonymous third-party order on the exchange.
There is an inherent conflict of interest when your dealer is profiting by taking the other side of your trade. Traders have historically complained about poor order execution, excessive quoting, or stops being “gunned,” and there is probably some basis for these complaints. Forex after all is an unregulated market, and shady dealers do exist. Currency dealers are aware of these perceptions as well and are now marketing no dealing desk execution or direct interbank trading as an alternative order execution strategy to taking the other side of the trade. These trading platforms suggest the dealer is not involved with your trade, and passes the order directly to a trading partner. Whether every order is matched anonymously or not is a matter of trust, but it doesn’t hurt to do business with a dealer who offers an alternative to taking the other side of every trade.
