A circle of Conflict: Why do 9/10 Retail Traders Lose? 👎
Updated
Volatility is a trader's lifeblood. Since 2009-- and the end of the 1990's for that matter-- volatility has been absolutely crushed on the race to zero commissions and iPhone trade gurus. Without volatility , there is no risk and opportunity (sides of the same coin).This has resulted in nominal yields across all major G7 economies falling to all time lows.
The question is, why has volatility been crushed?
There are a few reasons:
The monetary policy introduced by the FED after the 08' recession was quantitative easing QE ). Essentially, QE means that central banks increase the supply of money by buying government bonds and other securities. This is not limited to one direction, as evident from last years 350b+ per night which forced banks to retain the credit worthiness-- and realistic credit spread-- through reverse repurchase agreements.
What does this mean? It means a guaranteed buyer of bonds--name it the Government or the Fed member banks whom are regulated and audited to follow reserve requirements necessary to keep a fiat currency within the largest service producer in the world. This results in suppressed yields permanently, feeding over into other asset classes since the market begins to look for other opportunities (chasing yields) which ironically only suppresses yields further.
Technology: Volatility has been suppressed by the advancement of algos and automated trading stations. An increase in algos over the last 8 years has dramatically increased the number of market participants. How does this affect volatility? It's simple: more willing buyers and sellers mean that the equilibrium in price is considerably more stable, thus decreasing the natural fluctuation in the price of an asset at every single price.
Dec 08
Comment: Now how exactly is the market rigged against the retail trades? I'll explain every dynamic. I'm going to assume you understand what a CFD is and how a margin call is determined through an over-leveraged exposure to the market with your accounts equity ( google these if you are new).
Now how exactly is the market rigged against the retail trades? I'll explain every dynamic. I'm going to assume you understand what a CFD is and how a margin call is determined through an over-leveraged exposure to the market with your accounts equity ( google these if you are new).
Let's think about the problem that an international broker has as a business. Keep in mind, over 90% of their clients losing all of their deposited funds within 3-4 months, how does this business even grow? If you own the brokerage company, you have to spend a significant amount of money (between 30-50%), towards customer acquisition. This is the only way you can stay at the same level. Now, this is where conflicts of interest begin. What do you think happens when a broker has access (backend) to 90% of let's say 10,000 traders who always are losing money? You take the opposite side of their trade. Why? You would have a 90% win ratio. With an average balance of a few thousand dollars, most retail traders tend to blow up in just a few days when trading over 100x.
The way that the brokerage industry works is that it is built around and codependent on major conflict's of interest to not only their clients, but other funds looking to achieve stable credit spreads and ample liquidity. This creates a scenario where all players are aware and build the infrastructure for their benefit not the retail trade (you).
A retail trader has one simple objective, to make money through profitable trades in the market.
Wall Street's intentions are to take retail traders money.
There are 4 main conflicts of interest I will discuss.
Spread. What is spread? The spread comes from the guaranteed purchase or repurchase (short) of an asset, through a profit in the difference of market value and the price. The cost of guaranteed liquidity is through the broker being offered a price that they can make a profit on. If a broker has two clients, the client a is relieved of their position at $1, and client b is then sold that position at $2, making a profit of 1$ by providing the liquidity. This is called "taking a turn".
Commission: A percentage of a trades price to enter in and out.
The two most obvious conflicts of interest here is that the amount of volume is dependent on the amount of profit for the brokerage. Brokers want the retail trader to trade in the biggest position possible as much as possible. Now the answer to the question as to why a brokerage would lend you 100x to trade with becomes obvious; they get paid.
The next two are not so obvious.
Over the counter contracts are unregulated. When a losing contract is provided liquidity from the broker to a losing retail trader, taking the other-side of this contract is called "OTC Gain".
"Financing Turn" is the money made from the percent difference between borrowing from creditors (banks, investors) to finance leveraged grading and the percent charged to clients. IN essence, this is the ability to charge 100X of commission for an account with X dollars.
Who finances a brokers ability to lend money, comes from an investment bank. Through collateralized debt, a revolving credit facility can be formed and thus farmed for credit from retail traders. The only reason this makes sense is through the deposited funds from retail traders themselves. These funds are again collateralized and used by the investment bank. IN essence, retail trades deposit money, which sponsors the broker to be lent money by their investment bank at a % higher. Retail traders essentially finance their own financial demise. With over 90% of traders losing money, a brokerage is incentivized to borrow as much money as possible to profit from the financing turn of their clients. This is where the introducing broker ( IB ) comes into play.
A brokerages revenues come from the addition of spread, commission, financing turn, and the OTC gain.
Retail brokers are incentives to create a narrative that increases you changes of losing money. They are heavily invested to make retail traders believe in scalping and high volume trading strategies, so that you can get rich quick.
Let's break down the chart.
*Investment Bank: Provides credit and clearing to the brokers. Order-flow is created here.
Broker: Providing access to platform and software, access to credit, and fulfilling liquidity (that you wouldn't get as a retail trader anywhere else). This means that a retail traders has to use a broker; necessary evil .
Educator (introducing broker): Educators are paid by a broker commission on every trade you take. They will glamorize the lifestyle of quick and easy money, becoming a millionaire from a $600 account. Providing a simple strategy using 4 indicators, with a simple buy and sell execution plan around it.
Retail Trader: Dumb money. They believe everything that their educator and broker tell them. They pay spread and commission, and provide the demand for financing/leverage, losing trades, and for a false narrative.
Smart Money: Believe none of the participants in the entire market who have conflict of interest
Who are the biggest clients of exchanges?
Investment banks.
Smart Money (Licensed traders)
*understand how the market works
understand that conflicts of interest exists
avoid trading in the way that anyone with conflicts of interest want them to trade
do everything in the opposite way to the how retail traders do things.
Dumb Money (retail traders)
*believe everything they are told and rely on the infrastructure provided to them by market participants with conflicts of interest.
believe the infrastructure has been built and designed to benefit THEM.
they do everything in the opposite way to professional traders.
Smart money requires dumb money to exist. Smart money predicts the future (whisper numbers). Dumb money reactions to the present and wealth is thus transferred.
The biggest payers of feeds to exchanges are investment banks, hedge funds and pension funds.
The question is, why has volatility been crushed?
There are a few reasons:
- quantitative easing, the advancement of algos, and expanded participation.
The monetary policy introduced by the FED after the 08' recession was quantitative easing QE ). Essentially, QE means that central banks increase the supply of money by buying government bonds and other securities. This is not limited to one direction, as evident from last years 350b+ per night which forced banks to retain the credit worthiness-- and realistic credit spread-- through reverse repurchase agreements.
What does this mean? It means a guaranteed buyer of bonds--name it the Government or the Fed member banks whom are regulated and audited to follow reserve requirements necessary to keep a fiat currency within the largest service producer in the world. This results in suppressed yields permanently, feeding over into other asset classes since the market begins to look for other opportunities (chasing yields) which ironically only suppresses yields further.
Technology: Volatility has been suppressed by the advancement of algos and automated trading stations. An increase in algos over the last 8 years has dramatically increased the number of market participants. How does this affect volatility? It's simple: more willing buyers and sellers mean that the equilibrium in price is considerably more stable, thus decreasing the natural fluctuation in the price of an asset at every single price.
Dec 08
Comment: Now how exactly is the market rigged against the retail trades? I'll explain every dynamic. I'm going to assume you understand what a CFD is and how a margin call is determined through an over-leveraged exposure to the market with your accounts equity ( google these if you are new).
Now how exactly is the market rigged against the retail trades? I'll explain every dynamic. I'm going to assume you understand what a CFD is and how a margin call is determined through an over-leveraged exposure to the market with your accounts equity ( google these if you are new).
Let's think about the problem that an international broker has as a business. Keep in mind, over 90% of their clients losing all of their deposited funds within 3-4 months, how does this business even grow? If you own the brokerage company, you have to spend a significant amount of money (between 30-50%), towards customer acquisition. This is the only way you can stay at the same level. Now, this is where conflicts of interest begin. What do you think happens when a broker has access (backend) to 90% of let's say 10,000 traders who always are losing money? You take the opposite side of their trade. Why? You would have a 90% win ratio. With an average balance of a few thousand dollars, most retail traders tend to blow up in just a few days when trading over 100x.
The way that the brokerage industry works is that it is built around and codependent on major conflict's of interest to not only their clients, but other funds looking to achieve stable credit spreads and ample liquidity. This creates a scenario where all players are aware and build the infrastructure for their benefit not the retail trade (you).
A retail trader has one simple objective, to make money through profitable trades in the market.
Wall Street's intentions are to take retail traders money.
There are 4 main conflicts of interest I will discuss.
Spread. What is spread? The spread comes from the guaranteed purchase or repurchase (short) of an asset, through a profit in the difference of market value and the price. The cost of guaranteed liquidity is through the broker being offered a price that they can make a profit on. If a broker has two clients, the client a is relieved of their position at $1, and client b is then sold that position at $2, making a profit of 1$ by providing the liquidity. This is called "taking a turn".
Commission: A percentage of a trades price to enter in and out.
The two most obvious conflicts of interest here is that the amount of volume is dependent on the amount of profit for the brokerage. Brokers want the retail trader to trade in the biggest position possible as much as possible. Now the answer to the question as to why a brokerage would lend you 100x to trade with becomes obvious; they get paid.
The next two are not so obvious.
Over the counter contracts are unregulated. When a losing contract is provided liquidity from the broker to a losing retail trader, taking the other-side of this contract is called "OTC Gain".
"Financing Turn" is the money made from the percent difference between borrowing from creditors (banks, investors) to finance leveraged grading and the percent charged to clients. IN essence, this is the ability to charge 100X of commission for an account with X dollars.
Who finances a brokers ability to lend money, comes from an investment bank. Through collateralized debt, a revolving credit facility can be formed and thus farmed for credit from retail traders. The only reason this makes sense is through the deposited funds from retail traders themselves. These funds are again collateralized and used by the investment bank. IN essence, retail trades deposit money, which sponsors the broker to be lent money by their investment bank at a % higher. Retail traders essentially finance their own financial demise. With over 90% of traders losing money, a brokerage is incentivized to borrow as much money as possible to profit from the financing turn of their clients. This is where the introducing broker ( IB ) comes into play.
A brokerages revenues come from the addition of spread, commission, financing turn, and the OTC gain.
Retail brokers are incentives to create a narrative that increases you changes of losing money. They are heavily invested to make retail traders believe in scalping and high volume trading strategies, so that you can get rich quick.
Let's break down the chart.
*Investment Bank: Provides credit and clearing to the brokers. Order-flow is created here.
Broker: Providing access to platform and software, access to credit, and fulfilling liquidity (that you wouldn't get as a retail trader anywhere else). This means that a retail traders has to use a broker; necessary evil .
Educator (introducing broker): Educators are paid by a broker commission on every trade you take. They will glamorize the lifestyle of quick and easy money, becoming a millionaire from a $600 account. Providing a simple strategy using 4 indicators, with a simple buy and sell execution plan around it.
Retail Trader: Dumb money. They believe everything that their educator and broker tell them. They pay spread and commission, and provide the demand for financing/leverage, losing trades, and for a false narrative.
Smart Money: Believe none of the participants in the entire market who have conflict of interest
Who are the biggest clients of exchanges?
Investment banks.
Smart Money (Licensed traders)
*understand how the market works
understand that conflicts of interest exists
avoid trading in the way that anyone with conflicts of interest want them to trade
do everything in the opposite way to the how retail traders do things.
Dumb Money (retail traders)
*believe everything they are told and rely on the infrastructure provided to them by market participants with conflicts of interest.
believe the infrastructure has been built and designed to benefit THEM.
they do everything in the opposite way to professional traders.
Smart money requires dumb money to exist. Smart money predicts the future (whisper numbers). Dumb money reactions to the present and wealth is thus transferred.
The biggest payers of feeds to exchanges are investment banks, hedge funds and pension funds.
Note
All information and charts published are simply for personal record and intended for educational and entertainment purposes only.This is not financial advice. I am not a currently registered with a FINRA member firm-- and am a licensed broker--hower this is solely for hypothetical representation and used solely for the functionality of it being recorded.
Note
It’s to be noted carefully in this respect, that past results are notnecessarily indicative of future performance and that you are NOT to
assume that this is for an account that involves fiat (mooney) or cryptocurrency.
You are aware that this is only hypothetical, and doesn’t contain any financial advice nor solicitations to buy or sell a currency or a currency-pair derivative--
unless done in a paper-trading (demo) account.
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