Hunted stops or bad trades?

"It is very clear Dodgy Inc Brokers go after stops."

Really? Have a look through stock forums at reviews on Forex and CFD Market Maker brokers and you see the above quote or a variation on it repeated over and over. The claim is that Market Makers are doing either two things,

1. Quoting you prices that do not correspond to the underlying market. Simply cheating. They are "drifting" the price away from the market to take out your stops and since they are on the other end of the trade your loss is their gain. Or,

2. That they are manipulating the underlying real market to take out their retail clients stops. That they are spending millions to manipulate the prices of real markets like Index Futures and Foreign exchange rates down or up enough that their clients stops are hit and again since they are on the other end of the trade your loss is their gain.

What a load of rubbish! The first point of drifting prices would be suicidal for them. It would create the biggest and easiest arbitrage trade ever. Here is the example. You have a DOW CFD Index Long @ 12,000 and an auto stop at 11,980. The Market Maker can see your stop so drifts their price artificially down 21 points to take out your stop but the real market doesn't move. What would the sharp Futures trader do when seeing this. He would sell the Futures at 12,000 and buy the CFD at 11,980 at the same time with his ears pinned back. That is a guaranteed 20 point win. All he has to do is wait until the CFD provider realign the prices and then close out the trades. Or if you knew that the prices drift and then realign why make it an arbitrage why not just load up on the incorrect prices and then close them once all is back to normal. I have challenged everyone who has stated that this has happened to post a chart so I can compare it to the underlying market but never have I seen this happen in spite of all the claims.

The second point that the Market Makers manipulate the under-lying market to take out stops just doesn't add up. Think about the cost to brokers of moving an Index Future to take out small retail traders. Or moving a FX cross 30 pips in the inter market Foreign exchange to hit your retail clients stops who are holding a couple of $1,000 leveraged position. Just madness to think that that is a profitable scenario. Yes the local players gun for stops in all markets but they are "in" the market looking for big volume. What is there to gain in hitting the ES(S&P500) futures with thousands of contracts to take out your small time retail CFD traders. It would cost you hundreds of thousands in the real market to hit your retail traders stops for a gain of a couple of thousand.

This assumption has profound effects on your trading and I warn anyone not to listen to this stuff. When you get stopped out and you put it down to manipulation by your broker what is that saying about your approach, your OWN actions and ability to learn. Every trade that goes bad is valuable info about the market and more importantly your trading method. If the only thing you get out of a loss is that the game is rigged you are on a course to failure. Instead of,

the game is rigged & and my brokers stealing from me.

Your response should be,

that trade didn't work what really went wrong?

Then you can take responsibility for a poor entry, poor stop placement or just incorrect reading of the market. Once you know the problem your just completed step 1 to fixing it. If you never recognize the cause you have no hope of finding a solution. The game is rigged for sure, its rigged against thous that will not take responsibility for their own actions and learn from them. Don't be lazy, don't move to the next market or next indicator do the work to fix your problem. One thing that may help is don't be stingy with your data. Bucket shops give out free or cheap data because thats all its worth. Your not looking at the real market. You get no volume and no depth of market to make proper decisions. Most CFD index players don't even know what instrument they are trading. And when looking at the real market you soon see that the volume of trades in $ terms would make point 2 above just not feasible. And point 1 a very profitable opportunity to the sharp punter. 

Comments

[Hydro]

I can't say anything about drift, but I tried IG Markets' demo recently and noticed the occasional "spike" where the high and low for a period were way off. BHP on 09/06/06, for example - and it seems the 7th of the same month has the same problem. I found these accidentally when testing some software I wrote looking for large range days using EOD data from Commsec.

http://i82.photobucket.com/albums/j265/Hydrostat/bhpcfd.gif

Around the same time, I was stopped out of a Brent crude long position at a price that, according to the low indicated on the main interface, the cfd itself didn't even reach. There could be something about the underlying instrument that I don't understand, though. I'm very new to all this.

Now, I don't think they're going for my stops, but it certainly suggests to me that the longer I hold a position, the more likely it is that something strange happens that triggers a stop-loss. This is unfortunate because IG seems to have an annoying lag/sync problem that makes intra-day trading difficult. Well, it does in the demo, anyway.

Of course, I could be wrong about these events - the spikes may have been confined to the data used by the charting app - but I don't think I'll take your advice of blaming myself just yet. And even it that were the case, I'm not sure I want to try trading with real money using charts that display garbage.

Oh, and I've checked out the Pacific Trader demo and the charts for the CFDs and shares are different. The CFD for Cochlear finished 48c higher than the share on Friday and the candle has a much smaller real body (looks like a hanging man). This the broker's own data, by the way.

[THT]

CFD charts are Bid or Ask charts they are not trade charts. they will not look the same!!

[Hydro]

I think I understand. As I said, I'm very new to this.

That would explain the differences between the two charts on Pacific Trader, but would that also explain the relatively large spikes on the BHP CFD chart from IG Markets? Also, doesn't this adversely affect technical analysis given that 1) the charts don't represent actual price movement and, therefore, 2) the bars/candlesticks are often completely different?

[whitecloud]

An perfect description of a common malaise among folks who don't know what they are doing. They spend energy posting in forums, complaining, instead of investing that same effort into understanding the market they are dealing with and how it functions.

The difficulty with CFD maarkets and Forex markets is they are unregulated, operated by the CFD issuers, meaning they are self contained mini-markets. One reasonable sized stop going off can spike the CFD price a long way from the market if the mini-market is thin and there is no-one there to meet it. The market-maker has no obligation to be there. This can start a domino effect, cascading up and down. It's one of the reasons the majors do not leave large stops in regulated markets over night. If they get triggered they can have a devastating effect. So they dont. Spiking happens occasionally on the SFE about once a year. Some clown goes to market with a medium sized order and sweeps the market down 80 points. In the case of the SFE they will usually cancel all orders above or below the 40 point mark under the orderly market rule. But it does happen. At night there is no underlying market operating.

With stops in CFD and Forex markets you are at the mercy of some clown who panics or doesn't understand what they are doing and the damage they can do to others. That's the way the market works.

Most people will not make the effort to find learn from their mistakes and find out.

[Geffro77]

I am pretty new to this game, but I was amazed to find out that some CFD MMs use a bid/offer price to trigger your stop instead of the last price. This could be a big trap for the unwary as I assumed that the last traded price would always be used as a stop trigger. This could explain why some people think they have been unfairly stopped out.
Pays to ask the right questions!!