Cash Forex Trading - Counter-party Risk in Forex

By: Harold Hsu

In recent years, the cash Forex market has become one of the fastest growing financial markets in the United States. The prevalence of online trading platforms and the limited legal restrictions of the Forex market have literally caused dozens of companies to try their hand at Forex brokering.

And with so many new brokering firms popping up, it's inevitable that some of them will fall short in terms of the quality and even the morality of the services that they provide. Indeed, the biggest source of risk in cash Forex trading may not be the market risk from currency fluctuations, but from counter-party risk.

Counter-party risk can generally be defined as the risk that the cash Forex broker will perform its obligations and deal fairly with its customers. You should thus be very careful about evaluating the creditworthiness and integrity of your chosen broker, because your trading accounts (and funds) are at risk.

Why Should I Be Careful About Counter-Party Risk?

Not many people know that some Forex brokers don't actually provide accurate market price feeds. For example, the EUR/USD pair may be trading at 1.4657 in the market, but your broker may quote you 1.4659 to buy (excluding any spreads).

Also, not many people know that many Forex brokers take the opposite position of their traders' trades. If you enter a buy trade for the USD/JPY pair for example, your broker may then enter into a USD/JPY sell trade. This results in a conflict of interest because now if you make money, your broker loses money and vice versa.

Foreign Exchange
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