Forex market manipulation and how to spot it
When you hear market manipulation you may think is some big player like Goldman Sachs running a high frequency program or maybe a government trying to push their currency in their favour, but in the FOREX market your worst enemy may be your own FOREX Broker.
In March of 2006 Meta Quotes Software, the same company that created the most popular currency trading software, the MetaTrader 4, put out a Support Article on their Web Site explaining some of the features of a software your broker can purchase for an extra charge that can potentially manipulate your trades to maximize their profits.
Some of its features include:
Delaying customer’s orders by 5 seconds to give the customer the worst possible price.
Increase in spreads in order to trigger stops losses.
Watching symbols gaps, so stops are activated at the gap price and not at the client’s requested prices.
Disabling, setting, modifying or deleting pending orders during news times.
Automating the move of spread, limited and stop levels ahead of news event.
Reduce the leverage to force the liquidation of the largest positions of their customers.
MetaTrader is the world’s preferred Forex trading platform. According to some estimates more than 70% of all brokers offer the Metatrader platform and more than 90% of the total retail Forex volume is executed through it.
The name of this software is the “Virtual Dealer Plug-in”, this plug-in can be used to manipulate Stocks, CDFS, Gold, Futures and basically any other instrument your broker offers.
Now we will explain some of the plug-in features in more detail. When you ask MetaTrader for a Market order you would expect to get the current price as displayed on your terminal, but when the plug-in is running your order can be delayed up to 5 seconds, during the imposed delay, your broker will analyze the prices and it will try to give you the worst possible price, so the broker can pocket the difference, it could be just 1 or 2 pips or as high as 10 or 15 pips and if the price moves in your favour the broker can re-quote the price several times until it moves their way.
Not only you could get the worst possible price when you open a position, the broker can also manipulate the price feed to trigger your stop loss, and when you try to close a position the plug-in will try to split the price in the broker’s favor but never in the customers favor. These manipulations go usually unnoticed and if you ask your broker about it they will always blame it on the market, connection issues or other factors that are hard to corroborate.
We had an account that had been opened for several months and had a balance of around 8K USD, we had been trading a successful strategy from this account for the first three months, but then we started to notice re-quotes on almost every trade and other strange activity, we decided to open a new account with the same broker so we could compare the spread, executions times, re-quotes, profit and losses etc.
We opened a position on both accounts at the exact same time, and just on our first trade we noticed that the new account closed with a 15 pip profit while the same position on the existing account was re-quoted several times until it finally closed with a 5 pip loss. On other trades there were spread variations of 5-30 pips between accounts, which caused many positions to reach the stop loss while on the new account the same trades closed with a profit.
We repeated the process on different days with numerous trade combinations and obtained very similar results. These discrepancies were also clear when visually comparing charts side by side.
At the end of the first month our newly opened account had a profit of 181 pips while our old account had a loss of -46 pips while executing identical trades. By the third month both accounts started to perform the same way and at this point it became virtually impossible to make any profitable trades from either account.
We confronted our broker with the facts and after some time of discussion they finally admitted that it was standard practice for most Forex brokers to run the virtual dealer plug-in. We of course closed our accounts immediately.
During an audit in July 2009 the NFA discovered that Gain Capital (aka: forex.com) was using the virtual dealer plugin to manipulate trades that benefited Gain to the detriment of its customers.
You can read the official NFA document below:
NFA Findings VDA Gain Capital (www.forex.com)
You can find more information about the virtual dealer plugin by reading the official PDF document below:
Virtual Dealer Plugin oficial PDF