How are retail forex brokers different from betting shops?

Question

I'm struggling to find differences between bookmakers and retail forex brokers (e.g. OANDA). The former deals with horse racing, greyhound racing and sports, while the latter deals with currency exchange rates. Some retail "forex brokers" look a lot more like dealers than brokers.

Bookmakers and retail forex brokers...

• Both lose when their clients win.
• Both win when their clients lose.
• Both set prices on two sides (team A and team B for sportsbooks, and bid/ask for forex brokers) at which their clients can transact.
• Both profit from a spread (the vigorish for the bookmaker, and the bid-ask spread for the forex broker).

What's the difference between retail forex brokers and bookmakers other than the underlying instruments?

Note: I'm asking about currency trading (buying and selling currencies) using online forex brokers. I'm not asking about currency futures or spread betting.

Answer 1

I'm about about simply buying and selling currencies using online brokers. I'm not asking about futures or spread betting.

Note that you don't refer to a company that buys and sells currencies as a "broker".

They're not brokering anything. They just buy and sell things - exactly like a used car yard.

Both lose when their clients win.

That's wrong. The only time currency exchanges lose is in the (incredibly rare) case where the market changes dramatically, very quickly, and they are left holding stock.

(Exactly like a used car yard. If there's suddenly no demand for a vehicle which was popular last week, you might get stuck holding a couple of them.)

Both win when their clients lose.

Ditto. Currency exchanges don't even know if someone they sold some currency to "won or lost".

Say you buy, and later sell, some CHF to an exchange. (For you that may have been part of a "trade" to make money.) They don't even know or care that you did two transactions. (Indeed, it could be you did the two transactions with two different exchanges.) They make money separately on each of the two transactions.

Both set prices on two sides (team A and team B for sportsbooks, and bid/ask for forex brokers) at which their clients can transact.

That is not really correct, currency exchanges don't really "just pick" a price. They look at the "market" price of (say) USD/EUR (the "market" being the massive forex market) and then use that price with (as you say) just adding a percentage.

(Thus: observe that for the most currencies, that percentage is lower {because there's less risk of a fast move} and for obscure currencies that percentage is higher. Exactly like, if you sell Toyota Corollas the markup is lower (near the bone) than if you sell some obscure model.)

Answer 2

Both lose when their clients win.

Not true at all.

I used a retail forex broker for several years to hedge currency risk that I had from cryptocurrency trading on multiple fiat markets. What I was doing was effectively arbitrage. If I had a loss on a retail forex trade, it would only be because I had a larger gain on a cryptocurrency trade elsewhere.

I've used retail forex to hedge currency risks in various things I've been doing for decades. I do not see any reason to think my broker was losing while I was winning.

Forex is not a zero sum game. Forex reduces risk in foreign currency transactions, facilitating global trade.

Answer 3

It depends on the country you are in. In the United States, you are quite correct. They often carry a commission too. And, like a regular bookie, they "lay off bets." They also offer leverage.

In other countries, where they are heavily regulated in terms of things such as price quotations, they are more like commodity broker-dealers. Of course, a commodity broker-dealer isn't that far from a bookie on the dealer side of the fence. The U.K. market is reasonably well regulated from that perspective.

If, for some reason, I wanted to trade in the retail FOREX market, and I did not want to use a proxy such as buying Euro-denominated bonds, currency futures, or options, then I would fly to the United Kingdom and open an account.

If I were not carrying balances large enough to justify a plane ticket, the research time, and stay in London in order to open an account, then I would not be in the FOREX market.

Answer 4

Both lose when their clients win.

Both win when their clients lose.

Both profit from a spread (the vigorish for the bookmaker, and the bid-ask spread for the forex broker).

In response to edits

It sounds like you're asking how companies make money converting say US Dollars to Canadian dollars. It's simple, they charge commission.

If you want to buy Canadian dollars with US Dollars on OANDA you just give them money, and they find someone willing to sell you Canadian dollars. And they take their cut as a commission.

The spread shouldn't matter. You want to buy something with your money - don't overcomplicate it. If you're trading in raw currency it's essentially the same as a stock.

The reason your question has generated so much confusion is there is a large currency futures market. Most of the time when people are investing in a currency they actually are investing via a future.

Original answer Here is where you're wrong. The broker charges a commission. The commission may be based on the spread, but he doesn't profit from the spread itself, but profits from people looking to trade currency. The last sentence is key - he does not profit from the spread itself (but it may be used to calculate the commission).

In any market, you own a product. The product may be a piece of paper, but you are buying and selling a piece of paper. In order to determine the value of your product (or piece of paper), you have to go to the open market and try to sell it. A broker is a middle man to help you buy and sell your shares (pieces of paper).

A bookie makes odds and sells them. He essentially selling you fake money that's only spendable at his place if you win. He also sells you a piece of paper, but it's a bit different.

1. You don't own anything. You don't own a piece of the team/horse/whatever, you own a piece of paper that is only good with 1 guy if you win.

2. Because the paper is only good with one guy, there is no open market. Sure you can find a bookie with better odds, but once you buy in that's it.

3. Because there is no open market, the bookie makes his money by making good odds, not by commission. The bookie loses when too many people bet one way and win. He's counting on fools on both sides of the bet to profit. The bookie isn't a middle man.

4. Bookmaking isn't that hard, and the state wants everyone to play the lotto. Bookies are taking the stupid tax away from the state and putting it in their pockets.

Ok - so #4 isn't explicitly how gambling is different from trading, but I bet not many Forex brokers blow 1k a year on lotto tickets, which is what the average American does. The government can't easily corner the Forex market, so it uses an old stand-by to profit - taxes!

Answer 5

You are not very far off the mark, but as an outsider you may lack knowledge and understanding of some of the finer points. Supporting your notion would be the UK "spreadbetting" shops, where there's no suggestion that you are "trading" forex, but the user experience is (largely) the same, you "bet" the dollar will go up or down against the euro let's say, and making small bets relatively to your account size will allow you to weather the storm, not unlike the "margin" requirements of FOREX brokers. The "betting" part also gives you the much coveted UK tax-free status. Oanda however and other reputable brokers go against your notion, as they participate at several levels of the money markets and follow several sets of financial regulations, and they have little reason to lose money when you win, as they would have externalized to some extent your "order". The actual set of regulations differs from country to country so there is not one single recipe of operations, but as several brokers broadcast their daily balance, say 80% long the USD and 20% of their clients short the USD, I doubt they'll be making more money if the USD goes down proving 80% of their customers wrong. Famously when the Swiss Franc got "unpegged" and 99% of the customers were wrong (there was a 30% movement or something that pretty much nobody predicted), it took down several brokers, so no, they were not making money just because the customers were off the mark.