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History of Retail Forex News Trading

At the time this article was published, February 2014, the golden age of trading news releases was long gone. In the late 2000s, a flood of newbie traders came in the forex market pumped by promises of easy forex riches. The pitch went something like this:

‘’Trade just 5 minutes per day and make more than you would make in a month at your boring 9 to 5 job!’’

The brochures showed a chart of a highly volatile news event (usually the Non-Farm Payrolls jobs report) along with an arrow and an X. The chart below demonstrates this scam clearly.

The arrow points to where you would’ve bought and the X shows your exit. Naturally, as it is usually the case with these marketing gimmicks, you would always get a fill at the exact time the NFP report came out. You would never incur any slippage and somehow you’ll always manage to exit at the very top or bottom of the move. This technique became known as ‘’straddling’’.

Straddling the news

Straddling the news involves placing stop orders on both side of the market right before a news event that is expected to cause high volatility. A trader will place a buy stop order at, for example, 10 pips plus the spread above the current market price and a sell stop at 10 pips below the current bid. After the fundamental report hits the wires, a substantial one sided movement occurs. Because the trader has placed pending orders on each side of the market, they will benefit regardless of what direction prices move in the aftermath of the news event. This practice was very popular among retail forex traders during 2006 – 2007 but was quickly rendered ineffective by broker execution and changing market conditions. For a short while, it seemed like the marketing gurus were right. Trading the news was easy and anyone who wasn’t doing it was missing out on some risk free profits. What made this situation possible was the fact that most forex brokers were of the so called ‘’Market Maker’’ variety. Like the name says, the ‘’Market Maker’’ creates a market for a specific financial product. MM brokers didn’t relay most customers’ orders to the interbank market but instead matched them in-house and only offset their risk exposure in the interbank.

Because MM brokers didn’t pass on customers’ orders to the interbank market but kept them in-house instead, the execution was instant. This allowed traders to execute market orders on non-existing prices. Usually, around important fundamental releases like NFP, banks withdraw their bids and offers from the orderbook. The forex market is very liquid most of the time and the sudden withdrawal of orders causes the bid / ask spread to dramatically widen.

In addition to this, banks are not in the business of handing out money (well not for free anyway). Their trading desks are directly connected to all the major news networks like Bloomberg and Reuters. They can get the news just slightly ahead of the general public. If the Jobs report disappoints by coming in on the low side, most banks will not sell the US Dollar outright because they recognize that there will be no liquidity to execute their large order in the immediate aftermath of the news. What they will do instead is simply withdraw their offer to buy US dollars but leave their offer to sell in the orderbook. The effect of the one-sided liquidity withdrawal is an immediate price and spread spike, stopping out everyone who got caught on the wrong side of the market.

To put it simply, for a while, retail traders were allowed to execute trades on prices that never really existed. Either the quotes were lagging slightly behind the interbank or the liquidity simply wasn’t there. For example, the EUR/USD may have been quoted with a spread of 5 or 10 pips post-NFP but the actual volume behind that spread was very small, not enough to cover the demand by the retail traders.

MM brokers were caught with their pants down. Their customers would use EAs and scripts to automate the order placing process. Every first Friday of the month (NFP release day), a river of retail orders would flood the broker’s servers right after 8:30 AM EST. With a promise for immediate execution to retail traders and no liquidity in the interbank to offset this risk, MM bucket shops were caught with their pants down. For a while, no broker dared to challenge the status quo. Doing so would mean losing a ton of business from retail clients. It’s not a secret that most traders are losers. Whatever profit was made after NFP and other volatile news items was likely squandered by executing bad trades during the rest of the month. But as time went on, a small minority of disciplined traders were starting to become a threat to the very survival of some brokers. The highly profitable news trading practice allowed a select few to quickly compound their profits. Few months and several NFP reports later, these traders were starting to take a huge chunk of the brokers bottom line.

The Pushback

Then it began. The start of the pushback was unimpressive. A ‘’coalition’’ of brokers led by Oanda issued a public statement on the matter, attempting to do a name and shame campaign against news traders. The naive attempt wasn’t successful, no serious trader considered stopping news trading, on account of a mere statement, it was just too profitable. After their attempt at a verbal intervention failed, brokers had to take action, verbal abuse wasn’t cutting it.

Oanda was the first to intervene. The broker started to jack up the bid/ask spreads few minutes before and after important news announcements. Spreads would go up to what was then considered astronomical 50 to 100 pips on the highly liquid EUR/USD currency pair. Being the biggest retail broker at the time, Oanda’s action reverberated across the broker space and gave encouragement to others to follow suit. As the spread increases made straddling the news unprofitable, news traders left Oanda for other brokers, only to be met by re-quotes, prize freezes and platform outages. The profit window was closed.

Investing | Forex | Trading | Fundamental Analysis


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