Locking: a hedging method, a trick or just an annoying factor for the broker?
"The Downside of Trading"
The process of trading on financial markets through the trader's eyes has been already fully described in all possible sources. The advantages and tricks of using various trading strategies, choice of financial instruments, methods of technical and fundamental analysis, trader's psychology, patterns and features of the market - you can hardly find a topic which has not been covered in books, articles, blogs and specialized portals. However, there is at least one more link between a trader and the market - a professional intermediary or broker. And its activity, features and possibilities, as a rule, remain behind the scenes. The subject of the broker is raised only in case of disputes, claims and problems with the withdrawal of profits.
In this series of articles we would like to leave aside the tip of the iceberg and take a deeper look at the trading process. Why do the broker's stated trading and order execution rules contain certain clauses? In what cases does a broker or a dealing center really work against the client, and when certain prohibitions and limits are objectively justified? How to avoid possible cancellations of deals, restrictions on the profit withdrawal and how to understand the brokerage business from within? Read about this and other facts about the other side of trading in our monthly articles.
Arguing about, what is lockingWhether it's an effective method of limiting losses and a worthy alternative to placing stop orders, or an effective method to limit losses and a worthy alternative to placing stop orders, the debate in the trading community has been going on for years. Without going into details and arguments of both sides, we admit that there is some truth in the positions of each of them.
Locking as a lifeline and a rock on a trader's neck
Indeed, in various market situations lock or lock can minimize the trader's losses. In case of trend went against the initially open order, a negative lock will reduce the losing position. Positive loc.The position set against a profitable position will allow you to insure against market pullbacks and reversals. Zero loc. - that is, opening differently directed positions of equal volume will allow one to reach a breakeven level in any case. However, the use of locking techniques requires serious thinking and is not suitable for beginners. It is necessary, at least, to determine a sufficient volume of the second position, support and resistance levels. But The biggest problem is the correct exit from the location with the maximum possible reduction of the loss and preservation of the profit on the order, which eventually turned out to be profitable.
So, wait for a quick and unambiguous answer on whether it is worth it to apply locking to work on the market derivatives and other marketplaces is not necessary. Everyone has to come to his own opinion by trial and error. But here is a new hitch: many, if not most, brokers and dealing centers operating in Russia do not welcome or at all prohibit their clients from locking.
Let's take a visual look at the principle of locking:
Locking as a source of broker's income and loss
How is locking advantageous or disadvantageous for the broker?
A prohibition on the use of locking tactics can be contained in any of the company's internal documents, but most often it is included in the Trading Rules or the Trading Agreement/Brokerage Services Agreement. This position may not be commented on in any of the documents, on the website or in the rhetoric of the support managers, or it may be hidden behind abstract words about protecting client interests and combating fraud.
In fact, the objective reasons for banning locking can be divided into only three points:
- Regulator prohibition.
- Technical impossibility to place a locking order in the trading platform.
- Unwillingness to provide clients with an unnecessary tool to limit losses.
The prohibition of hedging through lock positions was made by U.S. National Futures Association (NFA) in 2009. The official explanation for this position: to ensure the safety of client funds. According to the regulator, traders who use locking tactics, Misjudge the financial costs of such operations and conduct "economically unjustified activities. Naturally, this ban is objectively impossible to circumvent, and clients of brokers - NFA members have to put up with it. However this rule is valid for the market segment which is limited by territory of the USA. The broker, which activities do not fall under the jurisdiction of the NFA and similar organizations, of course, may prohibit locking on the basis of "trends" of the American brokerage business and recommendations of leading U.S. regulators, but in this case it will be not about the objective impossibility to open such service to traders, but about the same reluctance to allow locking of positions of their clients.
The possibility of locking may also be prohibited in one or another trading platform. One of the most popular and well-known terminals in which it is technically impossible to open opposite orders for the same instrument is MetaTrader 5. The developer also presents this measure as a concern for the interests of traders, first of all - inexperienced ones, and increase of the financial stability of brokers. The advantages and innovations of MT5, of course, largely compensate for the ban on locking, but at the same time this fact becomes a serious obstacle to the widespread dissemination of the new terminal. Many companies prefer to use the previous version of the platform and improve it by their own developers, in order not to scare away a fairly large part of the audience, for whom locking is one of the key factors in building a trading strategy.
If both the regulator and the trading platform allow locking, and the restriction on its use is introduced at the initiative of the company itself, it is a serious reason to think about the principles of execution of transactions and the integrity of the broker.
The locking of orders can bring the company any direct harm or losses in the only case if it is the second party of clients' trades and profits from their losses, i.e. if it does not place orders in the open market, but overlaps them inside its own system, in other words, it acts according to the "kitchen" principle. Indeed, in this situation it is not profitable for a broker, or rather for a dealing center, to provide their clients with an extra tool for loss minimization, even such a controversial one as locking. Because TraderThe company will be able to get out of the location correctly, depriving an unscrupulous company of profits.
Brokers working on the agent model and performing solely intermediary functions, it makes no sense to prohibit locking. They profit from the spread and SWAP on each open trade. And the more such deals are opened, the more client trading costs are transformed into company income. The broker's concern for the interests of his clients and the desire to protect newbies from reckless risk can be expressed not in prohibitive measures, but only in recommendations not to use locking without a clear plan for exiting the lock, to calculate the exact margin for both positions, to balance the risks and one's real market experience, etc.
A broker cannot, and is not obliged to, control the trading activity of his clients and minimize losses for them. In this case, it would be logical to forbid opening orders without the StopLoss setting, entering the market more than 25% from the deposit and other risky actions, which, you must admit, would look absurd. Every trader is an adult who must accept and understand the risks associated with margin trading. The broker's job is to provide him with all necessary conditions for normal activity, including the possibility to apply any hedging tactics and methods, and to inform about the possible risks. And the introduction of bans, justified by subjective factors such as the desire to streamline the market or business, is rightly left to the regulators by the majority of conscientious market participants.