Are foreign exchange rebate policies good or bad? Detailed analysis of the pros and cons of foreign exchange rebate policies
【Advantages of Rebate Policy】
We believe there's a reason behind the existence of anything, and the same holds true for rebate policies.
Rebate policies are a reward mechanism given by brokers to IBs, and IBs give a certain rebate to customers, making IBs undoubtedly beneficiaires.
IBs earn a portion of the service commission, reducing costs for customers.
For brokers, rebate policies can attract more IBs to help them expand their market, thereby benefiting from a volume-based model.
【Disadvantages of Rebate Policy】
So, what are the disadvantages of rebate policies?
Under a set spread by the broker, the rebate policy is a win-win-win for the brokers, IBs get service fees, and customers reduce costs.
The forex market is also continuously expanding.
However, due to inherent flaws in the rebate policy system, there are still some drawbacks.
1. Malicious competition among brokers
The main areas of malicious competition are the rebates offered by brokers, which essentially is a price war, with consequences that are generally understood.
Each broker has a cost, whether operational or otherwise, and will not operate at a loss. High rebates inevitably affect the brokers' operations.
Therefore, it is necessary to consider a reasonable profit margin for brokers, whose spread costs are currently around 0.7~0.8 points.
2. Malicious competition among IBs
Malicious competition among IBs mainly occurs among some rebate websites. Some rebate sites may offer up to 98% or even 100% rebates, but for large IBs, their operations have costs, and such high rebates result in diminished profits.
A confession article from a forex IB once appeared in the financial section of the Tianya Forum (which was later banned by the forum), during a time when traders were very unfamiliar with the forex system, pay little attention to trading costs, and market makers allowed IBs to arbitrarily increase the spread, enabling fast initial capital accumulation through increased spreads.
However, such instances have become rare nowadays, with traders paying close attention to spreads and trading costs.
3. Wash trades and credibility crisis
Because of rebates, traders have devised a wash trading profit model.
For example, if the rebate is $10 per lot, through EA or other high-frequency trading, as long as the loss per lot doesn't exceed the commission rebate (better if there's a profit), your interests are protected as long as volume is sufficiently high.
Of course, this wash trading model is not as simple as it sounds, and from an industry development perspective, it's unhealthy.
If your orders are large, brokers might manage to market them, but for smaller ones, brokers have to absorb them themselves (note, in STP models, brokers need a certain volume to market orders), meaning brokers are constantly losing money.
Brokers usually set some conditions to prevent wash trading (though some claim to allow it, there are restrictions), like trade time, whether it's 2 minutes or 1 minute.
However, once brokers have made regulations and clients are operating within them, then the rules of the game should be respected.
