Swaps and Liquidity providers

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My broker gives me a positive swap if i short EURUSD .

But the overnight euribor rate is 3.392% (at the time of writing).

Shouldn't the broker be paying a positive swap on the buy side  ?

Does that mean the LP of that broker is opening an opposite position ?

(so i short eurusd , the LP will then buy euros ? hence the positive swap in the short?)

Thank you 

Also the swap for 1Lot is 3.48$ , its not 3392$ , so that is from the pooling of orders i assume . So is the swap also dependent on how many traders in the broker are trading in the same direction as me?

 
Lorentzos Roussos:

My broker gives me a positive swap if i short EURUSD .

But the overnight euribor rate is 3.392% (at the time of writing).

Shouldn't the broker be paying a positive swap on the buy side  ?

Does that mean the LP of that broker is opening an opposite position ?

(so i short eurusd , the LP will then buy euros ? hence the positive swap in the short?)

Thank you 

Also the swap for 1Lot is 3.48$ , its not 3392$ , so that is from the pooling of orders i assume . So is the swap also dependent on how many traders in the broker are trading in the same direction as me?

When you buy, you take money from them, you pay them interest, because you borrow that money. You pay interest to the liquidity provider for borrowing.

When you sell, you actually do an "empty sell", meaning, you give money to the liquidity provider. The "value" if your sell is a liability, covered by your broker, the holder of the other side of the CFD between you and him.

This is why your payed interest is higher than your received interest.

Both, the broker and the liquidity provider make money on your swap payments, no matter the direction.

The CFD liability is usually covered only by the risk, which is secured with the margin, you have to provide.

The actual value of your short position is in fact only on the market, as it is the supplies to liquidity. The consequence is, the liquidity provider gains liquidity by your short coverage, because he can use the same amount twice. Once to cover your short position, and since he is the market maker, a second time for someone else holding a buy position. Hence he receives twice the payment (difference in short and long swap) of interest for the same money.
 
Dominik Christian Egert #:
When you buy, you take money from them, you pay them interest, because you borrow that money. You pay interest to the liquidity provider for borrowing.

When you sell, you actually do an "empty sell", meaning, you give money to the liquidity provider. The "value" if your sell is a liability, covered by your broker, the holder of the other side of the CFD between you and him.

This is why your payed interest is higher than your received interest.

Both, the broker and the liquidity provider make money on your swap payments, no matter the direction.

The CFD liability is usually covered only by the risk, which is secured with the margin, you have to provide.

The actual value of your short position is in fact only on the market, as it is the supplies to liquidity. The consequence is, the liquidity provider gains liquidity by your short coverage, because he can use the same amount twice. Once to cover your short position, and since he is the market maker, a second time for someone else holding a buy position. Hence he receives twice the payment (difference in short and long swap) of interest for the same money.

So the swap is essentially pointing to where the LP is earning more by interest.

If i buy 1Lot of eurusd cfd for instance , 1:30 lev , they have to turn some of their usd to eur ? 

 
Lorentzos Roussos #:

So the swap is essentially pointing to where the LP is earning more by interest.

If i buy 1Lot of eurusd cfd for instance , 1:30 lev , they have to turn some of their usd to eur ? 

Usually the liquidity pool is in one currency, the broker does the same exchanges.

The liquidity provider will have a rate negotiated with the broker. So whenever the broker takes money from them, they have to pay the liquidity pool interest. And they charge you that amount + some for their own pocket.

Vice versa for a short position. - Sort of..

No, it does not give you a clue on anything about the liquidity provider.They just make a fund guarantee available to the broker.

Do you really think there is "real" money at play? It's all just balancing assets versus liabilities.

Mostly the coverage comes from other assets, not from cash on some account. It's a play of long term vs short term credits/debts.
 
Dominik Christian Egert #:
Usually the liquidity pool is in one currency, the broker does the same exchanges.

The liquidity provider will have a rate negotiated with the broker. So whenever the broker takes money from them, they have to pay the liquidity pool interest. And they charge you that amount + some for their own pocket.

Vice versa for a short position. - Sort of..

No, it does not give you a clue on anything about the liquidity provider.They just make a fund guarantee available to the broker.

Do you really think there is "real" money at play? It's all just balancing assets versus liabilities.

Mostly the coverage comes from other assets, not from cash on some account. It's a play of long term vs short term credits/debts.

yeah there's a lot of mistakes in my initial question .

So the euribor is charged to an entity is not credited .

I don't understand the positive swap to be honest .

So the broker has many Liquidity providers and there's scenarios where they make money (everything else they do makes them money , yeah) from some exchange routes between their LPs ? 

Thanks 

(if the broker is not a market maker ,it is them that need to be holding the underlying currencies of positions ?)

 
Lorentzos Roussos #:

yeah there's a lot of mistakes in my initial question .

So the euribor is charged to an entity is not credited .

I don't understand the positive swap to be honest .

So the broker has many Liquidity providers and there's scenarios where they make money (everything else they do makes them money , yeah) from some exchange routes between their LPs ? 

Thanks 

(if the broker is not a market maker ,it is them that need to be holding the underlying currencies of positions ?)


I am not sure if I understood you. But, it is all based on trust, there is no actual cash involved. Liquidity providers give a guarantee, brokers use that guarantee and cover the risk with your margin.

A short sell is a guarantee for the liquidity provider to keep an asset at a certain price level. It works about like this: at the point where you open a short, the amount is "taken" from the liquidity pool at that price (sold). Now you sell it to someone else on the market, and buy it back at a better price. When you do so, it gets transferred back into the liquidity pool.

You have sold for you, and for the liquidity pool. You get payed your profit by the one who you sold to. While the liquidity pool had sold it to you at open price and receives it back at your close price, for the liquidity pool it is still the same amount of money. Nothing has changed for them.

All this happens only with guarantees, no money, except for you and the counter part, who bought from you and has to cover his loss, will be moved. So the transfer is actually between the two retail traders accounts.Although the market is used to do the actual transfer of the value.

So, you see, there is nothing involved, except for some guarantees. And these guarantees raise interest, because "reputation pays off"...

As said, the liquidity provider is able to give loans, for whatever you do with it. The broker only distributes this loan, and secures it with margin. You are the only one who is paying...everyone else makes money on you not having the required "reputation" or guarantee.... (Or cash for that matter)

No, the broker does not need to hold any position. You do that. They only exchange (for you).


Edit:

Maybe it's not clear yet, but the liquidity provider only gives a guarantee. The way he provides this guarantee can be iE by mortgage coverage. So someone's real estate, which in turn is also only credited with a guarantee... And so on.

The point here is, the liquidity provider never had put out any money actually. Only a value of an asset, which is iE allocated in USD, maybe in a 10 year Treasury. - They just double the interest payment on the same "value" by providing the guarantee of coverage to you. Or you could say, they resell the guarantee of the central bank for the currency they provide in.

They don't care what you do with it, because for them the only currency, they care about is the currency in which their asset is allocated. A US Treasury is in USD... They don't care about the exchange rate at all...

 
Dominik Christian Egert #:

I am not sure if I understood you. But, it is all based on trust, there is no actual cash involved. Liquidity providers give a guarantee, brokers use that guarantee and cover the risk with your margin.

A short sell is a guarantee for the liquidity provider to keep an asset at a certain price level. It works about like this: at the point where you open a short, the amount is "taken" from the liquidity pool at that price (sold). Now you sell it to someone else on the market, and buy it back at a better price. When you do so, it gets transferred back into the liquidity pool.

You have sold for you, and for the liquidity pool. You get payed your profit by the one who you sold to. While the liquidity pool had sold it to you at open price and receives it back at your close price, for the liquidity pool it is still the same amount of money. Nothing has changed for them.

All this happens only with guarantees, no money, except for you and the counter part, who bought from you and has to cover his loss, will be moved. So the transfer is actually between the two retail traders accounts.Although the market is used to do the actual transfer of the value.

So, you see, there is nothing involved, except for some guarantees. And these guarantees raise interest, because "reputation pays off"...

As said, the liquidity provider is able to give loans, for whatever you do with it. The broker only distributes this loan, and secures it with margin. You are the only one who is paying...everyone else makes money on you not having the required "reputation" or guarantee.... (Or cash for that matter)

No, the broker does not need to hold any position. You do that. They only exchange (for you).


Edit:

Maybe it's not clear yet, but the liquidity provider only gives a guarantee. The way he provides this guarantee can be iE by mortgage coverage. So someone's real estate, which in turn is also only credited with a guarantee... And so on.

The point here is, the liquidity provider never had put out any money actually. Only a value of an asset, which is iE allocated in USD, maybe in a 10 year Treasury. - They just double the interest payment on the same "value" by providing the guarantee of coverage to you. Or you could say, they resell the guarantee of the central bank for the currency they provide in.

They don't care what you do with it, because for them the only currency, they care about is the currency in which their asset is allocated. A US Treasury is in USD... They don't care about the exchange rate at all...

Thank you for the info . 

So they essentially "tie" that amount down in the LP, there is no exchange occuring.

The swaps are legally required to be passed on to the trader then? (because he is the owner of the position)

For 1Lot then , lets say i want to sell Eurusd . Lev 1:30 and the account is in usd.

i have to buy 100000*eurusd Usd so 109200usd , and i'd need 109200/30 =3640 $ Usd as margin . (~1.092 was the rate at the snapshot of 3.48 more or less)

I'll receive 3.48$ per swap application that's 0.095% of the margin , where does that come from ? 

 
You really like to overcomplicate things guys.
 
Lorentzos Roussos #:

Thank you for the info . 

So they essentially "tie" that amount down in the LP, there is no exchange occuring.

The swaps are legally required to be passed on to the trader then? (because he is the owner of the position)

For 1Lot then , lets say i want to sell Eurusd . Lev 1:30 and the account is in usd.

i have to buy 100000*eurusd Usd so 109200usd , and i'd need 109200/30 =3640 $ Usd as margin . (~1.092 was the rate at the snapshot of 3.48 more or less)

I'll receive 3.48$ per swap application that's 0.095% of the margin , where does that come from ? 

I am confident after studying this document, you will update your calculations...

It has nothing to do with margin or with leverage, but it is probably as flexible (complicated) as margin calculations are..

It depends for what you want to calculate the swap.

Take a look:

Please don't make me explain this, because I don't want to... Could write an article about money calculations for retail traders instead.
 
Alain Verleyen #:
You really like to overcomplicate things guys.
Why? He asked and I answered him...

I once wanted to know as well, so I began to research and tried to understand how the markets actually work. I couldn't imagine how they transfer such huge amounts of money so fast.

Luckily I have a friend, who works on the "Parket" at Bavarian State Bank and he could explain to me how they do it actually.

I guess, I would have never figured it out on my own....
 
Dominik Christian Egert #:
I am confident after studying this document, you will update your calculations...

It has nothing to do with margin or with leverage, but it is probably as flexible (complicated) as margin calculations are..

It depends for what you want to calculate the swap.

Take a look:

Please don't make me explain this, because I don't want to... Could write an article about money calculations for retail traders instead.

Thank you i'll try and understand .

That would be a very interesting article .

(so in short words : "someone is placing bets on the insurance of the bets")
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