FX Dealers

To understand how dealers trade, you simply have to understand how dealers think
(i.e. make money). If the big banks arc the FX wholesalers, then dealers are the
salesmen trusted to push their inventory. Like the used cur salesman who wants
to clear his lot, FX dealers are looking to move as much in ventory as possible
("chopping wood" in dealer speak) and regularly adjust their profit margins here and there in order to accomplish this. It may be worth accommodaling a transaction for a customer at a slightly lower commission (or loss) if it means locking up business from that client in the future.
Because of the wheeling-and-dealing style of their work, dealers have historically been more associated with the streets of Brooklyn than any Ivy League school, and they are renowned for being quick on their feet and excelling at order-flow trading; they are the definition of the intra-day trader.
ALWAYS BE FADING
A dealer's motto. Market moves are rarely one-way and dealers understand that the majority of the time intra-day markets are range-bound (around 80 %), so any sharp move (gap) is likely to be faded by dealers who have the deep pockets and knowledge that the price will eventually come back to them ... at least most of the
time!
Another favorite trading rule of the spot dealer is 10 never trusl the first price. After a news release, dealers know that the first price print is the knee-jerk reaction of the market and most often wrong, so dealers routinely use news events to Rush out any weak positions by moving the market against them. This is commonly known as the "head fake," whereby the price moves sharply in one direction before reversing course, catching many traders off-guard in the process. Yes. A dealer's biggest nightmare is a runaway market. where they are forced
to either stop quoting prices (and risk losing customers) or continue taking the
other side of the trade and risk being stuck with a losing position. Prices can al times run away from a dealer so quickly that they are unable to offset their exposure, and leaves the stressed-out dealer with positions deep underwater. Many risk-hungry dealers that continued to quote prices during the USDJPY crash of 1998, for example, were wiped oul. In general, any one-way market is bad for dealers, since prices do not retrace and they are forced to eventually unload their positions at a loss. However, from a dealer's perspective, this is simply seen as the "cost of doing business." through their quotes and fills. and dealers complaining about traders "picking them off' in arbitrage opportunities. Both have valid points in this love-hate relationship (actually mostly hate). but in the end one cannot do without the other. As in any business, good market contacts and relationships are fundamental to success in the market, and a trader may put up with a dealer's shoddy quotes if he knows he can count on him to take a large CADJPY order on a Friday afternoon. for example. You can have the best ideas in the world. but if you cannot find a counterparty (Q take your trade then you are going to be stuck with just that: an idea.
Of course, having a good relationship does not mean you are not willing to take the mher party's money. Every time a trader picks up the phone to deal, he knows that the person on the other end of the line is going to try to rip him off, but smart traders also routinely play tricks on their brokers. A favorite FX trick was to leave small stops with dealers all over the city and wait for them to take the bait before entering the market with your real move in the form of massive orders that would catch dealers wrong-fooled and looking sill y. Similarly, dealers often know the position of their client directly (through the margin deposit) or indirectly (through industry contacts) and actively push the market against them. The street is littered with stories of one party pulling the wool over the eyes of the other in what seems like an endless game of cat and mouse,
Forward/Swap Dealers: The most cerebral of the bunch. More concerned with time than price, these guys have to constantly keep track of value dates and expirations. Calculations can turn complicated in a hurry when clients approach them with obscure set•ups for which they must either quote a price or risk losing a client. Spot Dealers: Fly-by-the-seat-of-your-pants crowd. Rely more on their gut than their head. Can instantly calculate averages and are above all concerned with their net exposure at any given time. Generally more street-smart than book-smart. they are very attuned to human behavior and trade according to flows. If they smell blood they pounce. Retail Spot Dealers: Usually ex-bank dealers that were MretiredMor decided to move on to a cushier gig . They occupy an awkward place between the interbank and the retail market, with most transactions being generally straight-forward. Cushy job that entails little more than tracking customer flows and offsetting risk with their market makers. Now and then they organize ambushes on their clients, something they revel in. To put it in perspective, the head dealer at one of the major retail FCMs used to show up to work wearing a cap that read -FUCK YOU."
Pretty much sums it up doesn't it? But thats the FX Market Trading Ambiance