Virtual Dealer plug-in – dirty game against you

• Introduction
• How does the virtual dealer plug-in work?
• Types of orders in terms of the order source
• Theory vs. practice

Introduction

Probably any experienced trader knows that forex brokers often use plug-ins called virtual dealers. Such a plugin first appeared in 2006 and made a lot of noise among traders. For this reason, such developments were practically classified, and now they are called risk management. Yes, brokers manage their risk because they take a big risk when a trader’s account is in b book, and the trader starts to win. A B-book is when the broker’s server receives the quotes but does not transmit the orders but processes them by itself. The trader trades with the broker, and if the trader loses $1000, the broker wins $1000, and vice versa. When it is the other way around, the broker gets nervous and manages his own risk. 

Some brokers resort to the help of risk management companies, which share all risks as well as all profits from the trader’s losses on contractual terms. Often liquidity providers can play the role of such risk managers. Other brokers perform the role of a risk manager independently, buying a virtual plug-in or ordering their own, based on their ideas, to programmers.

How does the virtual dealer plug-in work?

The simplest virtual dealer randomly, i.e. irregularly increases the order execution time; thus, on a quiet market, such an increase in execution time is unnoticeable for a trader, but at high market activity, when HFT Software and latency arbitrage software operate, slippage increases and strategies begin to lose.

Such plugins can be set for all accounts of the server or a certain group of accounts. Let’s say the broker creates group A accounts and group B accounts. If a trader loses, he/she is placed into group A with ideal trading conditions, and if he/she wins – into group B with the plugin.

Also, very often, the plugin can be adjusted to the trading method. 

Types of orders in terms of the order source

The broker sees if the order was opened as a result of manual trading or automatic trading with a forex robot. And before 2022, some brokers set up plugins only for automatic trading since only a robot can quickly make a decision and send an order as needed in the case of latency arbitrage trading. But in 2022, many producers of arbitrage trading software started using the emulation of manual trading. I.e., the forex broker saw that the order was opened manually, but in fact, it was opened by a forex robot or program. That’s why forex brokers started to apply the virtual dealer more often to traders who trade “manually.”

Not many forex traders are aware that the order can be classified not only as an order opened manually or by a forex robot but also as an order opened in the web terminal, an order opened from the mobile terminal, an order opened as a signal source, an order opened by a dealer (a broker) and an order open through a gateway (a broker may act as a liquidity source for another smaller broker, and then he sees the order from the small broker with a label gateway.

Actually, we are not interested in the imitation of opening an order by a dealer or through a gateway, but the other five sources (manual, automated, signal, web terminal, mobile) would be useful to disguise arbitrage trading or trading on the news, for example. Of course, you should understand that if the brokerage company does not offer a mobile terminal, then imitating an order opening via a mobile terminal not only does not help to disguise high-frequency trading but also leads to the fact that the broker will quickly realize that you are trying to mask a trade which the broker will not welcome. 

Also, you have to understand that login and order are two different events, and if you do not log in from the mobile terminal and start trading with orders marked mobile terminal, or log in from the mobile terminal and orders will be from different IP addresses, the broker will quickly realize that something not natural is going on.

Theory vs. practice

Of course, it all sounds easy in theory, but in practice, it’s very difficult to write an arbitrage program that would simulate different types of orders from the perspective of the source of the order and then create an environment for high-frequency trading where the login to the web terminal and trading from an arbitrage program would be done from the same IP address.

I’m not even talking about the fact that this environment should be organized on a virtual server.  Let me explain what I mean by this environment for high-frequency trading. So, let’s say we have a program for arbitrage trading that should imitate trading from a web terminal. If this is a standard latency arbitrage, the task is simplified; the trader opens an internet explorer window and performs the login procedure to the web terminal. The broker sees the IP address of the web server – great. Next, the trader launches a latency arbitrage robot or program, and trading is done from the same IP address – not bad either. But the catch is that the standard latency arbitrage won’t work for a long time, even if the broker thinks the orders are sent from a web terminal or a mobile smartphone with a mobile terminal installed. For this reason, traders use 2-legged strategies that allow them to increase the order time and the fixed profit through hedging. This will also not be a problem if a trader has opened two accounts with two different brokers, but if the accounts are opened with one broker, the second account will require a second IP address. In this case, the trader needs to run the software for live trading, where the first account will be accessed through the main IP address of the VPN server and the second through an additional one or a proxy. The same problem will occur with logins to the web terminal or mobile terminal. One of the Web Terminals will have to be run through a proxy that was created on the additional IP address of the terminal.  

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In the case of the mobile terminal is even more complicated; you will need to run the mobile terminal on your iPhone or Android through the proxy or VPN to log in from the same IP address as to trade. Or use a cell phone emulator on the VPS.

So far, the above is a theory, but its implementation could lead to a change in the balance of power in the forex market for another couple of years, allowing forex traders to win selected by virtual dealer producers and greedy forex brokers.