Should You Consider Using A Forex ECN Platform? - MB Trading

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RETAIL e-FX CLIENT >>> because it requires advanced requirements in terms of technology, an excellent IT infrastructure and can bear high development costs, he adds. Vladimir Kisyov “The ECN environment allows clients’ orders to interact with other clients’ orders. All trade orders are matched between counterparties in real time.” is the answer to the growing number of FX traders demanding more transparent and fair pricing. He comments: “Retail Forex is today a mature product and traders understand its logistics (including the fact that pricing and trades are often handled in a market making environment). While there are still a few brokers using ambiguous statements about the nature of their retail forex system, most brokers are now offering a variety of trading environments to satisfy the growing demand of alternative products, often in place of the classic dealing desk.” Changing expectations “Today, we see a significant change in terms of clients’ expectations,” Vedikhin points out. “Clients from all backgrounds, including retail, are becoming increasingly demanding with regard to the suite of services they are being offered by their broker. All traders are now requesting institutional-level execution speeds, and NDD execution helps us to deliver on that. While approximately only 5% of retail clients trade via ECNs today, we expect this to grow to over 95% within the next few years. The benefits of ECN trading, including transparency, deep liquidity, market depth and NDD execution, will then become available to everyone.” On brokers offering both DD and NDD FX trading facilities, Kisyov says the number of NDD FX trading facilities (either STP or ECN-STP brokers) has notably increased in the last couple of years or so. He comments: “The shift from the DD to NDD business model has accurately addressed the growing needs of the forex trading community for greater liquidity and best execution, thus explaining the major migration of retail clients from MMs to ECN-STP brokers. Nonetheless, the DD model still provides advantages to traders.” “The logical consequence has been to see brokers offering an ECN-style environment. However, few brokers really allow their clients to trade these products, but simply made a major switch from the ‘fixed’ spread model to a ‘floating’ spread pricing which they marketed as a ‘NDD’ or ‘multi bank’ feed. Unfortunately these are merely DD-based systems which simulate or replicate the floating bid and ask of a true ECN model, but execute orders on a DD basis,” states Zagara. Andrey Vedikhin, CEO of Alpari (UK), agrees that most brokers would like to be in a position to offer NDD execution because it allows for a much greater level of automation when matching trades. However, NDD execution is relatively difficult to achieve Giuseppe Zagara “..most brokers are now offering a variety of trading environments to satisfy the growing demand of alternative products, often in place of the classic dealing desk.” 126 | april 2010 e-FOREX
RETAIL e-FX CLIENT >>> Sanjaq continues: “I believe that brokers who are offering both DD and NDD are actually DD brokers trying to catch the trend by promoting NDD trading for their clients. The DD-NDD dilemma is ethical and can not be taken as a variety of services. Since an ECN broker’s role is to give individual traders access to the interbank market, they do not benefit from the spreads or the losses of their clients. Therefore, they usually charge a commission fee per transaction proportional to the trade size. Besides, banks usually charge the ECN broker commission fees for transaction executed on their end.” Wolf in sheep’s clothing? While Ditlove comments: “This is an example of a wolf in sheep’s clothing. If your broker does not immediately display your bid or offer for all other clients to see, if your broker maintains minimum fixed spreads, if your broker knows information about your order that is not fully transparent to the rest of the marketplace and retail traders alike, then you’re not getting a fair deal. Just because someone calls themselves a NDD-ECN does not make them so. Frankly, it’s laughable.” Yet the debate about dealing desks and non dealing desks (NDD) is a red herring, claims Glenn Stevens, CEO at GAIN Capital. He says as a retail trader, your Andrey Vedikhin “While approximately only 5% of retail clients trade via ECNs today, we expect this to grow to over 95% within the next few years.” primary concern should be your ability to get into a trade quickly and at the rate you request, and where your orders are filled. These things can positively or negatively impact your trading results; where your order is ultimately routed does not. Stevens explains: “Our belief is that NDD’s came about in response to complaints about the poor execution quality at some of the retail brokerages. Promoting themselves as a NDD was a way for brokers that entered the market late to differentiate themselves. It’s fairly well known that when the first NDD firms came on the scene there were several firms with poor reputations for execution, especially where they filled their client’s stop loss orders. Also, some brokers prefer the NDD model because it’s much easier to take a price feed from a bank, mark it up to the retail customers, then push all the trades back to the bank, than to act as a MM and manage risk internally while providing the best client dealing experience possible.” Continuing, Stevens states that GAIN Capital believes an experienced, professional trading desk is the real benefit to its retail clients at FOREX.com. “We don’t have an arm’s length relationship with our clients; we take full responsibility for the prices we quote and where we fill orders.” Conflict of interest In a pricing basis model, also known as a MM model, the prices are streamed from data vendors directly to the client terminals. Clients perform trades on the streamed prices, but the trades reach a dead end, which is the MM’s servers. Meanwhile, the dealers of the MM are trying to negotiate execution for the favour of the MM and to minimise the profitability of their clients. Sanjaq states this model creates a huge conflict of interest between the broker and their clients, as the loss of the client is considered as pure profit for the broker. He states: “As a client trading on MM’s platform, when you are buying a currency pair, the MM is your counterparty (selling to you). Therefore, if your buying order goes in profit of $1000 for example, it means that the MM is losing $1000. It’s as simple as that, unless the MM has a risk management policy that it applies to offset your order with a different counterparty at a certain point. Slippage and requotes are techniques used by MMs to minimise the profitability of the client. Scalping is usually not allowed by MMs because it gives the client higher 128 | april 2010 e-FOREX
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