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

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RETAIL e-FX CLIENT >>> a day; it’s not feasible that we would or could trade against individual clients,” Stevens concludes. Not robbers On possible conflicts of interest in order execution that can occur with MMs, Kisyov says: “Market makers literally make the market for traders. They sell to buyers and buy from sellers by quoting fixed spreads. Unfortunately, most of the MMs quote variable spreads now. Market makers have been growing in number since the dawn of retail FX. I don’t think they could have survived if they had robbed clients’ accounts, especially in this highly regulated environment, where clients’ interests have been strictly protected.” Glenn Stevens “..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 t rades back to the bank, than to act as a MM ...” chances of closing in profit few pips away from the opening price, which is inevitable loss for the MM.” Vedikhin states that some FX brokers are criticised by retail investors for having a conflict of interest when executing client orders; they sometimes have to become the counterparty to their own clients’ trades. However, most of this criticism is unwarranted, he claims, because the majority of clients trade with brokers that are fully licensed and regulated by various agencies such as the FSA and NFA. “Regulated firms like Alpari (UK) must abide by rules regarding best execution and treating the customer fairly at all times. This prevents any wrongdoing on behalf of the broker because regulated brokers are put under immense scrutiny by their respective regulator,” he says. Stevens agrees: “One of the biggest myths promoted by NDD brokers is that DDs are somehow ‘trading against’ clients. This is hype. At GAIN, we’re a hybrid model. We offset a potion of our trades immediately in the interbank market. Everything else is our ‘net customer exposure’ and managed on an aggregate basis. We maintain strict position limits and hedge our exposure in the interbank market as needed, according to our risk management guidelines. In certain cases, we may offset customer trades immediately in the interbank market. We process well over 100,000 trades While Jesse Richards, a registered broker and a principal at Fastbrokers.com, comments: “When the broker is on the other side of each trade, there is a conflict of interest as that broker will lose money if the client profits (if the broker does not hedge its risk), therefore the broker may be more profitable if the trader makes bad trades. I believe that the majority of deals done at NFA-regulated FDMs are done so on an ethical basis, however there are many unscrupulous brokers that actively manipulate the price to their advantage and to the disadvantage of the trader. The conflict of interest manifests itself in the execution of orders. The two most common forms of manipulation Layth Sanjaq “Scalping is usually not allowed by MMs because it gives the client higher chances of closing in profit few pips away from the opening price, which is inevitable loss for the MM.” 130 | april 2010 e-FOREX
RETAIL e-FX CLIENT >>> traders complain about are stop hunting and spread widening.” Richards adds stop hunting is the practice of a MM moving the price to hit a large number of protective stop orders, even if the price may not have reached that level through competitive pricing. In this scenario the MM pushes the price up or down by a few pips momentarily with the intent of stopping out traders and booking profits for the dealer. Spread widening is the practice of artificially widening the bid/ask spread when accounts are in a profit, to eliminate said profit or even forcing accounts to incur a loss due to margin issues, says Richards. Ditlove says MB Trading holds its liquidity providers to fairly specific terms that if they are showing a price, they have to execute a certain amount at that price. He adds that obviously, there are scenarios such as news releases where more orders are being fired at them and they also want to execute less. But compared to years ago when a deal desk could slip a customer 100 pips because of the non-farm payroll data releasing, things have come a long way, he claims, adding: “Does every fill occur on the visible bid and ask at the time you click the button? Probably not under fast market conditions, which is no different then an NYSE specialist who is charged with maintaining an orderly market. “That being said, the way to combat this circumstance is to add more liquidity venues to our system,” Ditlove continues. “MB Trading is an aggregator of liquidity; if we find that there is less then optimal liquidity we add more banks as sources. But that doesn’t change the fact that our routing algorithms are very fast and our liquidity provider relationships are fairly deep, so the system will generally find a way to get a fill in a timely manner. The main point that I would focus on is that any slippage that occurs on our system is a function of global supply and demand, as opposed to a DD that refuses to give a retail client a fair deal in order to maximise their own profit.” ECN settlement On how the FX ECN model works and how it operates on a settlement rather than pricing basis, Richards says because forex is a non-centralised market, there are two ways for retail traders to access it; either through a MM offering marked up liquidity from one or several liquidity providers, or through an ECN-style system. Jesse Richards “The two most common forms of manipulation traders complain about are stop hunting and spread widening.” “Now, it should be noted that while banks, prime brokers and large institutional traders may operate on a settlement basis utilising a true ECN environment, most retail forex ECN style accounts still operate on a pricing basis even if they are STP, NDD accounts,” Richards explains. “On a retail forex ECN style system, while it may operate on a STP basis, the counterparty to the client’s transaction is ultimately a prime broker, who is not aware of the identity of the client. Instead, the prime broker has a credit relationship only with the broker counterparty, that is, the company you would normally open an account and deposit your funds with. Retail ECN models eliminate the inherent conflict of interest that exists with a MM, but do not truly operate on a settlement basis.” Costs and fees to trade on ECNs depend on different factors, according to Zagara. Generally speaking, he says the trader is offered an ‘all inclusive’ commission quote which includes the broker’s profit and fees. The broker then pays its fees to the prime broker and to the ECN itself, which charge a transaction or clearing fees, similarly to futures exchanges. Some of these charges do not apply to what Zagara considers to be ‘home made’ ECNs. Also, he notes that while more brokers are embracing the forex ECN style, we can expect to see a growing commission battle among brokers, which will eventually benefit the traders; a similar path that the electronic futures have followed in the past. However, Kisyov adds it is the individual trading style that matters when choosing a trading model, in terms of the potential impact on trading performance. “It is always about costs involved and execution when elaborating on the choice of a trading model. With variable spreads, the difference between the bid and ask prices of a certain currency pair fluctuates in a range. On the other hand, fixed spreads are predetermined under all market conditions.” Kisyov states that Deltastock’s fixed spread on EUR/USD is 2 pips, while it goes down to 0.1 pips in the ECN/STP module. The company has utilised direct pricing with no mark-up or mark-down from its liquidity providers, and the only fee that applies for ECN-STP order execution is 0.3 pips for trades as low as 10,000 base currency units. So, assuming a EUR/ USD order is executed at 0.1 pips spread, the bottom line for clients will be 0.4 pips total transaction costs. MT4 bridging issues Bringing ECN trading to the retail trader, many firms offering ECN trading now claim to bridge to the everpopular MT4 platforms. On issues with bridging an MT4 platform to an ECN, Ditlove says MB Trading spent more than a year finding out. He states: “The short version is that MT4 is half a decade old at this point, and MetaQuotes is busy working on MT5 now. When MT4 came around, there were no ECN forex brokers. It’s a round plug in a square hole. We had to meticulously consider every part of how MT4’s architecture worked and strip out pieces that simply didn’t make sense in our current execution model. There are now a lot of brokers that claim to be FX ECNs with MT4, but we review what they are claiming and know that at best, they are simply routing orders out to one destination and again failing the transparency test.” Most of the issues are technology related, although the prime reason for there being issues is because FX ECN’s and MT4 have vastly different trading philosophies, says Vedikhin. The biggest challenge, he warns, is to be able to match client orders from MT4 with liquidity from an ECN. ECN’s show market depth but MT4 does not, so it is important to resolve the issue of execution when an MT4 client wants a trade executed immediately at the best possible price. “In MT4 it is not possible to provide partial fills, but ECN platforms often execute client orders at slightly different prices subject to available liquidity at a particular price. This core difference in approach can cause issues when bridging liquidity,” he comments. Zagara says Fastbrokers.com explored MT4 bridging 132 | april 2010 e-FOREX april 2010 e-FOREX | 133
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Should You Consider Using A Forex ECN Platform? - MB Trading

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