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

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