Should You Consider Using A Forex ECN Platform? - MB Trading
Should You Consider Using A Forex ECN Platform? - MB Trading
Should You Consider Using A Forex ECN Platform? - MB Trading
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RETAIL e-FX CLIENT<br />
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traders complain about are stop hunting and spread<br />
widening.”<br />
Richards adds stop hunting is the practice of a MM<br />
moving the price to hit a large number of protective<br />
stop orders, even if the price may not have reached<br />
that level through competitive pricing. In this scenario<br />
the MM pushes the price up or down by a few pips<br />
momentarily with the intent of stopping out traders<br />
and booking profits for the dealer. Spread widening is<br />
the practice of artificially widening the bid/ask spread<br />
when accounts are in a profit, to eliminate said profit<br />
or even forcing accounts to incur a loss due to margin<br />
issues, says Richards.<br />
Ditlove says <strong>MB</strong> <strong>Trading</strong> holds its liquidity providers<br />
to fairly specific terms that if they are showing a price,<br />
they have to execute a certain amount at that price. He<br />
adds that obviously, there are scenarios such as news<br />
releases where more orders are being fired at them<br />
and they also want to execute less. But compared to<br />
years ago when a deal desk could slip a customer 100<br />
pips because of the non-farm payroll data releasing,<br />
things have come a long way, he claims, adding: “Does<br />
every fill occur on the visible bid and ask at the time<br />
you click the button? Probably not under fast market<br />
conditions, which is no different then an NYSE<br />
specialist who is charged with maintaining an orderly<br />
market.<br />
“That being said, the way to combat this circumstance<br />
is to add more liquidity venues to our system,” Ditlove<br />
continues. “<strong>MB</strong> <strong>Trading</strong> is an aggregator of liquidity;<br />
if we find that there is less then optimal liquidity we<br />
add more banks as sources. But that doesn’t change the<br />
fact that our routing algorithms are very fast and our<br />
liquidity provider relationships are fairly deep, so the<br />
system will generally find a way to get a fill in a timely<br />
manner. The main point that I would focus on is that<br />
any slippage that occurs on our system is a function<br />
of global supply and demand, as opposed to a DD<br />
that refuses to give a retail client a fair deal in order to<br />
maximise their own profit.”<br />
<strong>ECN</strong> settlement<br />
On how the FX <strong>ECN</strong> model works and how it<br />
operates on a settlement rather than pricing basis,<br />
Richards says because forex is a non-centralised<br />
market, there are two ways for retail traders to access<br />
it; either through a MM offering marked up liquidity<br />
from one or several liquidity providers, or through an<br />
<strong>ECN</strong>-style system.<br />
Jesse Richards<br />
“The two most common forms of manipulation traders<br />
complain about are stop hunting and spread widening.”<br />
“Now, it should be noted that while banks, prime<br />
brokers and large institutional traders may operate on<br />
a settlement basis utilising a true <strong>ECN</strong> environment,<br />
most retail forex <strong>ECN</strong> style accounts still operate on<br />
a pricing basis even if they are STP, NDD accounts,”<br />
Richards explains. “On a retail forex <strong>ECN</strong> style system,<br />
while it may operate on a STP basis, the counterparty<br />
to the client’s transaction is ultimately a prime broker,<br />
who is not aware of the identity of the client. Instead,<br />
the prime broker has a credit relationship only with the<br />
broker counterparty, that is, the company you would<br />
normally open an account and deposit your funds with.<br />
Retail <strong>ECN</strong> models eliminate the inherent conflict of<br />
interest that exists with a MM, but do not truly operate<br />
on a settlement basis.”<br />
Costs and fees to trade on <strong>ECN</strong>s depend on different<br />
factors, according to Zagara. Generally speaking, he<br />
says the trader is offered an ‘all inclusive’ commission<br />
quote which includes the broker’s profit and fees. The<br />
broker then pays its fees to the prime broker and to the<br />
<strong>ECN</strong> itself, which charge a transaction or clearing fees,<br />
similarly to futures exchanges. Some of these charges<br />
do not apply to what Zagara considers to be ‘home<br />
made’ <strong>ECN</strong>s. Also, he notes that while more brokers are<br />
embracing the forex <strong>ECN</strong> style, we can expect to see a<br />
growing commission battle among brokers, which will<br />
eventually benefit the traders; a similar path that the<br />
electronic futures have followed in the past.<br />
However, Kisyov adds it is the individual trading style<br />
that matters when choosing a trading model, in terms<br />
of the potential impact on trading performance.<br />
“It is always about costs involved and execution<br />
when elaborating on the choice of a<br />
trading model. With variable spreads,<br />
the difference between the bid and<br />
ask prices of a certain currency pair<br />
fluctuates in a range. On the other<br />
hand, fixed spreads are predetermined<br />
under all market conditions.”<br />
Kisyov states that Deltastock’s fixed spread on<br />
EUR/USD is 2 pips, while it goes down to 0.1 pips<br />
in the <strong>ECN</strong>/STP module. The company has utilised<br />
direct pricing with no mark-up or mark-down from<br />
its liquidity providers, and the only fee that applies for<br />
<strong>ECN</strong>-STP order execution is 0.3 pips for trades as low<br />
as 10,000 base currency units. So, assuming a EUR/<br />
USD order is executed at 0.1 pips spread, the bottom<br />
line for clients will be 0.4 pips total transaction costs.<br />
MT4 bridging issues<br />
Bringing <strong>ECN</strong> trading to the retail trader, many firms<br />
offering <strong>ECN</strong> trading now claim to bridge to the everpopular<br />
MT4 platforms. On issues with bridging an<br />
MT4 platform to an <strong>ECN</strong>, Ditlove says <strong>MB</strong> <strong>Trading</strong><br />
spent more than a year finding out. He states: “The<br />
short version is that MT4 is half a decade old at this<br />
point, and MetaQuotes is busy working on MT5<br />
now. When MT4 came around, there were no <strong>ECN</strong><br />
forex brokers. It’s a round plug in a square hole. We<br />
had to meticulously<br />
consider every part of<br />
how MT4’s architecture<br />
worked and strip out pieces<br />
that simply didn’t make sense<br />
in our current execution model.<br />
There are now a lot of brokers<br />
that claim to be FX <strong>ECN</strong>s with<br />
MT4, but we review what they are claiming and know<br />
that at best, they are simply routing orders out to one<br />
destination and again failing the transparency test.”<br />
Most of the issues are technology related, although<br />
the prime reason for there being issues is because<br />
FX <strong>ECN</strong>’s and MT4 have vastly different trading<br />
philosophies, says Vedikhin. The biggest challenge, he<br />
warns, is to be able to match client orders from MT4<br />
with liquidity from an <strong>ECN</strong>. <strong>ECN</strong>’s show market<br />
depth but MT4 does not, so it is important to resolve<br />
the issue of execution when an MT4 client wants a<br />
trade executed immediately at the best possible price.<br />
“In MT4 it is not possible to provide partial fills, but<br />
<strong>ECN</strong> platforms often execute client orders at slightly<br />
different prices subject to available liquidity at a<br />
particular price. This core difference in approach can<br />
cause issues when bridging liquidity,” he comments.<br />
Zagara says Fastbrokers.com explored MT4 bridging<br />
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