[FXopportunist]

Market Makers & ECN’s Is the grass greener ?

This topic is discussed constantly by traders, journeyman and newcomers alike. And to answer the question we have to get to the truth, examine the differences and define our needs. This writings purpose is to bring what I have learned together in a manner that will save many from hours of searching, reading, trial and error.

The Stage

Broker complaints and debates have gone on since they have existed. But lately, this topic has been hotter than ever. Why? Because, things are changing. And, when you change things people get upset. Hey, my spreads never widened before or what the heck! I never got slipped like that! So, why is all of this happening now?

Retail trading strategies around news have been changing. The little guys are getting in on the data game. It is not hard to see the tremendous profit potential possible on many of these economic reports. Some retail traders are getting news services, some are joining data release signal clubs and a large number are just straddling their favorite pair before the release.

The market makers dilemma

So, how does this change anything and why would ECN style brokers be any better? Well, the answer lies in the market makers liquidity providers and their relationship with the global interbank market. This is not so easily defined because these relation ships can come in many forms. But, this explanation will apply to most retail brokers.

As most of you know, retail brokers are the counter party to all of your transactions. When trading on the exchanges, Joe sells and another member Mary buys and the exchange broker merely gets a commission for facilitating the deal. At BigretailFX when Joe buys BigretailFX is selling and when Joe sells BigretailFX is buying. BigretailFX may take Joe’s position and cover it with their liquidity provider, they may put it into a pool and then take a position with their liquidity provider that equals their total position or they may just hold it in house knowing that Joe is probably going to lose anyway. In any case, there is a step or most often two between Joe and the community of banks, hedge funds or other brokers that would have the other end of Joe’s position in an ECN type environment.

These 1 or 2 steps are where the problems start for Joe’s market maker broker during high volatility trading such as economic releases. You see Joe’s broker may have promised him “fixed spreads”, “guaranteed fills”, and/or “zero slippage”. Or, they just may not have slipped him or widened his spreads in the past because it always worked out in their liquidity pools and they want to keep Joe happy.

Then, suddenly, the world changes. More and more of BigretailFX’s customers start trading the news. And, at the same time they are start having incredible success because the market reactions have been very predictable and they have been educated on strategy. Now BigretailFX is in trouble, their business model is not working and they are loosing money like crazy during economic releases. Why? It is those darn 1 or 2 steps between Joe and the greater market. The fact is, good old BigretailFX is selling Joe and hundreds of their clients Euros when no one else in the Forex community would. And, you guessed it, no one will sell them to BigretailFX so they can cover either.

So what does BigretailFX do? If you are a Forex trader, you know the answer oh so well. They widen their spreads, introduce slippage or just shut down during economic releases altogether.

Suspicion and the want for something better

When a trader clicks on buy or sell, he has an expectation of what he thinks will happen. When he ends up in a lesser position than he expected he thinks “What the ….? They screwed me!!!” We have each been there a time or twenty. This very experience starts the thought and from there on forward you are looking out for being “screwed”. So what now? You have decided that your broker is no good. You talk to your fellow traders and they say “I’m getting screwed too”. So, you all start searching. And everywhere you look it seems to be the same old thing. Why? Because everywhere you looked it was pretty much the same old business model.

Are ECNs our savior?

Then one day a new player shows up with promises of a better deal. We have all heard the new sales pitch. “Spreads as low as 1 pip”,“No dealing desk”, “We never take positions against you”, “Straight through processing” and even “True interbank access”. Wow, woohoo this is just what we were waiting for! We quickly open a demo account and see the spreads. Man oh man, we are impressed! “Look at that! One pip on the pound!” But as we begin to try it out suddenly it is not exactly what we had assumed it would be.

The ECN experience

Let’s face it. We all create our expectations based on what we know. And, the fact is, most of us did not really know what to expect out there in the “real” market. So we thought the ECN style brokers will be just like the good ol’ days only days but with tighter spreads and no lousy, cheating dealing desk. This is where we come to terms with those ever present expectations.

The first thing you find out when you open your ECN style account it that there is still slippage. But why? If there is no dealing desk to cheat us, why is there slippage? The reality is, in a true ECN environment,
slippage is a misnomer. Nobody is slipping you. Your ECN style broker is merely providing you what you asked for. You ask for a market order to go long on the euro and that’s what you got. The problem is many of us had no clue what a real market place is about. We thought we could buy the euro at the price on the screen like a tomato with a price tag. Why do we think this? Because, BigretailFX and his competitors trained us to think this way. Retail brokers have spoon fed retail traders simplicity. Some wanted to make it as easy as possible for traders. Others used this trader ignorance of the real market and market prices to steal some additional profits. In a sense, they set themselves up for all of the dissatisfaction and suspicion to come.

You see in real interbank networks, a market order is just that, a request for a euro at the market price. And the market price is not static. It is moving all of the time. Sometimes it is moving very fast. In those conditions, you may request a euro at 1.2750 but in the time it takes for you to push the button, route the order and match a buyer the price could be 1.2752 or in a really volatile market as during economic releases, the next seller might not be available until 1.2780. How many stupid people do you think are out there that want to sell a euro after the Federal Reserve just released a U. S. dollar negative statement? This is the reality of the real market. Sometimes there just isn’t a buyer at the price you want. Because we have been lied to, and some of us flat out cheated in the past, we immediately go into combat mode. “I can’t believe it! These guys are just as bad as the lousy market making broker I just got rid of!”. Well, no, probably not. They are just giving us what we asked for. Unfortunately for us, we didn’t really know what we were asking for.

After a few days with your new ECN style platform you observe your first economic report. And the good news is that you don’t get the ridiculous 20,30 or even 50 pip fixed spread that popped up prior to the data on your BigretailFX platform. But the spreads do widen a few pips and the spread starts dancing like crazy, especially on the pound. The spreads widen, narrow and even invert in a frenzy. And for a few seconds before the release it just looks scary. Banks are pulling order and last minute speculators are taking positions. It looks dangerous because it is. Welcome to the cold cruel world of the real interbank networks. There are no guaranteed stop losses here. Just buyers and sellers and whatever the market will bear.

Commissions are the next consideration. Unlike BigretailFX, the brokers profit is not hidden in the difference between your price and the brokers liquidity providers price. The Bid and Ask you see on the screen is representative of the prices offered in your ECN’s network. So in order for your ECN style broker to profit, they charge you a transaction fee or commission. While the commissions can vary, most retail ECN style brokers commissions average the equivalent of 1 to 2 pips per round turn depending on the currency pair. Just a little math will tell you that in order for your ECN style brokers spreads to be better that your old retail market maker, your ECN style broker must be showing a spread of 1or 2 pips or less. And this may or may not be the case when it is time for you to take a position. So are ECN style broker net spreads really better than your old market maker broker? Sometimes yes, sometimes no.

So why all the praise for the ECNs?

In a word, transparency. Or at least the promise of transparency. While some are initially attracted by the spreads, the big draw for ECNs is to see the real market. If we can see the real market, then no one can lie to us or cheat us. And for many, we just want a fair shake. But the thing that must be said here is that, we may have revealed, your old broker may not have been so bad after all. More specifically, your old broker may not have been out to cheat you. BigretailFX is just built on a business model put them in a position that inspires distrust. Throw in the fact that there have been notable amounts of skullduggery by retail brokers over the years and you have a Forex market begging for transparency. Are ECNs style brokers truly transparent? Not really. Unless you have central clearing where everyone, including the retail trader, has access to the feeds then it is not truly transparent. But they are a good step in the right direction.

Run straight to your nearest ECN? Not so fast.

As we discovered, your old market maker broker may not be obsolete just yet. In fact, many of them have features that are an advantage or just down right prudent for new or small account traders. Some market maker brokers guarantee no negative balances. Which means you can never lose more money than you have in your account. This is a huge plus and a very smart safety feature. Also, you won’t find any ECN style brokers that guarantee stop losses. These features alone can make them the only choice for many. Many market maker brokers also have leverage up to 400 to 1. This may be attractive to some and makes those stop loss and no negative balance guarantees all the more important. Let’s face it, if you need 400 to 1 you had better have no negative balance protection! Last but not least is the advantage of fixed spreads. If you trade at odd times like early in the Asian market timeslot, fixed spreads can be better than the interbank, especially on the pound.

So, is the grass greener with ECN style brokers?

The answer is up to you. We now have a much better idea of each broker’s structure and advantages. In general, I will state that experienced, active Forex traders will probably be happier with and ECN style broker. While a new trader, in need of simplicity and financial safety will likely be better off with a quality market making broker that has these safety features. After all I have learned, for now, I will have one of each.

-The FxOpportunist-

[FXopportunist]

Is this sticky worthy Merlin?

[Money Talks]

You bet it is! (I think!!)

[merlin]

well we dont do stickies in main forum, but i think we should get this thread roaring and then sticky it in the broker forum...nice job btw!

[reliant]

Excellent article FXO. Well written, concise, and informative. As a newbie, it's the kind of information I need, and it's the most objective I've read on the subject yet. I appreciate you taking the time to put your perspective in writing.

[FXopportunist]

Thanx to all for the positive feedback.

Yes relaint, I agree, it is truly hard to find objectivity in forums and on the net in general. You can usually chose between sales pitches and hate threads. I had to read a bunch and talked to alot of people to put it together I hope many get the opportunity to read it and benefit from it.

[Klaka]

So, the feeling of security as a pro and the con of a much more random and much more dangerous market is what we are getting which trading ECN's.
Well, if ECN's are highly different and are on a totally different page than what we have learned over what retail brokers have been hand feeding us.

Who will start the revolution to teach others the true market experience?
You'd have to start totally from scratch with another set of "traders helping traders" tip and tricks education.

The truth be told,

i see it like this. Market Makers are Casino Dealers, ECN's are like the NASDAQ trading floor. The trading floor for STOCKs has TEN times more deception in it than ANY retail broker could ever have. Retail brokers cheating people should be the easiest and first obstacles to overcome, first. Now i see why STOCKs, with as many as they have, they don't offer demo accounts, because you might catch on to the "real rules" of cheating to trade.

PS- There ARE illegal trading tactics used over the STOCK market, many which can be implimented over the forex, digitally, but. Who has the real balls to try it? It is after all an "edge" in our/your favor if you do.

In my opinion, we are all losing and surviving because we are all doing the very samething, while brokers and big timers do it different. We lose because we're all playing "by their rules" and are "playing fair". Both of these rules can be broken, easily, but which of you have the balls to do it and to neglect the consiqences?

[Klaka]

Originally Posted by FXopportunist

Thanx to all for the positive feedback.

Yes relaint, I agree, it is truly hard to find objectivity in forums and on the net in general. You can usually chose between sales pitches and hate threads. I had to read a bunch and talked to alot of people to put it together I hope many get the opportunity to read it and benefit from it.

I respect you for what you said, someone may have mentioned this smal peice of info sooner, or later, but. You took a risk, pushing the public one small step closer, not to winning. But, to being aware. I commend that,

well said and done.

[Klaka]

One edge would be, lying to an interest offered broker that only offers to foreign, or musslim ethnic traders. Lying on the interest while hedging mutiple accounts, they've cought onto this, however.

Some brokers have statued limitations in their claus that have to go the many complicated central powers into changing this independant claus.
So, as of now, for now. You can hedge gaint positions sizes, or small lots, collecting interest on momentum and voliaty if you're foreign, they seem to offer the most. Which you can claim to be, but this is a small edge as it has a small risk.

There are bigger, more serious and much more illegal and effective methods of beating the house, but that you can find foryourself.
Most of it is fradulant, however. If you want to play it legally, you can simply become a broker, yourself. You win either way, depending on the firm and commission quotas that you have to fill in. Another way for STOCKs was to only trade in the spread, with entry/limit orders.

There are many more ways, but for rightnow. Let's assume that ECNs are the best ones, advantages i mean.

[FXopportunist]

Allow me to read between the lines of your posts a little Klaka. I absolute understand your frustration with the trade tactics that go on in all trading. Trading has always been filled with treachery. That will never ever change. So I don't waste any time struggling against it. I try to be aware of it and put myself in a position where it can't hurt me or maybe even benefit from it.

My purpose of this article was to help people see thruth about the brokers world, their options and maybe even ease some anxiety. Once you know the score you can get back to learning to make money. And, I am quite certain, that is why most of us are here.

Good luck to you Klaka and thanks for contributing!

[FX-007]

Thanks everyone for this Thread!!!

I am trying this on my demo. So far, so good.

Will let you know how it finishes up (or down, as the case may be...)

[FXopportunist]

As we all know Brokers all claim excellent liquidity. Some specifically boast about their relative liquidity while others are just making a loose reference to the entire Forex market.

The question I want to open for discussion is this:

How do we, as traders, determine the claims of brokers liquidity. This is particular is relevant to ECN style brokers. In an ECN network, the size, depth and variety of the group of liquidity providers they have procured will absolutely determine how competetive their fills will be. How do we know how many banks, hedge funds or other brokerages they have in their network?

This I know, their not telling. They have their reasons. Their liquidity providers sure don't want to hear from traders on price disputes and they shouldn't have to. But with that being said, When we are shopping for a broker, and we want to make sure we are aligning ourselves with good liquidity, how would we know? How can we know?

[NewstraderFX]

You've made some excellent observations FXO-i agree totally with a lot of the thngs you said...I have a question for you regarding order types with one of the ECN brokers-MB Trading. They have an order called a Stop Limit. If you're doing a buy side trade, you place the Stop where you want to enter and the Limit is the highest price you are willing to pay. According to them, you can only get filled between the Stop and the Limit, not above or below, so slippage isn't possible. The caveat to this is that if no price is available between those 2 points-your order will not get filled at all.

This seems very fair to me. Have you any experience with this either at MB or with another ECN? Opinions?

Thanks and good trading

NewstraderFX

[FXopportunist]

Originally Posted by NewstraderFX

You've made some excellent observations FXO-i agree totally with a lot of the thngs you said...I have a question for you regarding order types with one of the ECN brokers-MB Trading. They have an order called a Stop Limit. If you're doing a buy side trade, you place the Stop where you want to enter and the Limit is the highest price you are willing to pay. According to them, you can only get filled between the Stop and the Limit, not above or below, so slippage isn't possible. The caveat to this is that if no price is available between those 2 points-your order will not get filled at all.

This seems very fair to me. Have you any experience with this either at MB or with another ECN? Opinions?

Thanks and good trading

NewstraderFX

You have it almost exactly right NewstraderFX. Once the price trades at your stop level you can be filled at a price no higher (worse)than your limit. But, you can be filled at a price lower (better) than your stop.
For example:
Say your StopLimit is set at a Stop of 1.2550 and a limit of 1.2560. Once the price trades at or above 1.2550 you could still be filled below 1.2550. Like if say 1.2548 is the next price that there is a taker, 1.2548 is where you will be filled.

This is an excellent feature in MBTrading's software. The only other company that I know that offers that is GFX in Switzerland but they do not offer retail trading in the United States yet. I also noticed that alot of the meta based platforms have a similar feature but I am not certain that it is actually supported by any current meta brokers.

Meta guys?? does this feature work??

[ycomp]

would anyone care to comment if they think retail brokers in general are more likely to go under than ECNs?

I guess there is no definite answer, but any observations could be helpful.