Lawyers? matched principal vs. rights to or interests in

Rights to or interests in VS. matching principal
what are meanings and differences
picture picked up from FCA site (UK)

You can check picture content here--each either by registration number or broker name.

https://register.fca.org.uk/ShPo_FirmDetailsPage?id=001b000000b YdMVAA0

registration number: 434413--broker name: Activtrades Plc
registration number: 631382--broker name: House of Borse

anybody could explain the difference?

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???


Matched Principal Brokerage
Matched Principal transactions allow buyers and sellers to trade on market exchanges and allow them to transact anonymously in Over-The-Counter (OTC) transactions. In such transaction, STX acts as counterparty of both buyer and seller. In other words, we buy from the seller and we sell to the buyer. Of course, the client remains in control of all of its trade decisions.
Trade initialisation

1. Broker provides access to the OTC marketplace for trading.
2. Broker facilitates quotes/offers from clients by publishing them on the market anonymously.

Trade execution

1. When the broker has established two or more matched counterparties, prices and trade terms are verified.
2. For exchange based transactions, a firm client order is given before the order is executed on the exchange.

Trade confirmation

1. Once the transaction is certain, the broker confirms the trade against the counterparties. Broker sends a confirmation of the principle transaction to each counterparty.

Matched principal trading (MiFID definitions)
Internal Electricity Market Glossary (http://www.emissions-euets.com/internal-electricity-market-glossary)


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Matched principal trading means a transaction where three elements are simultaneously fulfilled:


1) the facilitator interposes between the buyer and seller to the transaction in such a way that it is never exposed to market risk throughout the execution of the transaction (no-risk exposition component),


2) both sides are executed simultaneously (timing component), and[/highlight]


3) the transaction is concluded at a price where the facilitator makes no profit or loss, other than a previously disclosed commission, fee or charge for the transaction (remuneration structure component)

???

matched principal broker
a firm (https://www.handbook.fca.org.uk/handbook/glossary/G430.html?date=2006-10-31) with permission (https://www.handbook.fca.org.uk/handbook/glossary/G863.html?date=2006-10-31) to deal in investments as principal (https://www.handbook.fca.org.uk/handbook/glossary/G264.html?date=2006-10-31) other than:
and which satisfies the following conditions:

1. 1. 1. (a) a bank (https://www.handbook.fca.org.uk/handbook/glossary/G97.html?date=2006-10-31), a building society (https://www.handbook.fca.org.uk/handbook/glossary/G118.html?date=2006-10-31) or an ELMI (https://www.handbook.fca.org.uk/handbook/glossary/G354.html?date=2006-10-31); or
      1. (b) a UCITS management company (https://www.handbook.fca.org.uk/handbook/glossary/G1202.html?date=2006-10-31); or
      1. (c) an insurer (https://www.handbook.fca.org.uk/handbook/glossary/G569.html?date=2006-10-31); or
      1. (d) a local (https://www.handbook.fca.org.uk/handbook/glossary/G668.html?date=2006-10-31);

   1. 1. (e) it deals (https://www.handbook.fca.org.uk/handbook/glossary/G260.html?date=2006-10-31) as principal only to fulfil customer orders;
      1. (f) it holds positions for its own account only as a result of a failure to match investors' orders precisely;
      1. (g) the total market value of the positions is no higher than 15% of the firm (https://www.handbook.fca.org.uk/handbook/glossary/G430.html?date=2006-10-31)'s initial capital (https://www.handbook.fca.org.uk/handbook/glossary/G546.html?date=2006-10-31); and
      1. (h) the positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question.

https://www.wmba.org.uk/assets/Role%20of%20the%20Broker.pdf

???
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ANY LAWYAERS

I'm not a lawyer, but I can answer your question.

The Permissions
When a brokerage house registers with the Financial Conduct Authority, they are granted certain "permissions" that allow them to carry out various types of business operations. The FCA reviews the broker and determines as to whether or not the broker meets the regulatory requirements and is deemed fit to be granted whatever permission.

One of those permissions is known as "Dealing in investments as principal," which is jargon for: "Buying and Selling as Principal." In this context, principal means: the company that signs an agreement, and is acting as one side of a contract, and thus has rights, duties and obligations regarding a transaction with a counter-party. An FX contract sold to a client would be an example of dealing as principal. In other words, it is the permission for market-making.

If a broker has the permission to deal as principal, it is allowed to create contracts, and directly buy or sell them to their clients. Therefor, the broker can act as a market-maker for its clients. So when the client clicks on "buy EUR/USD," the broker can sell that contract to the client, and vice versa. If you have this permission, I can come to you and ask to "buy EUR/USD" from you. And you can decide to take the other side of my contract and act as principal, since you are the "dealer" that "sells" to me, the buyer. You can also reject my offer and give a re-quote--this is known as "last look."

The Limitations
Once a permission is granted, limitations can also be imposed on that permission. These are the caveats that the FCA imposes. They set the boundary of how the permissions are allowed to be used.

So what is "Rights to or interests in (both)?" In this case, the broker has "rights to" and "interests in" the contracts that it buys/sells to its client as "investments," so long as those contracts are of a specific type. In the dealer permission page, you can read in bold letters: "Investment Type." Those are the types of investments that the broker is allowed to "deal" in, such as an FX rolling spot. The broker-dealer is then said to have "interests in," as in financial interests, and "rights to," as in legal rights, to deal in those investments.

And what about "matched principal broker?" This is a limitation imposed on smaller capitalized brokers. The reason why this limitation exists is because acting as principal is risky. What if the market goes against the broker? If the broker is a smaller company, they may not have enough capital to cover losses regarding their dealings, since their clients' gain is their loss. Therefor, smaller brokers are limited to matched principal only. In effect, they are made to facilitate a transaction, but not take personal risk in that transaction.

This is how a matched principal broker would operate: As a client, you click on "buy EUR/USD." The broker sells you the contract you wish to buy, and simultaneously, it buys from it's liquidity providers the same amount that it just sold to you. The net result is that the broker is hedged and has no exposure, because it bought and sold the same amount at the same prices. In this respect, the broker has acted as a riskless "agent." It was the middleman between you and the liquidity provider, such as Goldman or UBS. And consequently, an agency model has less conflict of interests with its clients than a broker-dealer.

A Warning
You may now be tempted to think that the right choice as a broker is a matched principal broker, like Borse, because they are agents that have no stake in your FX trades. But you would only be half right, because an agency model has other forms of conflict of interest. For example, an agent may be an introducing broker, or a white label. This means that you are actually a client of another company without knowing it. So if you have an account with Broker A. Your broker may pass all your order flow and information to Broker B, which does act as a broker-dealer. You may think that you are trading with Broker A, but you are essentially a client of an undisclosed broker.

Another form of conflict of interest arises from order flow. A broker may claim that they are an agency with ECN and not market-makers. However, they can simply have a private deal with another company, or a sister company owned by a holding company, that is a market-maker. Therefor, they can pretend to be an ECN agency broker while they route all their orders to the market-maker company. Even a hedge fund may contact smaller agency brokers and ask them to route their order flow to the them for a fee.

Either way, retail FX does NOT generally provide access to currency markets, and is a highly unregulated industry. In almost all cases, with few exceptions, a broker-dealer is creating the illusion that you are a market participant, whereas in fact, you have never actually traded against real liquidity providers in an ECN. The only assured way to access currency markets is to be a client of a prime broker or a prime of prime broker.

thank you very much
thank you very much
thank you very much
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House of borse, for example, spread almost 0.0 for most pairs, sometime for gbpnzd spread is 0.1 pips!!
there is a comission equal to 0.9 for most pairs.

now ASIAN PERIOD, YOU CAN LOOK AT SPREAD FOR LAST 15 MINUTS (NEXT REPLY)

from 21:15 GMT to 21:30 GMT.

COULD THIS MEANS ANT THING!!

in other words, regarding your warning, how i can distiguish between tempted ECN and true ECN??

Moreover, please give us example about PP?

Low Spreads
Regarding your first question about the implications of very low spreads, I can only say that the picture you posted above is showing average spread conditions. Keep in mind that true spreads are variable. They are never fixed to a boundary. So it's possible for GBP/NZD to reach 0.1 at rare times. That does not necessarily indicate foul play.

However, if you are suspicious of your broker's spreads, you can always compare your spreads against an ECN to verify if you are receiving fair prices:
http://www.integral.com/ocx/
https://www.currenex.com/
https://www.hotspotfx.com/marketData/liveStreamingMarketData.jsp

If your broker's spreads don't APPROXIMATELY match, on average, and are higher than the rates of the ECNs I listed above, then your broker is artificially marking up the spread. And if your spreads are lower than the websites I listed, that would be highly suspicious, and I would suggest that you close your account with such a broker.

ECN
In order to answer your question regarding how to distinguish between ECNs, first we have to know what an ECN is. The only "true" ECNs are the ones that are accessed via a relationship with a PB or PoP as I already mentioned. Hotspot, Integral or Currenex are the real ECNs that aggregate liquidity. They are technology companies that create the conditions for the buyers and sellers to come togather. They provide an infrastructure, as in a computerized network, to bring together and match the buy side and sell side.

If you wish to access an ECN and buy EUR/USD from a liquidity provider like Goldman, you need to post margin. Liquidity providers will refuse to do business with you unless they know that you are able to honor your contract, otherwise you are a high-risk counter-party. The prime broker's job is to extend their credit to you so that you may trade with Goldman. The Prime Broker is a credit intermediary. They extend a line of credit to their clients, like a loan, so that you can trade in the ECNs. And the prime broker is the company that is posting the margins you need to trade, otherwise the liquidity providers would refuse to accept your orders.

Retail ECN
Retail FX brokers cannot, by definition, provide direct access to ECNs. The term "ECN" was hi-jacked by the retail FX industry to trick people into thinking that they are directly accessing currency markets. An ECN Broker means that the broker itself has access to an ECN, not the client. A retail broker can never provide clients access to an ECN, period. Never. THEY CAN ONLY PROVIDE INDIRECT ACCESS VIA AN AGENCY MODEL. Meaning: when a broker is acting as an ECN agent, it is providing its client INDIRECT access to an ECN. The broker itself is the one who has access to the ECN. You, as a client, are not the counter-party to a liquidity provider. You have no prime broker. You are not placing your trades in the ECN. So when you buy, you are actually telling your broker that you want the broker to buy, under their account, and with their prime broker, because you can't. You have no access to an ECN. They do.

Keep in mind, this is only true if the broker decides that they are going to be ECN agents. They can pretend to be agents against sister companies, or business partners. And there is virtually no way to know what your broker is doing with your order flow. Only regulators can investigate the execution of an order and trace its route. And what the broker ultimately does depends on both the regulatory environment and how you personally trade.

The Test
Try this test on your broker. It's very simple: send only limit orders and check to see if you ever get slipped. Slippage can only happen to market orders, not limit orders. If you are sending a limit order to an ECN, you will never get slipped. Any degree of slippage on a limit order means that either your broker is not executing limit orders or does not allow limit orders. Whatever their excuse, a broker like that is very suspicious. Never trade with such a broker. And don't confuse Limit and Market orders. MT4 has a limit order option.

Thank you very much,
Do you mean whatever the direction of slippage, either against you or in sake for you
assume i put a limit order on EURUSD, buy at 1.05000
is there any difference if it was executed at 1.04999 or 1.05001 ??

All of what you say is correct with one exception! MT4 does not support real limit orders!
When you place "limit" order with MT4 in reality this is virtual order residing on the server of the broker. It's just a price level with some additional parameters like SL/TP, lot size.....
As soon as the market price is equal or worse than the price in the pending order, the order becomes active market order. This is why traders often get negative slippage with the "limit" orders in mt4.

In order for MT4 broker to provide REAL limit orders, they have to install some additional custom made extensions and plugins to the platform. I'm pretty sure that 99% of brokers do not provide such feature.

MT5 on the other hand does support REAL limit orders and exchange trading model with market depth and order book. So with MT5 in theory it's possible for brokers to provide real ECN accounts. But it's not practical because most traders trade very small volumes. So in the end, brokers still act as bucket shops. There is just no other way to provide trading service to small traders.

A limit order is an order for a specific price or better. So yes, there is a difference: a limit order does not allow for negative slippage, but does allow for a better price. In other words, your limit order is the maximum price you are willing to accept, and not 1/10 of a pip higher. If your buy limit is at 1.05000 and you get 1.04999, that is perfectly okay because a limit allows for better prices in your favor. But a limit will never execute on 1.05001. If you get 1.05001, that's not a limit order anymore, that's a market order.

As for the points raised by alphaomega, I'm not surprised that MT4 doesn't natively allow for real limit orders. Although I have heard that it is possible. In any case, it is not in the interest of brokers to provide limit orders to their clients. This is simply because they make a lot of money committing fraud by slipping orders.

The ECN Test Explained
I just want to clarify the ECN test that I mentioned before. I should have explained what I meant by the test.

If you want to verify that you are trading on a "true" ECN, and distinguish between a real and fake ECN, you can simply send limit orders and check for negative slippage. If you are actually trading on an ECN, you have the ability to send limit orders to the Order Book. And consequently, negative slippage can never occur on a limit order executed on the Book. The worst case is that your order is partially filled, which you can also prevent with a "no partial fill" setting.

If you do this test, I predict that you will find that you are being negatively slipped on your limit orders. This means that you are NOT trading on a real ECN. The broker is simply creating the illusion that you are trading on an ECN, and lying on their marketing materiel and website. Retail FX ECN is not an ECN. What the retail FX industry calls an ECN is good old-fashioned market-making. While it is possible that a broker provides clients indirect access to an ECN via matched principal, as agents, it is extremely unlikely.

The whole point I am making with this test is to prove that retail FX ECNs are by and large fraudulent. It's an unregulated industry, where advertising standards are not even enforced, let alone fair trading conditions. No creditor in their right mind would ever post margin for a retail trader to trade on an ECN like Hotspot. It's not going to happen. And for this reason, retail FX traders do not and will not have access to ECNs.