Broker Challenge "NDD/STP" vs. True "ECN" and "Mkt Mkr" broker talk

Hello all,
I hope this thread can lead to positive, constructive and useful talk between some of the great minds here at Forex Factory.

This is not a thread to "talk up" /promote or even post suggestions of ANY brokers' name. If and only if it is acceptable to the FF rules shall we mention an actual broker only to use as an example of a service offered, >MODS please chime in if that is not an acceptable means of notation.<

I intend and will be posting ALL of my experiences with all three of these types of brokers.
Primarily ALL my posts in reference to this matter will be from LIVE trading, diverging to "demo" only in an effort to illustrate the
prior experience, to live trading, with said broker type.

There are stars next to certain terms which indicates I will elaborate further in later posts
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What I would like to see - at some point - is an agreement amongst traders here
of what the best type of broker is for the independent, or for that matter any off exchange trading party. I also hope this thread can slice through some of the "smoke in mirrors" that many brokers use as advertising strategies to employ new found money into their shop.

Ideally, there will be a conclusion at the end. I encourage everyone to contribute, this is an effort to put a ton of great knowledge in one location for the greater good.

To make things even more interesting, for those who may not feel like giving an opinion in words, I kindly ask you to PLEASE VOTE, in the poll will attach.

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What we are looking at here is trading FX, plain and simple, The simultaneous buying and selling of one currency against another, creating both a long and short position in the desired pair (for those that do not know.) Or as I like to phrase to friends and family, "It's the same as going to the airport exchange office" - Had I been an FX trader the last time I was in CDN! I would certainly exchanged my USD/CAD way before the trip!:nerd:

Furthermore, unless you are a central bank, hedge fund, large multinational corporation, "market maker FX or other" or someone who is capitalized "wealthy" enough to provide liquidity (ie: Warren Buffet) to the biggest money market in the world ForeX, you are "off exchange" trading. Not inside the inner circle of (a quite small in global retrospect) central banks that comprise (trade with eachother) the actual FX Interbank (this terms is all to often thrown around in the retail market) Foreign "Exchange" has no centralized location "place of exchange" such as other EXs - ie; NYSE or NYMEX /ComEx -- etc.

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So the decision here is simple. How can YOU / we the retail consumer/trader get the closest solution to being "on exchange?"

What you/we want is simple - yet- multi-fold:
-Transparency - In quotes, spreads, business practices.* (i'll get back to this later)
-Tight Spreads with low commissions.
-Reliability - Customer service that is THERE. Tech support
-A Platform - that suites YOUR NEEDS -ie(scalping? - news trading? etc) not mine - not the guy next door - not other members - YOU and only YOU are the one that matters.
-Orders Filled** TO WHAT THE MARKET DICTATES. ie: Sunday open a true GBP/USD spread will vary from Sunday 5pm to Monday 3:AM
-NO re-quotes - NO "odd messages" preventing you from making profit/ taking trades - ie "trade context busy"
-Minimal technical interruptions if any - ie; no server connection, no access to trading server in high volatility (LDN/NY cross / Asia Close LDN open)
Etc. the list goes on.

Sounds like a lot? not really this is the BARE minimum a broker that is profiting every time you trade should and can offer.

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I am having some difficulty with believing prior market makers, are now NDD/STP. I will explain my "possible contradictions" of a prior MM broker truly offering NDD/STP. Where as an with an ECN - (NDD/STP) goes without saying.

And I SINCERELY feel that MMs have made it TOO SIMPLE to trade for the retail consumer using Far removed applications Like MT4, for people to run losing EAs (I do not use any EAs currently) and other un-educated mass trader to lose money, like a drop in the bucket! LoL -"bucket shops."
Sure MMs can offer other proprietary means to trade, yet, even if the most successful card counter at a black jack table "is KEPT playing against the house" he too will LOSE. Forex should not be treated as a gamble - rather a multinational startup business to the freelance CEO/CFO/COO all of which are YOO or YOU!

A few nuggets,
Why does MT4 usually have fixed spreads? = MM4
Why does MT4 or other prop MM trading not offer MARKET DEPTH? to show Real orders happening in REAL TIME by other Traders, institutions and banks?
Why do Prop trading MM platforms not show WHO the liquidity Providers are that are Quoting the prices you are taking? (SOme ECNs DO)
Why are spreads and trades easy to take (4 pips) when the real market may have a 30 pip spread? at low liquidity times on a pair like GBP/USD?
Would these alone not make you Question Where your Hard Earned Money is Going?

I like the Simplicity and Ease of use on an MT4 chart, yet can't we do the same TA on others????? YES. I am not bashing the "MT4" system, Just the ultimate pair of a MM with a too easy / not enough depth software combo to the average FX interested person.

Just wanted to get the thread started and hope many here at FF will visit, vote and contribute.
Sincerely,
XTrade

EDIT
Edit:WELL I WROTE A LOT HERE AND REALIZE NOW THERE IS A STICKY ABOVE THIS ABOUT THE SAME TOPIC!!! LOL I THOUGHT I READ IT.

Yet there are many differences and I have decided to leave the thread up.
PLEASE VOTE PEOPLE - THE CONCLUSION IS FOR THE GREATER BENEFIT OF THE MEMBERS HERE AT FF AND YOU!!!! TOO![/color][/b]

THese terms are in SPECIFIC order for a reason. After the definitions are read, (I WELCOME any improvement or correction) You will likely understand MY aforementioned dilemma.

MM: Market Maker - (W/ dealing desk) In FX this is a broker that will take multiple prices from different liquidity providers and decide which combination MOST SUITS THEM, NEXT they will add a pip or 4 to the spread and pass it along to YOU the retail FX trader. In turn they have Just MADE a Market.
When you place a trade LARGE or small - it is routed to the dealing desk if not immediately counter-positioned by a black box against you and figured out later. What is later? Later is when the Dealing desk that has taken the opposing side to your trade gets around to seeing if you are a threat to their bottom line. If you are and have somehow edged through. 2 things may happen;

1. they actually do offset the risk by putting your trade (through their name- onto the Interbank market to reduce risk and protect their net exposure)
OR
2. they DO - CAN and will have your IP address/ (given, acct #) and can slow down your executions. --- If not completely block or freeze or RE-quote your account until you are in a losing trade. STOP HUNTING is considered a SPORT in London. LOL i'd say NY as well. Tons of bucket shop.
Stops are Not hunted in the sense many may think either - by unfairly widening spreads just to take you out. A retail broker is not going to get rich by taking out a couple mini lots from you. How it works as I know is this. Brokers know where your stops are. You have in fact told them, so there is no secret. When a large number of stops accumulate in an obvious area, say 5 / 10 pips below recent swing low. A market maker can go onto the real FX market and place a large enough order to move the price back down in a less volatile time. Essentially wiping out a decent amount of stops before exiting, next the price continues on it's journey backing and filling all the while.

3. MMs offer ridiculously low opening account balances. This is the beginning of the end for many retail traders.
A. Get new money in / they will lose. B THey will come back more aggressively and lose faster on emotion.
4. Market Makers have dealing desks, see #1 - this is what they do and your trade never goes any further than their decision.
5. Scalping is useless, the spreads are too high, and the execution is lousy at best.
6. I can guarantee you - there are maybe 1% of retail traders actually making real money (enough to live off comfortably) trading with a market maker.
---> if I am wrong on 6 - please prove to me so. <---



NDD: NO Dealing Desk / STP : Straight Through Processing
:
Here is where the dilemma arises - This is one of the main purposes of my writing and I will be passing this question along to a commercial member on the board representing a prior market maker now turned NDD/STP.

OK so - NDD/STP - two sort of redundant, yet different, and somewhat contradictory terms.
The No Dealing Desk model, claims exactly that - your orders are not immediately taken by the deal desk in the opposite side of the trade. ( ie: I sell EUR/USD deal desk buys)

The claim as I know it is as follows:
Trader X opens platform to execute order of Ask(long) one lot EUR/USD (Buy EUR sell USD) this order is then routed to the "ndd" brokers server,
Next, the broker is supposed to instantly create its own order with it's liquidity providers (whoever will fill at best price available) for the counter trade
(Sell EUR buy USD) then claiming that only if the counter trade is executed will your initial trade be accepted. In volatile times this is all happening tick by tick on a pair like EUR/USD, from 10's of 1000s of traders worldwide.

Finally it is stated that because the broker is "only" filling the order to trader x if the counter is executed, they have effectively eliminated the conflict of interest a deal desk has with trader x - due to the "claim" that they are not taking the opposing side of the trade, rather passing it "straight through."

Now I begin to have problems.
How is that STP? I still have a position with the market maker and not a bank or another trader. STP is supposed to mean that your order goes from
you trader X to counter-party Y and the broker is only facilitating a means to place the trade. But this is not so. (at least from my research)
What is happening is this:
Trader X orders buy EUR/USD - Broker places trade sell EUR/USD with market. --- Now, what if the broker thinks this trade may be better taken by them at a slightly better price, say 5 pips away from trader x's entry?


ECN: Electronic Communications Network - Which as a given should be NDD and STP.


Just laying the frame if this thread survives - gotta run for a bit. back later.
X

There is one important lesson to learn for new (and some not so new) traders who wish to survive in Forex.

All retail brokers (and except Prime brokers that give you access to institutional markets of EBS calibre), all without exclusion brokers are middlemen manipulating financial streams of numerous (relatively) small traders (intra-marketmaker market) and real forex market. In between, there are ZILLION OF DEALS that have nothing with REAL MARKETS.
Broker's software algorithms monitor internal buys and sells orders, as well as, general situation on REAL MARKETS, so participating traders GET ILLUSION that they are part of trading streams where many small lots are aggregated toward tradeable lot which interacted with REAL MARKET.
As idea, there is nothing wrong with that, retailer should basically do that and charge commission (or take part of spread) for deals done.
In reality, commission is much less important to retail broker than OPPORTUNITY to execute deals per own algorithmic criteria when no REAL MARKET is involved at all (or when REAl MARKET serves only to score the difference between intra-marketmaker market and REAL MARKET), consequentelly, execution of deal is easily made in favour of particular scenario that makes much bigger profit for broker retailer than commissions and pure spreads.
The lack of clear, firm rules and regulations enables forex brokers to tweak platforms in way that is not very obvious and definitelly not easy traceable by average small trader.
Bigger or real FX pro traders are totally aware of such situations and they can actually see the difference, but not to extent to have hard proofs of wrongdoings.
Key point is that REAL FX MARKET is fluid and there is no one single benchmark FX rate at any given moment of time. There are deals between interbank participants that differ from mainstream deals at the same time and depending on marketplace such differences occur naturally.
Retail brokers (specially advanced ones) have accesses to variety of marketplaces simultaneously and with advancement of softwares they get more and more capabilities to match REAL MARKET conditions with their own execution to avoid clear proof of playing against any single trader.
When situation becomes particularly congested and somehow too difficult to be executed in both 'reasonably manipulated fashion' and 'in line with profit-making criteria' than various strange things enter into picture like platform glitches, slippages, re-quotes and all range of nasty inventions that make final balance aligned to broker's expectation.
It should be mentioned that market situation can create troubles to brokers, too, so it is additional moment when brokers are forced to compensate for their problems with traders losses.
It SHOULD BE CLEAR to any small, non-pro trader that before he becomes capable (financially, as well as, by experience) to trade in more direct way with access to 'institutional' marketplaces (without retail brokerage involved) he will be a victim of all aforesaid and final price paid for transactions done will be way higher than it might or it should be. This higher price turns to increase of overall risk for each particular trade and can became not only reduced profit or increased loss, but can ultimatelly cause margin call and loss of deposit.
All, and again in bold ALL RETAIL FOREX BROKERS are doing same, only degree of their manipulation differs. There are more sophisticated ways to rip traders or it might be very primitive.
Whole point is that aggresive advertising, sick promotions and unbelievable lack of common sense drive craziness and people continue to play on something that is very well thought money making machine for broker companies and their owners.

Way out is not that simple.
If trader is too small (thousands mean nothing in real FX market) he is fully on mercy of bucket shops (market makers, DD brokers), subsequntelly he will easily face situation of total loss.
True FX market becomes reality for individual with heavier cash deposits in prime banks that allow trader to establish his direct access to marketplaces.
Electronic platforms with multiple accesses to various liquidity providers serve as aggregators for pro trader and enable him to execute strategy in the best way per current market situation.
There are basic conditions necessary to make such trading possible and they are mostly beyond the reach of small traders.
It goes without saying that nothing can save trader from wrong decisions on any marketplace, but at least he will not be ripped off by so called brokers and I have clearly in view all of them, independently to various degree of 'dirtiness' involved -from some slightly better like Dukascopy or DBFX through Oanda to total monsters like FXCM, FX Pro, Easy Forex, Alpari and endless line of similarly motivated legal thiefs.
Regulators should probably restrict small FX trading at all or provide kind of specific aggregating rules for small traders (with obvious limitations), as well as, forbid existence of non-segregated broker's accounts.

I wish all broker rep on the forum would explain/comment on this but I think they are afraid to reveal anything.

I hope trades here will think about this

I think some of the information in this thread needs updating. Once upon a time the retail market was such a small amount of liquidity in the FX market. But as of late, the retail (ECN,MM,Whatever) market is starting to create significant chunks of liquidity. For instance There are brokers doing over 100 billion monthly liquidity. This is nothing to poke a stick at. Its a huge figure, and any prime broker/bank will be happy to do business with them with the hope they can lap up all that liquidity.

The FX market is manipulated from the word go. Its not a charity, so everyone is in it for money. Its a battlezone. Some retail brokers (a very very select few) are providing relatively (not completely) honest services, and providing an environment that is good for trader and broker at the same time.

This is called evolution.

Its getting harder and harder for brokers to come up with new tricks, and the government regulators specifically are becoming increasingly aware of the games that Retail brokers can play.

Its only a matter of time, until ECN actually means ECN.. But at the same time, broker numbers will reduce significantly as the amount of profit to be made from an ECN model is minimal (and traders still think they are being over charged).

i think in the end all broker will be ECN or stp broker.

and who is going to give the liquidity? market maker seems to be a bad word today , but if there are not market maker who is going to offer the liquidity.?If you are placing order on NDD broker which is passing to a prime broker wich execute with a tier 1 bank . Is the tier 1 bank not a market maker?

As a rep of a broker I would like to show you that not all trading methods and practices fall under the common description above. I can give you example of an ECN/NDD/STP service for retail clients that we have discussed in another Forex Factory topic. I will use a quote from this topic to explain how it works in order to show you that a NDD/STP system could be different and can actually represent a true ECN environment.

Since we are company that operates in the European Union and is regulated by EU directive MiFID, we have to comply with current regulations and prepare for the forthcoming changes and implementations. In this regard, there is proposal for major changes in the financial regulation on derivatives, central counterparties and trade repositories that are expected to come into force in Europe in 2013.


The full text of the proposal is available here.

It is not clear whether FX trading will fall under the new directive, but since most brokers trade Forex as CFDs in the EU, especially UK based ones, it will be required that those instruments are traded through a CCP (Central Counterparty). If this is the case FX trading cannot continue existing in its present form in Europe, but as it is evident from the header of quote above, it is possible that it affects all G-20 countries.

We believe we are the only true ECN/STP service available to retail clients at the moment, but probably it will become standard way for trading FX.

Unfortunately, such regulations will make FX trading much more costly to the retail client and the restrictions imposed will prevent many small customers from participating on this market.

I have found another topic that includes screenshots from our order book where you can take a look - here.

Since I find the topic very interesting I would be glad to comment and answer any questions you might have.



Regards,
Deltastock

Thank you for giving a reply to my concern.

[quote=DeltaStock;4422891]

Unfortunately, such regulations will make FX trading much more costly to the retail client and the restrictions imposed will prevent many small customers from participating on this market.

So be it.. it is high time FX and other OTC products ( CFD in UK, Australia) are regulated just like central stock exchanges
Client money safety
Transparency

It will wipe out the scrupulous brokers , if you are not on eof them then you should not worry.

You should bear in mind that we offer ECN/STP but we are also a Market Maker so we are more or less concerned.

Deltastock: fx spot is not a derivative contract.

We also wish this is true. However if you take the time to check the websites of some EU based brokers including Deltastock, regulated by MiFID, you will see that in order to legally offer Forex in other EU countries they have to do it in the form of CFD contracts. CFDs are OTC derivatives according to the Proposal about the EP we quoted above.

Regards,
Deltastock

There appears to be confusion about that. Im arguing with the tax authorities at the moment just about this (due to a recent change in local legislation). I would get favourable tax-treatment if it were a derivative contract - however they insist that "ISDA-governed spot forex" contracts is spot-trading - akin to stock-trading - and therefore im out of luck.

Its of course not out of the question that the regulator and tax authorities have contradicting standpoints.

Providing such incorrect information in this thread... (closes door and leaves)

That's what they said about stocks in the mid 1990s. "The market makers have to be there to offer liquidity to the market."

Until they didn't and the ECNs dominated. Just a matter of time here, probably 2-3 years.

Thanks for your research and explanation about NDD. They are really good.

I absolutely agree with you that NDD is totally redundant when you have STP and not only that but also very inefficient. Why have the broker go back and forth manually "present" your order to the counter-party and then transmit the counterparty's order back to you when they can just transmit your order directly to the counterparty and vice versa through STP and just collect the commission when the trades take place? Why still step in between? What are they doing when stepping in between you and the counterparties? What do they get out of? These are the questions that still need to be answered by these NDD's.

And lastly, make no mistake about it. NDD's are still MM's. They are NOT ECN's. They try to differentiate themselves from MM's but they are NOT ECN's. FXCM made that very clear to me when I asked them specifically if they are an ECN. They kept emphasizing to me that they are NDD's and they don't take the other side of our trades but when I asked them to confirm if they are ECN's, they told me "No, they are still MM". So for all those people crying wolf about FXCM, they know what they are getting into.

Well, they have to be contracting each other in order to squeeze more tax dollars from you. But what you are arguing are valid points. Retail Forex is considered derivative products because the way the foreign exchange contracts just roll forward instead of actually settle and that's the argument that CFTC used to expand their jurisdiction over Retail Forex trading as part of the "Farm Bill". So if it's considered a derivative product, then you should be entitled to the favourable tax treatment. They can't rule you out of one category when it comes to collecting taxes and include you into the same category when it comes watching over our shoulders.

You can find the CFTC "Farm Bill" argument in one of the threads here. Good luck! I hope you qualify.

I understand what you are saying but you do not get my point.
I an ECN anybody who is offering the liquidity and take the other side of a trade is a market maker.
The quality of an ecn only depends on the ammount of liquidity which is present on the network.

Good point, however the only real liquidity on the typical ECN is that which is posted by clients.

With that being said, the ECN category should really be broken into two sub-categories:

ECN-STP (IB, MBT, Duka, Delta, FXCM AT, all Currenex brokers, etc)
Real ECNs (CME, Hotspot, etc)

In the first category, the ECN is primarily an aggregator of external LP quotes, client orders are STP'd to the LPs, giving the LPs the right to accept/deny ('last look'). The liquidity displayed in each of these ECNs is therefore somewhat of a mirage, the LPs aren't on the hook for execution.

The second category are marketplaces with real live liquidity on the book (WYSIWYG, instant execution, no STP roundtrip, no 'last look').

Edit - this isn't to suggest the first category is unsuited for retail traders. I use them, and for most they're perfectly fine & the preferable route. LPs are algo-driven, their quotes wouldn't be posted if they're not ready to execute 99% of the time (they're in the flow business after all).