Future of Retail FX

What are your thoughts on the future of retail level forex trading. Will the spreads narrow? Will the quality of execution improve? I wonder how the introduction of fxmarketspace, (the collaboration project of the cme and reuters) will affect the gft, fxcm's etc. of the world. It will create the first centralized fx spot marketplace - but will it work?

I think this is a terrific series of questions about the Forex markets, and I’d like to offer our perspective on this. We believe that the days of the “deal desk” mentality are numbered, just like the days of the market makers in the stock world were numbered back when ISLD and ARCA came into the stock market as ECNs in the second half of the 1990’s. Deal desks and market makers, while they were created to serve a purpose initially, are no longer needed as technology has progressed. Now, a deal desk serves only as an inefficiency that keeps retail traders from being successful.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o></o>

Ultimately, this industry is going to go through a healthy period of consolidation, centralization, and extra regulation that will make it a better market for traders. In the end, there will probably be one or two central locations for quotes and liquidity, just like ARCA and ISLD basically dominated the majority of the volume in the stock market after a couple of years.<o></o>

In terms of spreads, we believe that they are already a thing of the past. Traditionally, people think of spreads in terms of “what they are down” when they enter a trade. Many traders don’t recognize that they are “wasting” the spread when they buy and then again when they sell on a fixed spread system, so they are really getting hit twice on a deal desk. None of this is the case if you operate on a platform that allows you to post your own bids and offers and get executed against other retail or bank orders so that the “spread” is no longer what you are up or down. Because we have so many customers and banks placing orders on our system, pairs like the GBPUSD regularly show 1 pip or less between the bid and ask now during the regular trading hours. In fact, a lot of times, several of the banks in our system are actually bidding and offering at the same price (one bank buying, one selling), which creates a non-spread situation without any retail orders. But either way, if you can enter the GBPUSD and decide it was a mistake and lay our position out for sale one-tenth of a pip under the ask where you just bought and get filled, this is a much truer market, and eliminates the traditional view of how a spread works in Forex. This is how people have always viewed the difference between the bid and ask in stocks and futures, for example.<o></o>

My guess is that the last sign out of the deal desks is that you will see some pop up that claim to have essentially “no spread” and still be “commission-free.” At some point, you have to wonder if they think that the public is just that stupid that they are in business to not make money. When that happens, it just means that they will do that much more to fluctuate their quotes away from the real bank prices to sweep customers in and out and probably “discourage” active traders from opening accounts with them. Remember that on the average EURUSD customer trade where a deal desk has a 3-pip spread, they make 5 pips on average. Think about what they means about the fact that they control pricing and can see where customers are placing their limits and stops. Those days are coming to an end as the Forex traders become more educated about the process.<o></o>

We feel that our platform, which was designed in part by some of the original people that worked on ARCA in the stock world, is already providing traders that level of execution. As more and more customers come on-board and start to use the tenth-of-a-pip increments, our spreads will get smaller and smaller, well under the 1-pip bid/ask differences that we are currently seeing on stuff like the EURUSD and GBPUSD most of the session. As for the offering by CME/Reuters, we’ll have to see. Assuming they basically create a centralized marketplace like we have, then I think it will be also good for the traders. Remember that in the stock world, ISLD and ARCA could be hit together, so we would love to have our liquidity interacting with theirs and vice versa if they deliver that type of package. It remains to be seen whether their offering will be a true ECN/direct access platform between customers and banks, or if there will be limitations or games being played by an intermediary. Either way, we do believe that there will be room for more than one offering such as this, and it will only make the Forex market stronger and take us away from the deal desk model.


<o>Thanks again for asking such wonderful questions. </o>

I think that the FX world is getting smarter. Tremendous sites like this one are a great source for the shrewed and studious. Competetion should bring better and better situations for the educated trader. And hopefully lower commisions too............hint hint

I don't think that the bucket shops will completely dry up. There will always be that individual looking for 400:1 leverage. There will probably always be a steady supply of uneducated consumers that flock to hyperbole.

I am looking forward to FxMarketplace because of what it represents as well as what it may turn out to be. Just the credible acknowledgement and tangible attempt to supply the spot FX market true transparency is a very welcome statement by the markets.

I just hope that FxMarketspace is available to retail traders. It will be a true tragedy if it is not, as the retail sector has it far far worse than the commercials and big money boys trading through banks and primes.