Market Makers & ECN’s, Is the grass greener?

Yes, I totally agree with you. The post of FXopportunist is quite informative. Thank you FXopportunist for sharing your thoughts.
As for me, I would choose only ECN.

I use one of each...
I prefer MB for the spreads WAY BETTER than any other broker I have seen! I use FXDD for my EA (I am working on a robot to trade with MB Trading though) I hate having two brokers but it works out fine I trade a long term system that i only look at teh charts once a day for 10 minutes and i place the trades (MB Broker for that one) FXDD as I said runs my EA and I wish I could have better spreads like Mb I would make about 80-100 pips better a month. Yes MB charges commissions but its only a pip worth on each trade consider I see spreads of 3-4 on GBPJPY and on FXDD its 8 pips MB saves me money in the long run.

FXDD offers the charts/broker on the same platform so that is nice
MB offers a basic chart (not good at all very basic) If you use MB you need to be also using a Institutional software like Esignal, TradeStation,or MetaStock, some company like those that have a better data than your basic brokers stuff

Hope this helps anyone deciding which to use

Very nice insights! Loads of interesting info!

Thanks a LOT!

Fx opportunist said it best. Different strokes for different folks. Some prefer a fixed spread dealer and some prefer the ECN or "almost ECNs: out there like MB. Personally I would not get caught dead paying what amounts to a 2 pip commission on a 2 wide pound with MB or EFX (their IB)and their platform, especially at news time when the spread might get 20 wide. For someone else who trades mini lots though it might be a good solution.

For me it's either a real ECN running through a prime broker or a dealer with a fixed 1 pip spread and auto execution where trading against client is not company policy. In other words a dealer which does business the right way and manages risk properly. Last thing I want is to trade with a greedy dealer who trades against their clients to make extra money and becomes insolvent overnight because of it like FXLQ.

Hey Ut,

A little late here but I'd advise staying clear. Firstly....they were merged into Forex.com/Gain after the most recent NFA shakeout. Re-quotes and price spikes were always a problem. Now with the new system.....re-quotes happen more than ever....amazingly annoying and costly when trying to exit with a profit. I only use them for a small real money test account. Scalping with Velocity at least went somewhat smoothly....forget it now!

IMHO.

Anyway.....I hope this helps someone.

then the question becomes ....... who then is better? I am trying to chose between them and FXDD, ODL, mgfx, [ActiveTrades don't allow US accounts] [Aleccoh, but not yet ready in US], [MBTrading, /EFX,] and FXCM better than Velosity4x? Please who do I go with then? I personally think ODL and MGfx might be the best...also FXDD but 4 the spikes to kick out the stops? I do like Micro but Mini will work. Who do u like .... anyone. Since u all don't like V.4X who then do u like? Thanks all, ut2DaMax

Well, if you are trading standard lots on common pairs, you should consider learning the ins and outs of currency futures. If you are trading exotic pairs, smaller than standard lot positions or at odd hours I like OandA for smaller position sizing and ADMd's currenex platform for positions larger than 500,000.

ADMD makes a mockery out of Currenex with their spread padding shenanigans. I would avoid them like the plague. Any other ECN, or any other Currenex hub for that matter, is a much better solution.

I am not sure if everyone here truly understands the difference between the currenex model and a retail broker model. Reason being is because most of you think there is a difference between the two business models. Currenex is simply a platform that has the ability to receive quotes from multiple banks. Therefore you can see very small spreads. For example, bank one publishes EURUSD at 150.01/.02 and bank two publishes 150.02/.03. If the broker using the currenex software wanted to they could show their clients a choice spread of 150.02/.02. However, currenex's back end allows the broker to limit what they show so they will most likely show you whatever they want. As little as one or as little as two between the bid and offer what ever they decide. Therefore they will make a pip or two off your trade. This might be obvious but I dont know.

My bigger point is that currenex still allows the broker to bucket the trades. This means they can still run a book against their clients and hedge there risk as they see fit. This I can assure you almost all broker's offering currenex do to a certain degree. Also, banks tied into the feed still pull their bids and offers around news events and certainly widen their spreads which will be passed off to you the client.

News traders:
If an economic announcement comes out with what seems to be bad news for the US economy do you really think all of the banks are going to be willing to buy dollars when everyone else wants to sell? The answer is no and that is why they pull bids and offers and widen spreads to cover their risk. News traders still think that they are smarter then the banks and they get the information before everyone else. All your doing is trying to catch the banks or broker with their pants down. I will bet that anyone trading news can tell you that it is getting harder and harder to do as more traders are trying to make easy money off news events. I am not saying you will never be able to get in a trade around a news event but what I am saying is that if you do either the broker/bank messed up or they allowed because it was within their risk parameters.

The only thing currenex can offer a retail trader is hopefully better spreads. The other small thing is you can see depth of book for the liquidity providers on that currenex platform.

It is important for you to remember that currenex platform still offers the broker to manipulate the market in which ever way they see fit. It is also important to remember that banks can manipulate the market however they see fit. All of this should tell you one thing; spot forex is an OTC market. If you are a good trader you should be able to make money with a market maker or currenex and remember they are the same thing in more ways then not.

Good luck trading!

fxtrader42,

Great post about the Currenex model.

Unfortunately there are such vast differences between Currenex hubs, it can lead to some large variances of opinion among traders. Comparing ADMD's hub to Cantor's hub is practically night and day.

For this reason and others, perhaps traders who are seeking to trade on ECNs could be better served with a centralized ECN marketplace (HotSpot, etc).

I think this might be one of the worst and uneducated statements written on this thread. 1. Liquidity - currency futures do not even do a tenth of a percent in one day compared to what the spot market does in a day. How does that make it more liquid? Maybe you forgot but the spot market is the most liquid market. 2. Market depth - again futures no where near as deep as spot. 3. centralized exchange - yes, but how does this make it better. 4. guaranteed accounts - yes, congrats the one thing you got right. 5. have you ever heard of OTC options - they're out there. 6. transparency - okay maybe you got two things right. 7. true market price - hey buddy where do think those future quotes are derived? Its called the spot market. Do more research before you post again. I think I just threw up.

fxtrader42,

Your post is out of line. Phil's points are from the perspective of traders, as in everyone here. And this is a discussion about market makers/dealing desks, not the entire spot market.

Yes if you're an interbank desk, the liquidity & depth in the CME is not comparable to EBS. Phil was not disputing that. We're talking about traders, and what's potentially better for them. I know traders who place >100 lot trades through the CME day in and day out, and I haven't heard complaints about lack of liquidity.

If you even have to ask, then you haven't done your homework.

I am sorry that you think my post is out of line. However, I dont think it is. If he was simply stating that futures might be a safer place to trade currencies then I would be fine with that. Obviously, accounts held with futures firms have much more safety of funds. However, like you said I thought we were talking about traders here and I dont see how most of his points make trading currencies better for the trader. If you are worried about your broker going bankrupt and losing funds thats one thing, although I think there are plenty of firms where this shouldnt be a huge concern. However, it will always be a concern none the less. All most all of his claim makes no sense. My point about the central exchange doesnt come from lack of knowledge as to how an exchange works and its advantages. However, I dont see why this is a good reason to move from spot to futures. We are still talking about making profits here right?

Both spot and futures have advantages and disadvantages. Futures are exchange traded and spot is not. I have traded both. The reason I just trade spot now is; better liquidity, cost, and pairs in spot arent all quoted in USD like futures are. This being said this is why I like spot, some other traders obviously feel different, and that is why there is still currency futures today. Not even going to get into the hedging advantages in the futures market using currencies, even though forwards which is still considered the spot market to my knowledge. But that is neither here no there considering it does not relate to the retail market. I think we can go round and round but is that really needed? My only point was Phil's statements are not correct as to how futures would be a better choice to for traders trading spot. Am I missing something here? Are you telling me you agree with his statments except for maybe one or two points he made?

Phil, feel free to chime in and please tell me how the arguement made will do away with what traders hate in the spot market. My opinion is that the only reason people hate the spot market is because they lose money and dont know how to trade. Is that at all fair or am I out of line again?

I was alluding to the rudeness, which I felt was out of line. We try to treat everyone here with respect even when we disagree.


To sum everything up, there is much more of a distinction between dealing desk vs futures than there is between FX ECNs vs futures. I think we can all agree on that. If we simply discuss "spot" vs futures, it makes the discussion rather ambiguous.

As a former CME-futures trader and now solely spot ECN trader, I agree with you that there are benefits of the latter (liquid crosses & exotics, etc).

Okay Trader I can respect that. However, I want to know why you think there is a huge difference between ECN's and dealing desks. I will agree with a couple of things, first being that ECN models generally have better spreads. However, and you have to admit this is rarely the case during the Asian market. Cost for scalpers is less if the ECN allows them, some do and some dont. For example Oanda hates scalpers and they do a lot of weird stuff to deter them. Like reversing trades, platform going offline. I traded with them for a while and I was offline when one of my fellow traders was still executing trades. That was my last day there. I think you and I will both agree that IB is so far one of the best. I have never traded live with hotspotfxi but I have heard some horror stories but have no live experience. I also trade through a couple of dealing desks who I continue to like because the customer support and service is better then IB's. Both ECN's and dealing desks can manipulate what they see from their liquidity providers and show the client something different. The other thing is I still doubt that ECN's dont run a book (meaning they still book trades and run risk.) Why wouldn't they when most of their clients lose. For example, lets say you constantly make money and I constantly lose. (obviously the picture is much bigger then both you and I) If they cant match us, because your trade size is 1M, mine is 2M, same pair then they will allow the book to stay open instead of covering the extra 1M with their liquidity providers. This is why they have credit lines with prime brokers. They all have built software for just that. Its actually pretty cool when you think about it. The only thing that sucks is that if I constantly lose money they constantly win. I dont see how an ECN or a dealing desk will help me be a better trader.

I don't often see a substantiative widening in spreads during the Asian session, except for the Monday morning (US Sunday evening) session. Sure, cable is typically 1-pip during the US & European hours and 2-3 outside of that. But to the point where it becomes an equal playing field with dealing desk spreads during those hours, I haven't seen that.


Even if they did, which I doubt, I wouldn't overly mind. As long as I'm still getting sub-pip spreads, trading within the spread, and instantaneous execution, why would it matter if the ECN is taking the other side of the trade?

Yes it would affect firm risk, but that can never be eliminated (and is partially why I'm looking into a segregated bank account arrangement with my prime broker).

Great article, which is sticky worthy to ssay the least, FXO!

But...


1.) I disagree that all ECNs make money only through commissions. Some actually pad the pip spread (many currenex hubs seem to be doing this).

2.) There is one point that was not touched upon in your article: Safety of funds. What if you are a long term trader who is interested in compounding trades (i.e. keeping a large amount of money with a broker and letting it accumulate exponentially). The obvious problem with this is if your broker goes under, you may lose all of your funds! The ONLY brokers that allow you to fund your account with a letter of credit or bank guarantee are the higher end retail or institutional ECNs (vcap, dukascopy, etc.) So if your prime concern is not the pip spread or the commissions (as it is with most swing position traders) but rather the safety of your funds, then the retail dealing desks are not an option.

Great article!

scex

No need to disagree scexglobal. I agree with both of those statements.
It is just nearely impossible to cover every detail of every point and still maintain a readable and reasonable length article. Perhaps I count squeeze those details in if there is ever a 2nd edition.

FXO,

Why not revise it! Next to blueruby's writings on technical analysis, it find your article to be the clearest BS cutting material I have read in a long time! Respect!

Regards,

scex

I would like to make an additional comment regarding transparency as it concerns ECNs vs. Dealing Desks.

There is nothing theoretically wrong with the concept of a dealing desk. However, when this model is put into practice, problems of transparency arise (FXO explained these in his essay) and it comes close to impossible to determine what the market maker is doing behind closed doors. In fact, the truth is: YOU WILL NEVER KNOW!

Let us consider, from what I have heard and read, a fairly honest dealing desk: Oanda. The problem over the long term is that it is impossible to determine when/if Oanda deceides to change it's current honest policies and turn on its customers. Again, the point is: you will never know how a dealing desk operates internally.

With an ECN, you would know the first day whether or not you are getting screwed. It is also less likely that an ECN's internal system for handling an order would change in the future. If an ECN like dukascopy actually shows me were my orders are being routed to, it is unlikely that aside from skimming a few pips off the top, they are going to commit other indecent acts. If they were to do otherwise they would technically stop being an ECN. It certainly is possible, but from a technical stand point unlikely.

scex