MarketMakers

I personally think that if you have a scalping model then you should be trading on currenex or any other type of an ECN platform. Also, be aware that there are two types of Currenex streams, institutional and retail. On institutional you will get more depth but worse spreads, on retail you get tighter pricing but worse depth. If you are trading no more then 1 to 3 mill at a time i would suggest going with a borker that has the retail CX.

I only know of two brokers that offer cx retail:

FXDD
CMS

I am sure if you ask around there are other brokers that offer it.

has this been mentioned? just FYI
latest FCM monthly financial data (jan, Feb & March 2009) here

Thanks man. That's the kind of info us little guys need to survive. Much appreciated.

Thank you for sharing the information with us Rusty. It's an eye opener.

Good suggest, thx...... harimurti7.wordpress.com

I like oanda.

And the best Foreign Exchange bank for 2009 is...........Deutsche Bank, according to Global Finance. See PDF file.

"Objective criteria included growth in assets, profitability, geographic reach, strategic relationships, new business development and product innovation. Subjective criteria included the opinions of equity and credit-rating analysts, banking consultants and others in the industry, as well as corporate financial executives. The winners are not always the biggest banks but, rather, the best banks - those with the qualities that corporations should look for when choosing a bank."

Thanks for sharing artov.

Completely agree, good article Rusty

Hi Rusty Forexman, i am new to trading, at the moment i am playing with a demo account MT4, but would in a couple of to to get right into it an put my money where my mouth is, i was wondering seeing that you are in australia also whether or not you could recommend an australian broker firm. I have been talking to forex place who are only just about to launch here or many know them as 4XP, i just dont want to jump in blind, any advice on a firm or how to research them correctly would be greatly appreciated.

Cheers

Franco

very interesting, thank u for taking the time to share this kind of info with us
Would you recommend metatrader & ECN ?

does anyone can tell me is fxcm uk a broker or a market maker?? are my orders actully going into the market place??? I know that they are advertising that they are a broker, but they are connecting me with the dealers (who are actually providing us with "liquidity")...

thanks

As far as I can tell, FXCM is a Market Maker. Nothing about their business model suggests otherwise.

FXCM UK is not acting as a market maker on standard 10k and MT4 accounts. The only accounts whereby the FXCM trading desk manages risk is on the micro accounts. Even then there are no requotes on FXCM UK micro accounts.

On the standard 10k and MT4 accounts trades are executed using no dealing desk execution so trades are hedged on a one-to-one basis.

OK, my question is the following...

Here you're saying that trades are hedged on a one-to-one basis.

If you are broker, I assume your job is to connect me with the bank or "other financial institution", earn the spread and that's it...nothing else....
Why do you hedge then?

On your web site it states that ''FXCM does not take a market position—eliminating a major conflict of interest.''http://www.fxcm.com/forex-trading-benefit.jsp

This is a contradicting statement of yours....

Also, if I am having a winning position, which I attempt to close, I need to wait for a response from "a dealer"...that is saying the MT4...

Also, when opening a position there is this message on MT4:"Notice! At order by market execution, the price will be quoted by dealer". - this is a statement I am having business with dealers....

Furthermore, you say that you are connected with the banks...well many banks are dealers (or market makers, which is the synonym for dealer)...such as Deutsche Bank @ dbfx.com)...

So than when I am closing my winning position or even try to change my SL or TP prices, I am waiting for an answer from a dealer, which is the message I get....

So, can you (FXCM) please elaborate on my doubts about you being a market maker?

Thanks

P.S. I am not writing this in order to jeopardize somebody's business but to actually find out whether or not my orders are actually getting into the real market place and influence the market (at a very small scale of course) or am I (and many others) having just fictive business...

Indeed. A dealing desk based Market Maker is just what has been described there. As is the earning from the spread markup. An ECN earns from commission with the interbank spread being passed on.

Hi Kengur,

I appreciate the post and they're good questions for deeper discussion on how all of this works.

If the trades are not hedged or offset, then FXCM would be taking a position against our traders. Trades are hedged on one-to-one basis. This means that trades are not aggregated and then offset, but each order is individually sent to the banks for execution. Therefore FXCM does not take a market position. We generate revenue through a pip mark-up on the spread in the standard 10k and MT4 accounts, and a commission is charged on the Active Trader platform.

When trading in the forex market, the broker is the counterparty to your trade. This is true whether trading with a dealing desk (market maker), STP, NDD, ECN, etc. How the broker offsets that risk determines their style of execution. The reason why the broker is listed as Counterparty is because you yourself do not have credit lines with each individual bank. Therefore whenever a trade is placed the bank recognizes the broker as the counterparty and not John Doe 1, John Doe 2, John Doe 3, etc. In an STP, NDD, ECN model you send your broker the order, and your broker sends the order to the bank to offset or hedge that transaction immediately. Immediately is important because some brokers operating a dealing desk will wait 10-15 minutes (for example) to hedge attempting to get a better price. This is why a dealing desk dislikes scalpers. The dealer doesn't have enough time to work the order. Read the trading agreement risk disclaimer for any NFA registered broker and it will outline their trade offsetting process.

It is true that the banks themselves are market makers, but there is a big difference between trading against one market maker that can identify individual traders and adjust tactics accordingly, and trading anonymously with multiple banks competing for order flow. Since each order individually lists FXCM as the counterparty, the banks can't single out orders for intervention like you would have with one individual market marker. The price competition from multiple banks also ensures spreads will stay competitive without one bank or market maker controlling the spread.

Regarding MT4, FXCM's MT4 platform, all orders are submitted as at best market orders so you will not see the message waiting for dealers answer. This message occurs on a dealing desk where the dealer sends a re-quote with the market price they are willing to accept.

Traditionally, MT4 was designed for a dealing desk, so the messages you see in MT4 pertain to a dealing desk.

Here's some background. When using MT4, a broker chooses from two types of execution: Instant and Market. Here is how each is designed to work.

With Instant Execution, the order is sent to the dealing desk displaying the price you are requesting. If the price the dealing desk will accept is different, then they send a requote. The maximum deviation feature in the order window (if used) let's the dealer know a range of prices you are willing to accept if the price you click on is not accepted.

With Market Execution, the dealer can basically fill you at whatever price they will accept without having to requote you. That is why the message "Notice! At order by market execution, the price will be quoted by dealer" appears in the market order window. In the end, the message is built into MT4 and cannot be changed. The message is displayed even when a broker is using market execution for their NDD or STP setup.

In integrating MT4 into FXCM's no dealing desk execution we chose to use Market Execution. If the order is unable to be filled with one bank, it will automatically be sent to the bank offering the next best available price.

Let me know if you have further questions or if anything needs clarification.

Jason

Thank you Jason for very detailed explanation of the system...

This is how I understand what you have said....
FXCM is also a market maker at first, the only difference is that you stop being a MM once (immediatelly, as you have said) you hedge, i.e. offset my position...since then you are bearing no risk no matter where the market goes and you've earned the spread (since I pay more pips than you when you hedge with the banks)..

That ECN are run on the same principle (i.e. that they also hedge my trades on the ECN network with other banks) leads me into confussion because I understood that ECN network, and my oders that go direcly into the ECN network is the real market, while MM are just fictive setups...having no influence on the market...

If you say that FXCM and ECN brokers are running on the same principle, that means the following...

If I've bought EUR/USD 100K you hedge that by selling 100K EUR/USD with the banks. Since I bought, the actuall impact on the market was ONLY your selling action, that is your sell order of 100K. That means that when retail inverstors like me are buying EUR/USD the actuall impact on the market is EUR selling and buying USD...

So, whether via FXCM or ECN broker, if the majority of retail investors loose in forex (let's take an example of me, buying 100K EUR/USD and losing for example 200 EUR in one single trade-that means that you(FXCM or any other ECN broker as you say, have actually won 200 EUR since you have offset my long trade by selling 100K EUR/USD with other banks...) MM and other ECN brokers would earn the same amount that we retail investors lost plus what they have earned in terms of spread difference or commissions(for ECN brokers)...

Is my conclussion correct?

Furthermore, If I want to close my winning possitions, based on your model, you would need to close YOUR loosing possition with the banks....so banks (and especially if that particular bank is a market maker) would be happy to close your (FXCM's) loosing possition....so in that case they would not try to postpone or delay your order...
But only party that would have economic interest to give me problems with my winning positions would than be my broker, right?

Now I am very confused and I do not know how does supply and demand influence exchange rate, I mean what mechanism influences the change....I've read that only 2% of the currency market is from the retail forex trading
http://en.wikipedia.org/wiki/Retail_forex_platform

According to that, the interbank (OTC) market determines the rates...and we, retail investors (and your offsetting/hedging practice) if make logical positions are actually influencing the market in an unlogical way ( I mean my buying EUR via FXCM means selling EUR on the actuall market....

Is my understanding right?

Hi Kengur,
The conclusion to your example is not correct, and here is why. Let’s go through an example using 100k EUR/USD you mentioned and walk through the execution step by step for NDD / STP execution.

You want to buy EUR/USD, and the current market price you see on the platform is 1.50180. Let’s also assume for this example that the mark-up on the buy price is 1 pip (that is how FXCM is making money). Therefore fictional Bank A is offering to sell EUR/USD at the price 1.5017 and FXCM is charging an additional pip so you see the price 1.5018 on the platform.
When you press the buy button, the order is sent to FXCM, and FXCM routes the order to Bank A to execute a trade at the price 1.5017. If liquidity is still available the trade is executed. You have a long position at the price 1.5018, the bank has a short position at the price 1.5017, and FXCM has made a pip on the trade ($10 in revenue). All of this happens within a fraction of a second.

If your trade can’t be executed immediately with Bank A at the price you clicked then one of two things can happen: slippage or trade rejection. Let’s assume that this order is an At Best market order which will be filled at the best price available. If Bank A sends back a message that the order can’t be filled at the price 1.5017, then the order will be executed at the next best available price. Bank B is offering to sell at the price 1.50165. The order is sent to Bank B and executed at the price 1.50165 and you see the trade executed at the price 1.50175. You have a long position at 1.50175, the bank has a short position at 1.50165, and FXCM made 1 pip on the trade ($10 in revenue). Trade rejection occurs if you setup the trade as a market range order to be rejected if the market price has changed.

If you lose $200 on the trade, Bank A has reaped a $200 profit and FXCM is left with the same $10. If you gain $200 on the trade, Bank A has a loss of $200, and FXCM maintains the same $10. The same process occurs when you close trades.

This process is in contrast with a market maker. A market maker creates the prices you trade at and provides liquidity/decides what amount can be executed at each price thereby creating the risks described in the previous post.

-Jason

thank you Jason, your last post is understandable, but I don't see hedging in it? Where is the hedging gone now?