How to avoid conflicts of interest with your broker? | Forex Factory

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How to avoid conflicts of interest with your broker?

  • #1
  • First Post: Oct 20, 2012 9:38pm Oct 20, 2012 9:38pm
I'm currently reading "Reminiscences of a Stock Operator", and for first 40+ pages, I constantly read how the protagonist always gets in conflict with various brokers every time he makes a profit. So that got me thinking: Is there a way to avoid that? I understand that even in modern times, if a customer makes a profit, they cut into the profits of the firm. But is there a way to avoid this conflict of interests, something to keep both you and your broker happy?
  • #2
  • Oct 20, 2012 9:57pm Oct 20, 2012 9:57pm
I think trade with ECN/STP broker or trade with large market maker.
  • #3
  • Oct 20, 2012 11:07pm Oct 20, 2012 11:07pm
Quoting Belaslav
I'm currently reading "Reminiscences of a Stock Operator", and for first 40+ pages, I constantly read how the protagonist always gets in conflict with various brokers every time he makes a profit. So that got me thinking: Is there a way to avoid that? I understand that even in modern times, if a customer makes a profit, they cut into the profits of the firm. But is there a way to avoid this conflict of interests, something to keep both you and your broker happy?
For starters, you may want to trade with a real ECN broker but is there any way to avoid conflict of interest esp if the retail trader is not sure whether his broker is a real ecn or not?
  • #4
  • Edited 11:52am Oct 22, 2012 11:19am | Edited 11:52am
Quoting Forexnuts
For starters, you may want to trade with a real ECN broker but is there any way to avoid conflict of interest esp if the retail trader is not sure whether his broker is a real ecn or not?
there are 5 main elements :
1- you can see level2 the list of the bid size and ask size
2-you can trade within the spread
3- the spreads are very Tight
4- no re-quotes .
5- very fast execution .
  • #5
  • Oct 22, 2012 3:17pm Oct 22, 2012 3:17pm
Quoting @999
there are 5 main elements :
1- you can see level2 the list of the bid size and ask size
2-you can trade within the spread
3- the spreads are very Tight
4- no re-quotes .
5- very fast execution .
Here's the prob, there are quite a few ECN brokers who sell themselves as the real deal so just wondering if they are just market makers or real ECN brokers and how do you tell the diff?
  • #6
  • Oct 22, 2012 4:28pm Oct 22, 2012 4:28pm
Not for nothing, but "ECN" is any electronic network used for exchange. This recent trend with being "true" has been a bunch of marketing spin.

At least some brokers put forward that they are "ECN-like", that's honest. Most who trumpet the "True ECN" marketing term aren't much different.

Let's go over the numbered points mentioned:

1 - Level 2 is nice, but it's really only useful if you're worried that your order size might slip through a quote level. It doesn't reflect the market as a whole and what you're usually seeing there is mostly liquidity from providers, not orders from traders. If you're at the level where you're worried about slipping a price from the shear size of your order (in the millions for most majors) then you probably already understand this, and new traders would do better to completely ignore level 2 since it's can serve as extra noise in their trading choice.

2 - On ECNs where you're also providing liquidity, sure, that makes sense. However, some ECNs are liquidity-taking only for traders, like most DMA feeds to banks or quote aggregation feeds, and in that case I don't see this as a deal-breaking feature to lose.

3 - Spreads is where a lot of "True ECNs" get you. They boast about the lowest spread but their total cost of trading is usually no better than other DMA/ECN-like providers. It's not hard to play the spread game, just shift the spread to commissions and presto, now you can rank high on spread monitoring services while still costing the same. Always view spreads from a total cost point of view.

4 - Yup, that's right. No requotes since there's no dealing desk to reject orders. Either you're filled at the price you want or you're slipped to whatever the market was when the order was confirmed.

5 - Yes, execution has to be fast. That's given. But I'd expect this from a market maker, STP, or ECN/DMA broker... no excuse for slow execution these days.


Lastly, there's nothing wrong with market makers.. really.. I keep saying this, but an evil broker is going to be evil regardless of what execution type they use.

Plus, spot forex is a 'made' market. If it's not your broker doing the dealing, the liquidity providers and banks on the other side of the ECN are most likely making the market themselves. There might be huge volume out there from speculators and corporate hedgers, but what you see on level 2 is often liquidity providers doing market making activities.

Oh.. not to mention that most ECN brokers have to act as your initial counter party. So technically you're always trading with the ECN provider based on the quotes and prices they can offset your order with in the market. You know, that's how you stay anonymous on an ECN as it appears to the LPs and banks (a very good feature of ECNs.) But don't let that scare you.. that's how most of the big boys do it as well: the CME for example in futures is the same way.

Just saying. (market maker is a misused term these days in retail forex..)
FXGears.com
  • #7
  • Oct 23, 2012 1:30am Oct 23, 2012 1:30am
Quoting Jack_Larkin

2 - On ECNs where you're also providing liquidity, sure, that makes sense. However, some ECNs are liquidity-taking only for traders, like most DMA feeds to banks or quote aggregation feeds, and in that case I don't see this as a deal-breaking feature to lose.



the pure ECN should give you the ability to trade within the spread thus you will see your order in the level 2 list among the market makers who provide liquidity , otherwise the broker is not a pure ECN.
  • #8
  • Oct 23, 2012 9:51pm Oct 23, 2012 9:51pm
Nice thread and great replies, thanks guys! Have noted down the same so the info should come handy (I think)
  • #9
  • Oct 24, 2012 3:26am Oct 24, 2012 3:26am
Quoting @999
the pure ECN should give you the ability to trade within the spread thus you will see your order in the level 2 list among the market makers who provide liquidity , otherwise the broker is not a pure ECN.
Replace "true" with "pure" in my previous post.

Quoting Jack_Larkin
Not for nothing, but "ECN" is any electronic network used for exchange. This recent trend with being "true" has been a bunch of marketing spin.
In other markets, ECN's take up all shapes and sizes, and they are all valid ECNs. (Heck, in US equities, there are ECNs that don't show their book (dark pools, dark liquidity ECNs, etc..,) let alone level 2, ECNs that pay you to take liquidity and others that charge you to take liquidity.. ones that allow you to enter a mid-point price (half penny price increments,) and others that don't. They all have different rules, different features, and they are all ECNs by definition.

Given that forex is decentralized, and most retail order flow is filled by liquidity providers or banks who are in place to make the market, meaning that most networks of valid market prices are 'take only' liquidity environments, it would silly to define anything as "pure" or "true". Brokers have too much fun twisting such words around to make them seem like a better choice when there's little difference in the end.

I guess I'm just sick of seeing brokers spin ECNs as "pure" or "true" and boast about features that make them as such. Traders believe them, and go out preaching... yet the differences are, in the end, just feature differences. And I have a lot more respect for a broker who claims to be "ECN-like" in execution, or DMA, (which is honest and realistic,) than one that tries to put others down while trumpeting their own platform as "true" (which is marketing spin and takes advantage of traders who don't know any better.)

Just my thoughts.
FXGears.com
  • #10
  • Oct 24, 2012 3:38am Oct 24, 2012 3:38am
Quoting Forexnuts
Nice thread and great replies, thanks guys! Have noted down the same so the info should come handy (I think)
LOL... well, I rant a lot about terminology.. it's important, but in the end, an ECN-like broker won't be what makes you profitable.

Focus on consistency first, then once you have a style that fits you bets (ie, not what you think you'd like, but what you've proven to be consistently profitable with and trust yourself executing) you can find a broker with an execution style that compliments you best.

In the end, a market maker might actually be your best bet.. you never know.

(Remember, evil brokers will be evil if they are market makers or "ecn"s.. Honest market makers exist.)
FXGears.com
  • #11
  • Oct 24, 2012 4:48am Oct 24, 2012 4:48am
Quoting Belaslav
I'm currently reading "Reminiscences of a Stock Operator", and for first 40+ pages, I constantly read how the protagonist always gets in conflict with various brokers every time he makes a profit. So that got me thinking: Is there a way to avoid that? I understand that even in modern times, if a customer makes a profit, they cut into the profits of the firm. But is there a way to avoid this conflict of interests, something to keep both you and your broker happy?
Dear Belaslav,

At FxPro we have adopted the Agency Model, meaning that all orders flow straight to our top-rated liquidity providers , thus eliminating the conflict of interest. We want our traders to achieve their goals (being profitable), while offering the best possible service with tight spreads, excellent customer support, market news and insights, technical analysis, dealer alerts and much more.

I hope I have put some clearance into your question.

If you have questions, please do not hesitate to contact me in PM.

Kind Regards,

Vasily Sukhotin
Director of Sales
FxPro
Trading CFDs involves significant risk of loss.
  • #12
  • Oct 24, 2012 9:36am Oct 24, 2012 9:36am
Quoting yusuf84
I think trade with ECN/STP broker or trade with large market maker.
This is correct. Remember that no broker can possibly have enough liquidity just from their "book" of clients (ECN) to be liquid, so you don't just want an ECN. You want STP and ECN, meaning a broker that allows customers to add liquidity in the form of limit orders but will also route your order to a bank if that is the best option. Something like MB Trading.
  • #13
  • Oct 24, 2012 1:01pm Oct 24, 2012 1:01pm
Quoting Jack_Larkin
LOL... well, I rant a lot about terminology.. it's important, but in the end, an ECN-like broker won't be what makes you profitable.

Focus on consistency first, then once you have a style that fits you bets (ie, not what you think you'd like, but what you've proven to be consistently profitable with and trust yourself executing) you can find a broker with an execution style that compliments you best.

In the end, a market maker might actually be your best bet.. you never know.

(Remember, evil brokers will be evil if they are market makers...
l

Just wish trading was sans shady brokers..it would make things simple but then we would never have any fun trading without the usual snakeoil salesman cloying you with "One of a kind ECN" promises..
  • #14
  • Oct 24, 2012 2:49pm Oct 24, 2012 2:49pm
Quoting Forexnuts
l

Just wish trading was sans shady brokers..it would make things simple but then we would never have any fun trading without the usual snakeoil salesman cloying you with "One of a kind ECN" promises..
I love how FF's forum quote cuts off the post of mine you quoted so the last line reads entirely the opposite of what my message was intended to be.
FXGears.com
  • #15
  • Last Post: Oct 25, 2012 9:58pm Oct 25, 2012 9:58pm
Quoting Jack_Larkin
I love how FF's forum quote cuts off the post of mine you quoted so the last line reads entirely the opposite of what my message was intended to be.
Isn't the message meant to be read as how the reader wants to read it..after all, this is a forum so yea,chances are you'll get more "nays" than the usual quote of "yeah, that's right"..
and if your tag line reads something contrary to your message, it might be time to change it..
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