So... it turns out that Market Maker models aren't that bad | Forex Factory

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So... it turns out that Market Maker models aren't that bad

  • #1
  • First Post: Jan 16, 2015 6:20am Jan 16, 2015 6:20am
...afterall

Looking around today, the brokers that are still standing are mostly market maker brokers.

Those who are ECN, FXCM, Alpari etc seem like they are going under.

The reason seems to be that in the MM models, the brokers are your counterparty, when you lose, they win.

But with ECN brokers, since they pass you onto the main market through their liquidity suppliers, they assume the risk if their clients accounts go bust, so they end up owing their liquidity suppliers. This is why FXCM owes 225million.

So far as I can tell anyway.
  • #2
  • Jan 16, 2015 6:33am Jan 16, 2015 6:33am
Yes that was my conclusion as well. Alpari etc passed the trades onto the market place whereas Oanda etc most likely didn't and kept it on their book

All very interesting when you think about it....
  • #3
  • Jan 16, 2015 6:56am Jan 16, 2015 6:56am
In Market Maker model, do you mean that the broker makes a countertrade or hedge against your trade. But on the ECN model, the ECN broker does not make a hedge against your trade?
  • #4
  • Jan 16, 2015 7:14am Jan 16, 2015 7:14am
Does market maker model pose huge disadvantage only to short term trader,

eg 1m/5m/15m timeframe,

or it still hurts long long term trader? (H1 or above)
  • #5
  • Jan 16, 2015 7:35am Jan 16, 2015 7:35am
No - So it goes like this...

imagine this senario... (didn't happen BTW)

BBCMicro thinks SNB has his back ;-) so buys 10 lots of EUR/CHF @1.2008

Now BBCMicros broker (Alpari in this case) thinks... umm I have a liability - if BBC wins I loose (I have to pay BBC) and if he looses I win (BBCs acct dwindles)

Alpari doesn't like this so they also buy 10 lots of EUR/CHF @1.2008 - now if BBC wins I win and I just pass my winnings straight to BBC and if BBC looses and I loose well we're still equal as BBCs acct and therefore what he can withdraw has just gone down.

Now the SNB removes the floor and EUR/CHF is instantly trading @~1.0000 - Alparis stop gets hit. and they take a big loss - but thats ok because we pass that loss straight over to BBC who is in the same trade. - oh wait BBCs acct is now -£10000 (silly BBC only had £200 in his acct) (numbers not right I just made them up for illustration purposes) so Alpari is sitting at -£10000 and this will stay there until BBC tops his acct back to zero... - better get on the phone to BBC says Alpari we need that money now as we're insolvent!! we need that 10K ASAP.... - BBC takes the phone call and can't stop rolling about on the floor - that'll be right he says and hangs up...

of course the last phone call doesn't happen as they don't have enough staff and know exactly what everyones responcse will be - they still owe their liqudity providers who won't touch Alpari with a barge pole as they haven't been paid yet... all trading ceases and Alpari are now insolvent... administrators will get called in and they may well make the phone calls above as they try to reclaim the companies assets. but thats for another week/month...

This is in comparison to the MM model where they never got any stops hit as they never actually traded on the FX market. In this case as long as they can cope with that days winners then they live to fight another day...

Or to put it another way the only brokers that will be left are the ones that have a vested interest in seeing you loose (they don't hedge your trades on the FX market)

Interesting I think you'll agree....
  • #6
  • Jan 16, 2015 8:02am Jan 16, 2015 8:02am
Any idea which method Exness use ?
as which provider ( based on 2 methods) is recommended for 1000 USD a/c

Thanks, Prachait
Prachait Saxena
  • #7
  • Jan 16, 2015 8:02am Jan 16, 2015 8:02am
Quoting BBCMicro
No - So it goes like this... imagine this senario... (didn't happen BTW) BBCMicro thinks SNB has his back ;-) so buys 10 lots of EUR/CHF @1.2008 Now BBCMicros broker (Alpari in this case) thinks... umm I have a liability - if BBC wins I loose (I have to pay BBC) and if he looses I win (BBCs acct dwindles) Alpari doesn't like this so they also buy 10 lots of EUR/CHF @1.2008 - now if BBC wins I win and I just pass my winnings straight to BBC and if BBC looses and I loose well we're still equal as BBCs acct and therefore what he can withdraw has just...

ECN brokers don't take counterparty to your position, at least in theory, they are supposed to bundle your order together and pass it through to the interbank.

The market maker models do take counterparty, and when their risk goes above a certain threshold level, be that on their book, or any specific pair, then they must hedge in the actual interbank market.

The problem for the ECNs is that the liquidity providers stopped quoting them, meaning they couldn't get their clients out of the trade, meaning they were trapped in a market not quoting. Since many clients blew all of their own account, and much more besides, by the time the market had got to some kind of normality the ECNs brokers had a massive floating loss on their books precisely because they don't hedge. Which they had to assume responsibility to pay back.

That is how I understand it.
  • #8
  • Jan 16, 2015 8:04am Jan 16, 2015 8:04am
Quoting BBCMicro
. This is in comparison to the MM model where they never got any stops hit as they never actually traded on the FX market. In this case as long as they can cope with that days winners then they live to fight another day... Or to put it another way the only brokers that will be left are the ones that have a vested interest in seeing you loose (they don't hedge your trades on the FX market) Interesting I think you'll agree....

What do you mean in the MM model, the stops never got hit? Of course the stops sometimes got hit too right?
  • #9
  • Jan 16, 2015 8:04am Jan 16, 2015 8:04am
I think even market makers hedged their CHF risk. I think half of the brokers will go out of business!
  • #10
  • Jan 16, 2015 8:13am Jan 16, 2015 8:13am
i just think the broker who got hit have poorly risk management...it was pretty clear that SNB could not peg forever... so my ECN Broker wisely only allowed 1:10 leverage with CHF trades ...
  • #11
  • Jan 16, 2015 8:16am Jan 16, 2015 8:16am
Quoting verv
The problem for the ECNs is that the liquidity providers stopped quoting them, meaning they couldn't get their clients out of the trade, meaning they were trapped in a market not quoting. Since many clients blew all of their own account, and much more besides, by the time the market had got to some kind of normality the ECNs brokers had a massive floating loss on their books precisely because they don't hedge. Which they had to assume responsibility to pay back. That is how I understand it.

So when the ECN liquidity providers stopped quoting them, the stoploss orders in place would never activate too? Will the stoploss orders also not activate in MM models too in the same scenario?
  • #12
  • Jan 16, 2015 8:23am Jan 16, 2015 8:23am
The bucketshop MM model is the best for the MM not for the client.

MM offset trades internally and only go to LP if their internal offset overflows.

In a situation like yesterdays, they can easily confirm margin calls WHERE THEY WIN !!

While categorizing all (or most) take profits as a NO FILL !!

So where they win ( clients margin calls and stop losses) and where they lose ( take profits ) are treated differently to their own benefit.
So, you think you have rights? LOL
  • #13
  • Jan 16, 2015 8:25am Jan 16, 2015 8:25am
Quoting AthrunZala
{quote} What do you mean in the MM model, the stops never got hit? Of course the stops sometimes got hit too right?
The stops never got hit because there wasn't any to hit.

The 'broker' (because they are not really a broker but a dealer - however I digress...) never hedged your trade on the interbank bank market so they never had any stops on the interbank market.

So if a MM customer (any I've read some terrible stories) had +50K in your acct and ended up with -£250k then the MM will owe nothing to any liquidity counter parties (cos they never placed the trade) and you'll owe them £250k... now they can preach the no zero policy stuff and you are now grateful for loosing only 50K as long as the total numbers of winners on the day can be absorbed by these wiped out accts then not only does the MM live to see another day but they may well have profited from the whole debacle...

make sense?

BBCMicro
  • #14
  • Jan 16, 2015 8:29am Jan 16, 2015 8:29am
Quoting verv
{quote} ECN brokers don't take counterparty to your position, at least in theory, they are supposed to bundle your order together and pass it through to the interbank. The market maker models do take counterparty, and when their risk goes above a certain threshold level, be that on their book, or any specific pair, then they must hedge in the actual interbank market. The problem for the ECNs is that the liquidity providers stopped quoting them, meaning they couldn't get their clients out of the trade, meaning they were trapped in a market not quoting....
correct that an ECN isn't counterparty to your position (only they have to be as you don't have credit lines etc with the next tier down but ignore that) they do have you as a counterparty risk so when all those balances are negative they are forced to pay them to their liquidity providers (or become insolvent if they can't) because folks aren't topping up there accts like all good citizens should be doing in this case :-|
  • #15
  • Edited 10:56am Jan 16, 2015 10:43am | Edited 10:56am
Quoting BBCMicro
{quote} correct that an ECN isn't counterparty to your position (only they have to be as you don't have credit lines etc with the next tier down but ignore that) they do have you as a counterparty risk so when all those balances are negative they are forced to pay them to their liquidity providers (or become insolvent if they can't) because folks aren't topping up there accts like all good citizens should be doing in this case :-|
So in essence those guys who got reckless, and shorted the eurchf peg, and other crosses with high leverage, are responsible for others potentially losing money? - I agree.
  • #16
  • Edited 2:39pm Jan 16, 2015 10:54am | Edited 2:39pm
Quoting AthrunZala
{quote} So when the ECN liquidity providers stopped quoting them, the stoploss orders in place would never activate too? Will the stoploss orders also not activate in MM models too in the same scenario?
Sort of. With the ECN brokers when you take a trade the brokers take comission and pass it on to the market, I'm not entirely sure how they do this, but they don't act as counterparty. So as a broker they approach their liquidity provider with all the orders on their books, for eurchf, that is 94% long, 6% short = net 89% long eurchf which the broker is exposed to. Normally this is fine because any loss is the clients, and the broker just collects the commission. However if your brokers liquidity suppliers are not quoting they don't have access to the interbank, and as a result, if their clients accounts losses exceed the max value of the account, the broker suddenly owes it's liquidity provider the difference.

When an order comes to a MM broker, they offer counterparty to the position, when you want to buy eurchf, they will sell it to you, and hedge away excess risk. So with a MM, when 89% of clients are net long, the broker is 89% net short and some of that will be hedge by placing shorts in the actual market. So when the peg broke the MM brokers would have short positions equivalent in size to the net long of the clients, meaning they don't have to worry about stops being hit.

I'm not 100% sure on all of this, but that is my read on the situation.
  • #17
  • Edited 12:41pm Jan 16, 2015 12:28pm | Edited 12:41pm
Quoting dennist
Does market maker model pose huge disadvantage only to short term trader, eg 1m/5m/15m timeframe, or it still hurts long long term trader? (H1 or above)
MMs are probably not the best option for scalers but that doesn't necessarily mean that they are safe for swing & long-tern traders either because as they are taking the other side of the trade, if a MM broker ends up with too many winning traders then they could still go bust as the money won from losing traders mayn't be able to cover the money they'd owe to winning traders.

Quoting BBCMicro
No - So it goes like this... imagine this senario... (didn't happen BTW) BBCMicro thinks SNB has his back ;-) so buys 10 lots of EUR/CHF @1.2008 Now BBCMicros broker (Alpari in this case) thinks... umm I have a liability - if BBC wins I loose (I have to pay BBC) and if he looses I win (BBCs acct dwindles) Alpari doesn't like this so they also buy 10 lots of EUR/CHF @1.2008 - now if BBC wins I win and I just pass my winnings straight to BBC and if BBC looses and I loose well we're still equal as BBCs acct and therefore what he can withdraw has just...
Good explanation!

Quoting BBCMicro
{quote} The stops never got hit because there wasn't any to hit. The 'broker' (because they are not really a broker but a dealer - however I digress...) never hedged your trade on the interbank bank market so they never had any stops on the interbank market. So if a MM customer (any I've read some terrible stories) had +50K in your acct and ended up with -£250k then the MM will owe nothing to any liquidity counter parties (cos they never placed the trade) and you'll owe them £250k... now they can preach the no zero policy stuff and you are now grateful...
Yes, a MM broker could end up with a profit, significant amount of it at that but if he had a lot winning traders then he could be running into losses as well, so there's always that risk as well. In short, we're doomed

EDIT : On second thoughts, may be the best model is a hybrid one where the broker trades against the losing traders & is smart enough to quickly recognize & hedge the trades of successful traders, in which case, even during a rare event like yesterday, he'll have enough accumulated profit over time (money won from losing traders) that he'll be able to cover the losses.
  • #18
  • Jan 16, 2015 2:44pm Jan 16, 2015 2:44pm
Quoting r41225
{quote} EDIT : On second thoughts, may be the best model is a hybrid one where the broker trades against the losing traders & is smart enough to quickly recognize & hedge the trades of successful traders, in which case, even during a rare event like yesterday, he'll have enough accumulated profit over time (money won from losing traders) that he'll be able to cover the losses.
This is what the MM already do.

They have two books.

One book with all the losing traders which they act as counterparty to, hedging only when maximum risk for that book is breached.

And another book called "marked risk" containing the winning traders which they hedge immediately, they only collect commission from these guys because they are winners.

In order to separate these clients, the losers from the winners, the brokers obviously closely monitor all traders performance.
  • #19
  • Jan 16, 2015 3:26pm Jan 16, 2015 3:26pm
Quoting verv
{quote} This is what the MM already do. They have two books. One book with all the losing traders which they act as counterparty to, hedging only when maximum risk for that book is breached. And another book called "marked risk" containing the winning traders which they hedge immediately, they only collect commission from these guys because they are winners. In order to separate these clients, the losers from the winners, the brokers obviously closely monitor all traders performance.
That's right. That's what smart ones already do & those would perhaps be the best option for the traders but obviously, not every MM is good at doing it well. And, is it really that easy for us to spot the smart MMs? These days most brokers like to throw around words like NDD, STP, ECN so it kind of obscures things. The point being that just because of what happened yesterday, traders shouldn't blindly think that any MM is better than an ECN as it seems like that's what a good number of recent posts on these forums have been insinuating.
  • #20
  • Jan 16, 2015 4:36pm Jan 16, 2015 4:36pm
Quoting r41225
{quote} That's right. That's what smart ones already do & those would perhaps be the best option for the traders but obviously, not every MM is good at doing it well. And, is it really that easy for us to spot the smart MMs? These days most brokers like to throw around words like NDD, STP, ECN so it kind of obscures things. The point being that just because of what happened yesterday, traders shouldn't blindly think that any MM is better than an ECN as it seems like that's what a good number of recent posts on these forums have been insinuating....
I thought the ECNs where better too, shows what I know.
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